Contemporary: what real value?

In the context of a discussion this week, on this site and his own blog, about the appropriateness of different subjects for contemporay Art, Ed Winkleman said

The truth about the current art market is in fact so complicated it’s beyond the grasp of many of the world’s best economists.

Hmmm. That is either a disservice to Economists or an overly apologetic way of describing the nonsense of current pricing.

On bloomberg.com on Friday we had a quote from collector (and former hedge fund manager) Michael Steinhardt saying that new moneyed collectors buy contemporary art as a form of “personal aggrandizement”. He added:-

There are limited assets that have cachet. If you buy the fanciest Cadillac today, or a Mercedes, its a yawn. The world is so wealthy.

he continued:-

The decline [of Art Prices] will be associated with declines in stocks and real estate. A lot of markets are near new highs.

Rothko__72.84m.jpgClearly the records at both Sotheby’s and Christie’s last week reflect a combination of the intrinsic value of the works sold AND a premium associated with the wallets of those bidding against each other. For this not-disinterested collector/observer, it will be interesting to see where prices settle after the impending market correction. In other words: to see what the underlying value of a work might be, after the premium associated with the irrational exuberance of super-moneyed buyers is removed from the marketplace.

12 thoughts on “Contemporary: what real value?”

  1. Certainly no underestimating of economists was meant in that statement. But in the context of whether we’re seeing a bubble in prices of artwork, I know of no one who’s done the legwork of synthesizing the effects of the new money entering the market from Asia (and who knows where the limits there are?) and Russia with past experience to assert authoritatively whether we indeed are. Yes, it will end, but folks have been using downturns in housing and fears of inflation and all kinds of other factors to predict an imminent downturn for years now, just to see the auction results suggest it’s no longer that easy. I attribute this floundering to the fact it’s still expanding, i.e., it’s too soon to get a good sense of it, and therefore too complex for anyone to rely on previous history to assert any “truth” about it, at least not in the sense of “truth” we mean when talking about the sort of insight we expect from good art.

  2. I think Edward is on to something here. One element of complexity is relative pricing levels — of Chinese, Indian and Russian art to Euro-American art, as well as of the best pieces in each category (or even across the categories) to the general pricing level. It may be possible that general pricing levels remain buoyant while the premiums for individual works contract.

  3. I agree with both comments, to a degree. Calling the timing of the fall of any market is tough, as Edward says. And there are certainly different underlying “fair market” values for the different geographical Art markets as Hammad suggests. Demand varies across markets and capital available for each market varies. There are then different premiums for each category depending on the demand within the art-fashion-conscious super-wealthy for the different segments.

    I suspect, however, that one could take a stab at calculating what the premiums are for some markets, particularly US contemporary and modern. One would start by simply comparing price volatility, and aggregate price rises, of the fashionable artists and segments of the last ten years, with those of the less-fashionable; because although all seems to be rising in the current bubble, they haven’t all risen equally. (For some indication of market timing one could then plot this data against traditional financial indices, for the same periods, to look for correlations.)

    But I leave those calculations to someone at Artnet or in academia. Andras? %-)

  4. The boom of the late eighties came to an abrupt close for several reasons. The stock market crashed, albeit two years before the art market. The Japanese bubble popped. At the time a lot was attributed to psychological factors, the first Gulf War and even the devastation of AIDS. People felt uncomfortable with conspicuous consumption, some observers noted. The current art boom has done fine through a stock market pullback, a national security crisis, a housing decline, and a prolonged, depressing war. (Now, however, the pshychological theories have gone the other way: After 9/11 when collecting picked up, many people said it was about the pursuit of meaning, and throwing caution in the wind, etc.) As Edward notes, we now have had an equivalent number of factors to which it would have been possible to attribute a meltdown, but it hasn’t yet come to pass. Perhaps the countervailing forces (the globalization of collecting and the contentration of wealth, and all those empty walls from the construction boom) simply outweighted the downward pressures. Edward is right about one thing: mainstream economics has no answers for this. So much of art collecting is about deeply personal, nonrational motivations — precisely the kind of factors economists ignore as “noise” when explaining market behavior. Understanding the current art market is like trying to explain why there is a boom in skyscraper construction. Money and technology go only so far, but ultimately it’s about “soft” variables — passion, national pride, one-upmanship, sheer madness — that resist the traditional tools of economics. And this is what makes the art market so much fun.

  5. Fair enough. But not knowing what all the causes are, the “noise” in your description, does not stop one from measuring real variances in historical price rises across markets and thus calculating different premiums; and thus calculating a proxy for bubble over-pricing.

    My economics professor used to admit, grudgingly, that economics is a lousy predictive tool because of all the uncalculated “soft” values you speak of, that can come into play in a given putative future event. Economics is, on the other hand, an excellent tool, together with judicious use of simple statistical methods, for analysing WHAT things happened in the past (if not always why). And for calculating the size of any measurable discrepencies.

    So let us not allow the “magic” of the art market to blind us from the real benefits of simple statistical measurement of historical pricing. We may not be able to predict a fall or by how much things will fall. But we can certainly measure rises (or falls) that have already happened, and compare them across hot and less hot markets to imply the premium associated with said hotness. So to speak.

  6. I think a major issue here may be that many strait-laced economists are likely to stay away from analyzing the artworld, recognizing that so much of the data they’d need to apply their usual methods is simply hidden behind the opacity of the art market. Especially in ConArt, the sexiest segment of the market. This will change over time, and rapidly, as much more repeat-sale data for single works comes into plays, allowing economists to eliminate the need for either integrating qualitative judgments into their regression analysis or working with underpowered data sets.

    That said, I wonder if the issue is also that we have had not any really imaginative economists examining the question yet. If you think about how Freakonomics star Steven D. Levitt has mined previously ignored data to create economic models for all sorts of seemingly unparsable social milieu – from drug dealing to sumo wrestling – it suggests that maybe there’s some combination of as-yet-ignored factors that could help us differentiate between the billowy bubble effect and the denser growing core of the art market that lies concealed within it.

  7. Years ago when I was a graduate student at Columbia, in the sociology department, I joined a study about the art market that was being undertaken by one of my senior professors. He was a well respected and smart researcher, a dedicated empiricist and a statistical wizard. We set about analyzing auction data, looking for predictors of market value. We created a database and entered a number of variables about each art work. As a next step, my professor suggested something that is standard practice in statistics. To eliminate “outliers” he required that we exclude from the study the bottom ten percent and the top ten percent of all cases. This is a perfectly legitimate and common statistical methodology. It helps you ignore parts of reality that do not conform to general patterns and may skew your findings. The problem was that by eliminating the top tier, we were excluding most of the works deemed aesthetically and art-historically relevant, and probably 100 percent of the works that inform media coverage and public perceptions of the art market. If Mona Lisa had been put up for auction that year, it would not have been in our analysis. The story does have a nice ending. When we ran the numbers, we were able to confirm, based on our data, one statistically relevant variable that does predict prices in the auction market. Size.

  8. %-) Nice story. And as I said, predicting markets is hard. Although if I had been your professor I would have questioned the removal of outliers in an auction driven market where it is the high and low prices that drag the market along, because of the nature of those time-dependent, event-driven market environments, and not the bell curve centre.

    Not that this was where I started with this thread. The interest for me was not in predicting market movements (tough), but in measuring the ones that have already occurred and comparing the different scale of movements across different sectors. That differential would give us some sense of the size of distortions that exist. Though no indication when those distortions might disappear. Nor whether the middle will follow the outliers up, or whether the outliers will collapse down towards the middle…

    But then I have always been an empirical sort of fellow and I get the impression I am beating a dead horse here; so I will give over. %-)

  9. Ian, you are in fact looking in the right places, and my reason for bringing up this story is exactly the same. My hunch is that the middle of the market follows the laws of standard economics — its a supply-and-demand situation. At the high end (the part my professor was methodologically justified but substantively ill advised to ignore), however, the prices will be influenced by the kind of intangibles that cannot be wrestled to the ground with the tools of standard economics. If one billionaire wants to outdo another by bidding exactly $120+1 million for a work — mainly to achieve the distinction of being the highest bidder of all time — that price has clearly more to do with human emtions than anything else. We would all benefit from sohisticated empirical models that take these dynamics, and their effects on broader markets, into account.

  10. Artist Elizabeth Torak emailed us: “If in discussing the art market you are looking at just the auction market than it seems to me that the database is too small to make a meaningful statistical analysis. We are not talking about mass markets, but a small society of the extraordinary wealthy pursuing a finite number of works. A market like this would perhaps be better analyzed by Tolstoy than by an economist.”

  11. I think that there is a supply and demand model driving prices after a certain point but I don’t think that it really factors into the middle market. Don’t know much about economics but I think that supply and demand is used by dealers to drive prices up with things like their so called waiting lists, but in general there has to be a certain volume of work for there to even be a market. Otherwise, how else can you explain so many modern and old masters dealers (and auction houses) trying to find their way into the contemporary market? The artists from the 80’s who survived the dip are generally not the ones who made 6 painting a year. I can’t imagine that it is so complicated to figure out some baseline value. It would just take a bit of groundwork.

    On the market end, people want the easy thing in shopping. The other thing they want is a good selection. There are plenty of bargains out there if you are looking for real value, and it is not so hard to spot them and it is easier and easier to be informed. If a collector is offered one thing by an artist they are much more likely to pass than if they can select from 4 or 5 good works. It is a tricky thing to put it in supply and demand terms, polarizing perhaps, a model from the last century that will not work in this one.

  12. What’s interesting is that economists, right from the start of the discipline in the late 18th century, have singled out ‘rare paintings’ as a category that they don’t have much to say about. Adam Smith, Stanley Jevons, Alfred Marshall (that’s the guy that came up with the notion of supply & demand determining prices) and many others treated artworks as an exception to the theory of value they were proposing.

    Nevertheless, I think one can make some sense of the current market from an economic perspective.
    – The new players on the market are hedge fund managers who have on the one hand an enormous reputation deficit (they are considered the parasites of the financial system, much more so than the Wall Street traders that flocked the art market in the 1980s) and on the other hand an enormous surplus of capital (again, much more so than Wall Street in the 1980s or, for that matter nowadays). So for them the equation is an easy one.
    – Economists point out that the world has been flooded with liquidity in the last couple of years. This new money (read: savings from China and the Middle East) went into all kinds of investments that were previously considered too risky. Art seems to be one of them. Which makes it likely that once this liquidity is drying up, and investors are withdrawing their money from emerging markets, junk bonds, subprime mortgages etc(a socalled ‘flight from risk’) the art market will be hit as well.

Leave a Reply