aPastCourse: Internation Art Markets
Lecturer: Liesbeth De Strooper
Student: Sam Julio Fortes Neves 373043
Assignment 1: Essay Art and the Economy
Date: 09 – 01 – 2017
A Bubble Always collapses
Introduction
This essay focuses on the relation between art and the economy, specifically on the contemporary art bubble. Art critic and film-maker Ben Lewis has made a documentary wherein he spents two years following the contemporary art market. A large part of the documented period revolves around the bubbles peak in May until the crash in October, in the year 2008 .The same year of the economic crisis, which ricocheted over in several markets, including the luxury – (e.g. wine and jewelry) and art markets. Economics Professors at the university of Luxembourg have examined more than a million auction records dating from over 36 years, and they have concluded that the international art market was overheating, creating the potential of what they called a ‘’severe correction’’(Helmore, 2016). This was for mostly related to the post-war -, contemporary-, and American segments. In This essay I want to engage in the discussion regarding how the contemporary art bubble got inflated, and if this also relates to general patterns (trends) in other financial markets.
The discussion
‘’Market bubbles are generally defined as a dramatic escalation in the volume of trading in assets at prices that exceed their fundamental value, followed by a sudden collapse ‘’ (Helmore, 2016). ‘’These bubbles are constituted by rational expectations which put the fundamental value of an asset as equal to its expected discounted cash flow ‘’(Kräussl et al., 2014, p. 2). This is exactly the case in the events concerning the contemporary art market, which inflated to an unforeseen altitude. Continuously raised expectations, by means of speculation, regarding the value of the assets until the bubble ‘’unexpectedly’’ collapsed. What followed was that the assets completely devalued which led to bad auction sales etc. As for most assets, it should be easy relatively spoken, to project its value. ‘’For example through dividends on stocks or rent on real estate. In the case of art, however, returns can rarely be correlated to costs of production’’ (Kräussl et al., 2014, p. 3-15). ‘’But since art has no fundamental value, it is difficult for economists to apply economic principles to it’’ (Helmore, 2016). But still do the markets attempt to influence the outcomes by intense financial speculation and self-produced prices (Art. Dealers, galleries who stimulate this phenomena).
Goetzmann (1993) States:’’ The subjective nature of aesthetic valuation would suggest that the only constraint limiting the price of a work art is the wealth of the collectors who desires it’’. What means that the pricing of a work of art often is regulated by the demand side of the art market (elastic). And the wealthier the potential buyers are the higher you can set the price. Goetzmann (1993) also demonstrates’’ that the art prices have met an unprecedented growth’’. ‘’Despite this growth there is still little empirical evidence that art would be an attractive investment for a risk-averse investor ‘’ (Goetzmann, 1993, p. 1375). The subjective nature of art makes art a very uncertain market and hard to predict it’s trends, because of its often heterogenic nature. Especially when it comes to post-war, and contemporary art. Because of its limited supply and high demand, the speculated prices were set on such a high level that is was not feasible to sustain the actual performance of these works art. ‘’This has happened before with the old masterpieces that caused a smaller, but what was nevertheless, a market bubble’’ (Mei; Moses, 2002, p. 1656-1668).
The results of Goetzmanns’ (1993) investigation of the relationship between the art- and financial markets have implications for institutions as well as for individuals.’’ For institutions constrained to hold a significant proportion of their assets in paintings, the analysis of the behaviour of a portfolio of paintings offers some guidance for reducing the volatility of the investment portfolio by holding assets other than stock’’ (Goetzmann, 1993, p. 1375). A frequent finding is that these institutions often try to reduce volatility through these aforementioned ways. Therefore, it is safe to say that they are well aware of this demand uncertainty in the market. Or even try to make the demand uncertainty their advantage.
‘’Two major obstacles in analysing the art market are heterogeneity of artworks and infrequency of trading’’ (Mei; Moses, 2002, p. 1656). ‘’In spite of all those specificities, economists like William Baumol started considering art as a financial asset as early as in the 1960s, and the interest for art as a financial asset has kept on growing along the growth of the art market itself’’ (Kräussl et al., 2014, p. 3). ‘’Beyond scholars and economists, the art market has attracted large financial institutions (e.g. Deutsche Bank, UBS and Credit Suisse), in the sense of providing art advisory services to their wealthiest clients’’ (Kräussl et al., 2014, p. 3). Some of these financial institutions provide coverage or loan’s to stimulate the market and the guarantee’s provided by the auction houses, despite the risk-averse investments.
The problem at hand in the contemporary art bubble is that the various institutions (e.g. museums and galleries) and individuals (e.g. art dealers and the artists) regard the works of art as a financial asset which can be traded to those who value the work of art as a financial asset (apparent in general financial markets). Thus, trying to give something which in essence does not have a fundamental value, a speculated value. This often leads to inconsistencies in the pricing of the artworks and it often varies in between under- and over pricing, because they produce their own prices.
‘’The fundamental value of an asset equals its discounted expected stream of cash flows It is relatively easy to obtain the expected cash flow earned by owning a share of stock (dividend) or a piece of real estate (rent)’’ (Kräussl et al., 2014, p. 3-4). ‘’ The ownership of an artwork, on the other hand, provides no claim for monetary return but some kind of convenience yield as dividend of enjoyment or aesthetic pleasure ‘’(Kräussl et al., 2014, p. 4),
Mei and Moses(2002) state:’’ There are two propositions frequently advance by art dealers and economists. The first one states that art investors should buy only the top works of established artists (masterpieces) or buy the most expensive artwork they can afford’’ (Mei; Moses, 2002, p. 1656). ‘’The second proposition states that prices realized for identical paintings at different locations at the same time should be the same’’ (Mei et al., 2002, p. 1656). Various researches like Pesando (1993) identify that the ‘’law of one price’’ has been violated several times what resulted in a imbalanced ratio concerning the art market.
Mei et al. (2002)’’ have made three discoveries relating to the art market, based on sales data and is also broken down into three popular collecting categories’’. First, Mei et al. (2002) find: ’’art has been a more glamorous investment than some fixed income securities, though it under-performs stocks’’ (Mei et al., 2002, p. 1666). Which is not a very astounding result, when taking in consideration that stocks always have a direct financial asset whereas art can differ. Because there are people who collect the works of art purely for the aesthetics as some see it as trade commodity or investment. ‘’Second, their study finds strong evidence of underperformance of masterpieces as in Pesando (1993), which means expensive paintings tend to under-perform the art market index’’ (Mei; Moses, 2002, p. 1666). This stimulate the inflation, with influence of the economic crisis which also caused the bubble to collapse. The performance of the art work could not meet up with its expectations. Which in turn led to loss of investors which is one of the reasons why the value of the masterpieces deteriorated, in the first place. ‘’Third, there is mixed evidence that the “law of one price” is violated in the New York art auction market ‘’ (Mei et al., 2002, p. 1666).
Conclusion
‘’One of the important reasons why the contemporary art bubble was relatively bigger than bubbles in other markets is that it consisted of credence goods, which are goods whose utility impact are difficult or impossible for the consumer to ascertain (demand uncertainty) ‘’(Emons, 1996). ‘’The seller of this particular (credence) good knows what utility impact the good entails, creating a situation of asymmetric information, what leads to speculation on prices’’ (Emons, 1996). This is one of the many reasons that can lead to cause a market bubble. Because this speculation which often cannot be backed up by the actual worth of an art work, leads to an unsustainable increase in price which does not meet the demand that results in a collapse.
Sagot- Duvaroux (2010) also underlines the notion of ‘’the uncertainty that surrounds the quality of the contemporary artworks on the functioning of the market’’. A form of uncertainty which ‘’resolved’’ by speculation. Another Reason is the non-transparent almost obscure nature of the art market, who do little to not conforming, to the set regulations and restrictions when engaging in the market (e.g. the law of one price). Even when it is clear to notice that the art market resembles the general financial markets in many ways. There are evident dissonances regarding the fact that it consists of hard to measure prices or standards of quality. For instance, prices of the same work should not have a significant difference, but still this was sometimes the case. And last but not least of having an imbalanced ratio when it comes to supply not meeting the demand or vice versa.
References
Baumol, W.J. (1986). Unnatural Value: or Art Investment as a Floating Crap Game.
American Economic Review, 76, 2, p. 10-14
Emons, W. (1996). “Credence Goods and Fraudulent Experts”. The Rand Journal of
Economics.
Goetzmann, W.N. (1993). Accounting for Taste: Art and the Financial Markets over Three
Centuries. American Economic Review, 83, 5, p. 1370-1376.
Helmore, E. (17-01-2016). Art Market in ‘Mania Phase’ and Risks Bursting of the Bubble. The Guardian. Retrieved from https://www.theguardian.com/artanddesign/2016/jan/17/art-market-mania-phase- bubble-report.
Kräussl, R., Lehnert, T. and Nicolas Martelin. (2014). Is there a Bubble in the Art Market?
Mei, J. and Moses, M. (2002). Art as an Investment and the Underperformance of.
Masterpieces. The American Economic Review, 92, 5, p. 1656-1668.
Pesando, J. E. “Art as an Investment: The Market for Modern Prints” American Economic
Review, December 1993, 83, p. 1075-1089.
Sagot-Duvauroux, D. (2011). Art Prices. In R. Towse (Ed.). The Handbook of Cultural
Economic.s 2nd Edition (p. 43-48). Cheltenham: Edward Elgar Publishing.
e your essay in here…y in here…