Month: March 2013

Categories: Art, Culture, News – Posted on

The Economics of Art

By MICHAEL MCCULLOUGH          March 28, 2013

From the Soft to the Nonexistent Middle Market

Andy Warhol is quoted as saying “[a]n artist is someone who produces things that people don’t need to have but that he – for some reason – thinks it would be a good idea to give them.” I don’t know if this is an accurate quote, but it does touch upon some important concepts in today’s art market. What made Warhol so brilliant was his understanding of how surplus capital in an economy enables an artist to make a business out of giving people things they don’t need. And underlying this notion of serving a nonexistent demand is the truism that selling art is even more of a game than making it.

For gallerists who don’t understand this concept, the art market has become a difficult place to do business. For the past six years, those selling in the middle market have found it difficult to find buyers for low and medium priced works. This is not generally true for larger galleries who report strong sales in higher priced works. Many people have contemplated the motivations of buyers at the high end of the art market, as opposed to the more important question of what makes this type of market possible in the first place.

The difficulty of thinking about art as a commodity is that the supply side of the equation works differently in the art market when compared to other industries. In most markets, the supply fluctuates- both up and down- based upon the capacity of producers to meet demand; if demand falls then producers cut production. In contradistinction, artists give art to the world out of their need for expression, something necessary for their survival; most artists would continue creating art regardless of whether anyone purchased their work. In essence, the production side of the art market might be constrained when there is excess demand, but production would exist in some form or another even if there were no demand at all.

Consequently, the gallerist has to act as the regulator of supply, releasing works to the market in order to manage demand. And the better the gallerist is at creating demand and regulating supply, the more successful the gallerist will be. This might sound like market manipulation, and it is, but you have to remember that the supply side of the art market works differently than other markets.

Think for a moment about the most quintessential of American purchases: the automobile. Americans not only adore their cars, but need them in order to function in society. Except for in a few major cities, it’s not possible to live and work in the United States without a car. Necessity drives car purchases in the first instance, and vanity only enters the picture when you consider all the extras that you really don’t need but might desire anyway. Americans don’t buy art in the same way they buy automobiles. As Warhol points out, art is not a necessity for most people; it’s a luxury or, as some people in the art market like to call it, a “vanity” purchase. Most American homes are devoid of original artwork, especially of a quality recognized by art critics as important art.

I should add that none of this analysis reflects upon the art itself. Yes, art can be uplifting, and it can make us think about the world in a different way, and our cars can’t do that. And, yes, artists play a very important role in our society. But that role is not a function of the market. This is the crucial point. People pay large sums of money for artwork because they want to own, and thereby control, the dissemination of the artists’ output. Collectors want to be associated with a certain works of art because it either suits their aesthetic needs or it somehow reflects their style or philosophy. These are individual tastes and motivations not easily quantified in a market-type analysis. This is why it’s so difficult to predict trends in the art market because only the top gallerists and major collectors are in a position to understand them.

The only constant assumption in art market is that art is purchased with excess capital. Throughout history and in all economic systems- from Ancient Egypt to the Qing Dynasty China- a surplus of capital in an economy is necessary in order for the arts to flourish. Steadily since the end of the Second World War, industry in the United States has produced surplus capital and those surpluses have to be expended somehow. The first task was to build roads, then it was about creating great achievements in science and last came the focus on the arts. In any society, when the wealthy have amassed sufficient wealth, they have time to spend it on other things: in their pastime, the wealthy become art lovers.

Currently, we have the greatest disparity ever between the wealthy and the middle class in the United States and, indeed, throughout the world. In consequence of this, successful artists don’t pander to the bourgeois tastes of the middle class. Today’s art is big, bold and expensive. And in the great cities of our world dwell the wealthy art collectors who worship this aesthetic.

It comes as no surprise that Jeff Koons was a commodity broker on Wall Street for six years before making it as an artist. He, like Warhol before him, seems to understand the nature of markets and the needs of surplus capital. Some people might wonder if a giant, metallic-blue balloon dog is worth $5 million, not realizing how ridiculous the question sounds. You really shouldn’t expect a serious answer to such a dull question. These inquiries originate from people who neither have the money to buy art nor the imagination to apprehend why somebody else would. And you don’t have to be a genius to understand this concept; my father, who is neither an economist nor philosopher, told me as a child that “something is worth whatever somebody is willing to pay for it. Period.”

All of this might sound cynical but it’s really not. For at least the last century, the dominant world view among artist and intellectuals has been materialism, wherein art has become a game by which people distract themselves from the meaningless of life. The great detraction of materialism is the dullness and pointlessness of things, thus the search for happiness, beauty and wisdom becomes ever more important. People acquire certain artwork because they believe it reflects who they are or who they would like to be, and then everybody who visits their apartment or house can see them on view. And the more art they buy of a certain artist or genre, the more they are invited to exclusive events and the more access they have to the art. Thereafter, they are recognized by the market as an important collector, and the literati toady them immediately for the need of something to write about. Have you noticed how newspapers are now filled with editorials and lifestyle pieces, only because they are cheaper to write than hard journalism?

None of these trends in the art market are likely to change anytime soon. Then again, very few people stand to benefit from them.

Categories: Art, Culture, News – Posted on

Chasing Myanmar

By MICHAEL MCCULLOUGH          March 21, 2013

The Global Art Market in 2012

I suppose I started to notice it about eight years ago, when art fairs became the major source of income for most new galleries. Before that, collectors were content to visit individual galleries and attend shows based upon the strength of the artists and artwork on view; to a certain extent, they still are. The art fairs, however, offer a broad range of works in a single event which caters more to those who want to “find” works to buy than to those who want to be “shown” them. As a result, the major fairs have become somewhat of a status symbol for galleries to be taken “seriously” by this new breed of buyers, reminiscent of a trend several years ago where artists needed to have a presence on Google in order to sell their art. All of these are the organizing forces of a nascent global market in artwork, where information and public events provide fodder for market participants to adopt certain palates, follow major trends and purchase artwork.

TEFAF, the world’s leading art fair, opened last Friday and held a symposium to review the global art market during 2012. As TEFAF is the first major fair of the season, it’s quite clever of them to assume the wise-old-man role, and I suspect these market reviews will be a regular event at their fairs. In conjunction with this, they released a report, “TEFAF Art Market Report 2013” analyzing trends in the global art market last year. To no surprise, the worldwide art market contracted by 7% in 2012, as the Chinese market beat a retreat and shrank by almost a quarter.

Regrettably, the report suffers two major flaws from which it cannot recover completely. The first is a miscalculation of the estimated size of the private market, an understandable but fundamental error. The second is a failure to detail the volume of sales in each market sector, which is nothing short of lame.

For instance, they say the public market (auctions) makes up 48% of the total market and the private market (galleries) comprises 52%. To people who actually work in the market, these numbers are off wildly; most people estimate the private market to be at least twice as large as the public market. If my estimates are correct – and we know the global public market was at $27 billion last year- then the global private market was around $54 billion, thus the total global market should have been somewhere around $81 billion. To put this in perspective, if the art market were a separate economy then it would rank seventy-fifth, edging out Croatia and just behind Myanmar (which we should still call Burma).

To the second point, the “art market” is broadly defined as fine art, decorative art and antiques; this is a fair-enough definition, but the report fails to compile statistics on the volume of sales within each category. No reason is given for this omission, leaving the reader to wonder whether their statistics on the private market were so unreliable, or unobtainable, that a finger-in–the-air estimate of the total market size was the best they could do, with further examination relegated to the public market. In consequence of this, the report is only useful in its analysis of the trends within each sector of the market but not for comparisons among them.

One interesting observation is that 83% of the total public market by value is centered in three countries: the US, China and the UK. The US regained its leading position with 33% (up 4% on 2011), China dropped to 25% (down 5%), and the UK remained third with 23% (up 1%). What this really means is that the global public market is focused essentially in four cities: New York, Beijing, Hong Kong and London. This is equally true for the private market, as a brief review of the top galleries bears out.

We should also take note of the continuing strength of the high end of the market. In 2012, 66% of the fine art sales on the public market were of works priced over $250,000, even though these works made up only 2% of sales and 4% of total number of artists whose works sold at auction during the year. The top end of the private market, represented by gallery sales over $13 million, reported an average increase in turnover of 55%. The report mentions anecdotal evidence from gallerists that the market continues to be extremely selective, with some galleries reporting greater difficulty in selling low and medium priced works, while other galleries reported strong sales in higher priced works. Indeed, inquire of any artist or gallerist working in the middle market about its strength and you’ll likely get either a blank stare or a burst of profanity; the middle of the art market is sort of like being on the median of a major highway- everything is passing you by and you can’t seem to get off.

Perhaps feeling a need to explain these recent trends, the report suggests that investors are “minimizing risk by purchasing works by the best-known artists at the top end of the market.” This often-proposed explanation of the art market is, at best, incomplete: wealthy collectors choose art based upon their own tastes and preference with little concern for what market watchers think; investors are just following along for the ride. After all, the art market is still a collector’s market, although maybe just barely.

The report also focuses on China, which supposedly became the world’s principal market for art and antiques in 2011 with sales soaring to 30% of the global total. I recall having a good laugh over these statistics when I was in China last year, as sales figures from Chinese auctioneers were never considered by anyone in the market to be vaguely reliable. In fact, Beijing issued regulations last year to clean up an auction industry fraught with fakes, smuggling and non-payments, all of which tend to have an inflationary effect upon the market. TEFAF says the Chinese art market dropped by 24% to $13.8 billion in 2012, mainly due to a slowdown in economic growth in China and a reduced amount of high quality, high priced works coming onto the market. It also seems that many art funds and other speculative investors in China pulled away from the market last year.

Of course, the most under-reported story in the art market last year was Sotheby’s joint venture in China, which gives the company the ability to have its own auction sales on the mainland. Last September, Sotheby’s invested $1.2 million and took an 80 percent stake in a joint venture with state-owned Beijing Gehua Cultural Development Group. The joint venture, called Sotheby’s (Beijing) Auction Co. Ltd., can take advantage of the new Tianzhu Free Trade Zone in Beijing being developed by Gehua. Sotheby’s will likely gain a sharp market advantage in coming years due to the joint venture, thus propelling the company into a dominant spot in both the auction and private sales markets in China. Other perks of the joint venture are Sotheby’s ability to hold sales outside the free-trade zone and, more importantly, their ability to partner with other entities outside of China.

In fact, on Tuesday of this week TEFAF announced that it has entered into “exclusive discussions” with Sotheby’s to explore the possibilities of developing a high-end art fair for China in 2014, via Sotheby’s joint venture. “TEFAF Beijing 2014,” they say, would represent a ground-breaking collaboration between a leading international auction house and the world’s most important art and antiques fair.

Come to think of it, what is the Chinese word for market share?

Categories: Art, News – Posted on

A Crisis of Confidence?

By MICHAEL MCCULLOUGH          March 14, 2013

The Economics of Authenticating Art

In April of last year, I attended a gathering where Michael Straus of the Andy Warhol Foundation spoke about the foundation’s then recent decision to stop authenticating works by Andy Warhol. It was interesting to hear him say that part of the reason for the decision was the foundation’s confidence that the market for Warhol’s works “can take care of itself.” What this means in practical terms is that galleries, auctioneers and collectors can make their own determinations about the authenticity of a Warhol work when they decide to sell or purchase. Having worked in the art market for a decade and a half now, I’m sure the art market can take care of itself but the problem is that it really doesn’t want to.

Galleries and auctioneers rely on art experts’ opinions because it gives them cover to offer guarantees of authenticity to buyers. Only the criminally insane- though there are some out there buying- would spend millions of dollars on an artwork without some form of an authenticity guarantee. Therefore, if I own an artwork and want to sell it, I must have “the” expert on the artist bless the work; if they don’t then my artwork is practically worthless. To make this more complicated, sometimes the expert doesn’t say “no,” but determines that there is not enough information to form an opinion, which amounts to a vote of no confidence. And if I want to dispute the expert’s “no” or “no confidence” determination then I have to find not one, but two recognized experts who are willing to state that the work is authentic. The net result is that it’s difficult- if not impossible- to contest “the” expert’s authenticity determination. Moreover, sometimes it is the case that there is only one recognized expert for a certain artist’s works. The response of lately by collectors has been to bring lawsuits against “the” experts under various legal notions such as negligence, fraud, antitrust violations, and any other theory their lawyers can conceive. In consequence of this, many of the authentication boards for major artists will no longer authenticate works because too many of them have been sued by unhappy collectors.

What do we say when we want to cast doubt on a long-standing tradition that has ceased to produce useful results? We begin by saying tentatively, “Well, it’s not exactly written in stone.” Authenticity opinions were never meant to be written in stone in the first place, so it was quite predictable that the art market would be faced with this problem. Prices for highly coveted artworks have increased exponentially while the ability of collectors to authenticate those works has remained stagnant. What has changed is that collectors are no longer satisfied with their options.

Several years ago, I saw a cartoon of two art experts looking at a painting by the artist Peter Doig. One expert said to the other, “I’m certain it’s a Doig.” The other expert responds, “I think it might be a cat.” While a great deal of experience and thought might go into an expert’s decision about authenticity, in the end it’s only an opinion along the lines of “Doig” or “cat” at that particular moment in time. That is to say, the experts are offering galleries and auctioneers the ability to avow authenticity subject to future reconsideration while the economic demands placed upon collectors call for assurances on a longer continuum.

As a general tenet of life, people are created equal but opinions are not. When you receive an opinion from a doctor about your health you expect you can rely on it; we know that not every aspect of human body is if fully understood, but we at least expect to be given the variables and a prognosis of the disease. On the other hand, when a stockbroker tells you that a certain stock is a “must buy,” then you should run for the hills because you know something else is coming your way. Experience in life teaches us whom we should trust.

It shouldn’t be a surprise to anyone that art experts’ opinions are rarely meant to be final decisions. Scholarship, they will tell you, changes based upon new information discovered from time to time about artists’ techniques and materials, and new works are found that add to their knowledge of the artist’s oeuvre. An opinion about an artwork is more akin to who will win the World Series this year- it will be a choice of one of two, but no more can be said for certain at this time.

Unavoidably, this is exactly how the courts have treated art experts’ opinions; without exception, all of the lawsuits against art experts over the past several years have failed miserably. Judges and juries are in no position to gauge the authenticity of artwork, so they rely on the trusted experts. The Warhol Foundation was sued twice in the last few years and won both cases, though that smile on the courthouse steps probably cost them several million dollars. This means, practically speaking, that the authenticity quandary is more of an economic problem than a crisis of confidence. A much better reading of the situation would gather that art experts are not being compensated at an appropriate level. Think about other trades where people offer their opinions as a paid service: the credit rating agencies in the financial industry have been subject to vicious lawsuits- and probably justifiably- over the past few years and we don’t see any of those companies getting out of the credit rating business. Why? Because credit rating agencies make barge-loads of money every day- paid for by the very financial institutions that rely on their opinions to sell their wares. Does this sound familiar? If art experts were compensated in the same manner as credit rating agencies then the art market would not be having this debate. The Warhol Foundation should charge five percent of the fair market value of a work in order to authenticate it, and I suspect they would willingly withstand the judicial activism directed at them by any disgruntled patrons.

Just today, I came across another cartoon of two art experts standing in a gallery looking at a taxidermy wolf covered in a sheepskin pelt and enclosed in a glass case. One expert said to the other, “I’m afraid it’s a fake.” How very appropriate.

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Our Greatness and Our Goods

A Letter from Deep in the Heart

By MICHAEL MCCULLOUGH          March 8, 2013

Most budget debates in the US Congress are conducted on an astonishingly low cultural and intellectual level, marked by both parties claiming clairvoyance over what is required to “make the country a better place for our children and grandchildren.” While their concern for posterity is always welcomed, it leaves one wondering how the yet-to-be born where regarded when the deficits were created in the first place. After all, it takes a great deal of time and effort to create monumental budget deficits such as the ones we now maintain. And in a sign of utter incompetence, the Congress and President have now left the budget debate in the hands of the bureaucracy to work out; we’re all anxious to see if they can come up with a more rational method of balancing the Federal checkbook.

So far, being “sequestered” – in the budgetary sense- doesn’t seem so bad, but think how strange it is to see budget cuts that don’t disproportionately affect the National Endowment of the Art. Since the Reagan administration, the NEA has been the whipping boy for federal budget excess, as if the small amounts given to arts funding in the US has any real impact on the budget. Perhaps this is because the government’s role in defining and regulating cultural life in America has always been controversial: Americans, true to their pilgrim roots, detest government interference in most areas of life but especially the cultural and spiritual.

Every now and then, usually while visiting Europe, I realize how late the US was to funding the arts. In the early 20th century, philanthropists were creating great museums and libraries, while the Federal government’s support of the arts was- at best- sporadic, leaving many people in the arts community in despair and disbelief. In 1955, President Eisenhower tried and failed to introduce legislation to establish a Federal Advisory Council of the Art, a modest proposal by any means. President Kennedy revived the effort in 1961 but the bill was defeated in the House 166-173 on a roll-call vote (some things never change). Kennedy tried and failed again in 1963, but Congress passed a bill in 1964 creating an advisory body, the National Council on the Art, in the Executive Office of the President. In consequence of this, President Johnson was the first president in American history to employ a Special Assistant to the President on the Arts, a full-time arts adviser. This led to Johnson’s 1965 State of the Union demand for a foundation on the arts and to Johnson’s submission of a bill to Congress in March of 1965 to establish arts funding. Johnson decided that the bill was a “must” piece of legislation and firmly pressed the Speaker of the House to push the Committee of Rules to move the bill to a vote.

The result was the National Foundation on the Arts and Humanities Act of 1965. Johnson stated at the signing ceremony that the legislation was meant to address the curious fact that “[s]omehow, the scientists always seem to get the penthouse, while the arts and humanities get the basement.” The Arts and Humanities Act established the NEA and provided for 26 citizens to serve as advisers to the agency as members of the National Council on the Arts. Members are appointed by the President and approved by the Senate for six-year, staggered terms. Congress has since reduced the membership of the Council to 18 members of the National Council on the Arts and an additional six members of Congress to serve in an ex officio, non-voting capacity for two-year terms.

It’s difficult to know Johnson’s personal thoughts on the arts, and I’m not well familiar with the various biographies of Johnson. It’s unlikely that Johnson’s early upbringing had a major influence on his understanding of the arts; it’s easy to miss Johnson City, Texas while driving on Highway 289 between Fredericksburg and Austin. It seems more likely that Johnson’s approach to the arts was an intellectual one, and this plays out in many of his speeches and writings on the topic.

The legislative files on the Arts and Humanities Act of 1965 in the LBJ Presidential Library- a collection well worth the visit- offer some useful hints at Johnson’s views on the arts. The Johnson White House wrote dozens of letter to supporters of the legislation, but very few written by Johnson himself- most of the correspondence was delegated to aides. However, in a letter from Johnson to one of the early and keen supporters of the Arts and Humanities Act, Dr. Barnaby Keeney of Brown University, he wrote “[w]e have indeed begun to worry as much about our greatness as about our goods- – and it is a giant step forward.”

This theme of intellectual progress is reflected again in Johnson’s first annual report to Congress on the NEA, delivered in January 1967. The first draft of the address, written by aides, was a dry, bureaucratic checklist of accomplishments. To the final draft, Johnson added “[i]n countless American towns there live thousands of obscure and unknown talents. What this bill does is to bring active support to this great national asset.” He continued on to say, “[t]hose who believe that the quality and appreciation of art is one test of a nation’s maturity and greatness will take heart from this report.”

In another letter, written to the actor Kirk Douglas in thanks for his support of the Arts and Humanities Act, Johnson wrote, “[n]o society is truly great unless the arts are alive. If we can help nourish them, then history will favorably record our times.” As memories of the Vietnam War- and of Arthur Miller- fade, perhaps it’s time to reflect more upon Johnson’s support for the arts and his great legacy of arts funding.