15 May 2018

Is the art market driven by financial or social value?

Filippo writes:*

The art market exposes astonishing results, highlighted by the astounding $60 billion annual turnover of this marketplace.

The art market is highly specialized due to a broad range of choices, defined as different art movements which are comprised of modern art, contemporary art or expressionism, which are further specialized into sub-components. For example, in modern art, we can consider the Dadaist movement, fauvism, neo-expressionism, cubism, pop art, and surrealism.

This important variety contributes to general important returns, in terms of utility. Here utility is enhanced by an additional value, the aesthetic worth of a painting. Furthermore, the important specialization of the art market may offer many openings to buy artwork due to its consideration as an investment asset, reinforced by the expected gains of an estimated inflation in the art market. However, this type of investment market withholds an important risk [pdf], such as a devaluation of an acquired art work diminishing a prospective gain when reselling the investment asset.

Not to mention, information plays an essential role into forming the subjective models influencing investment [pdf] into an artwork. In other words, the incomplete information that the buyer has will influence his decision. For example, there is the risk that the purchased artwork will see its value increase, or a decreasing appraisal. Another feature can be a personal overestimation of an artwork due to incomplete or a lack of information, poorly and subjectively derived models or the only consideration of aesthetic returns [pdf]. Therefore, the buyer will face the risk of overpaying for an artwork which complicates the process of realizing a gain. This lack of information entails an important uncertainty in this market.

Consequently, the actors will try to compensate this lack of knowledge, or human capital within this market, with the social information exchanged in the art market. Here, social information is considered as information or signals derived from other actors’ economic actions, like ownership, buying, investing. These actors are termed as respected artistic institutions, for example world-famous museums, important collectors, esteemed galleries or significant art dealers.

For example, past ownership may play an important role in market valuation exemplified by the important raise of Basquiat’s work appraisal. Coincidentally, certain Basquiat’s oeuvres are owned by important Chief Executive Officers of important firms, namely Bernard Arnault, the CEO of Louis Vuitton Mo√ęt Hennessy Group. Moreover, the inclusion of certain works of art in important cultural institutions, like the MoMA or the Guggenheim museums, may increase the overall recognition of the value of an artist’s work which may inflate the perceived market value and price.

Nevertheless, the art market and art are usually connected with high society [pdf]. Especially if we base ourselves on the historical development of this discussed marketplace. Considering that one of the most important auction houses, Christie’s, started to develop thanks to artworks, which were mostly supplied by aristocrats. Coupled with an assumption, entrenched back in history, that these works of art have also been sold to wealthy people since most of the people within this social stratum beneficiated from an important disposable income [pdf]. For example, when Christie’s was settled, in the eighteenth century, the clients were aristocrats or individuals belonging to a wealthy social stratum, exemplified by the first important sale this auction house has experienced, which involved Catherine the Great of Russia. In other words, the consumption of an artwork can be identified as the consumption of a positional good, which signifies that buying an artwork would position the buyer into a specific social stratum.

Following, the possession of an artwork can also imply a certain societal value. Buying an artwork would signify showing a certain wealth which signifies that the artwork may be linked with the Veblen effect. Consequently, the Veblen effect implies a higher derived utility from owning expensive artwork following a belief that it signifies a higher position in the social hierarchy but most importantly, that this effect may signify that a more expensive artwork has more value. This increases the utility raised from the act of buying a more expensive artwork. However, this also increases the risk of creating a bubble in which the present actors would all try to buy the same artwork. Exemplified by the value of Jean-Michel Basquiat’s oeuvres, which increased in value due to an overall preference for his artworks.

Bottom line: Uncertainty in the art market is driven by incomplete models of value. The uninformed majority of actors in this market will try to compensate their decision-making representations. However, due to high cost to acquire more information, and embedded important transaction costs of this market, the actors will use the essential, available ‘social information’. This ‘social information’ is however withheld by the elite of this market, like important collectors or respected institutions. Therefore, the art market is a market with very high entry barriers.

* Please help my growth and development economics students by commenting on unclear analysis, other perspectives, data sources, etc. (Or you can just say something nice :)

1 comment:

jdavid said...

OK- I'll take the bait.

One could argue that what you describe is not a market at all, at least in the classic sense of many buyers, many sellers, and homogeneous product. Rather, you've wandered into the wonderful world of private values versus common values. Private values are idiosyncratic- unique to the individual. Common values are those are generally accepted. Art is idiosyncratic (or at least somewhat unique), decoration far less so (and more "common').

Auctions are how these are sorted out! Lots of fun, those. David, you should teach auctions, bidding strategies, game theory and all that stuff. Auctions (in my view) are transaction mechanisms when "markets" are to thin to work.

OK. I've said it. Now those of you who actually know something about this can jump in and correct me!

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