Economics and Economic Perceptions of the Art Market

by William G. Morrison.

Some fascinating economic problems associated with the art market
Perceptions and counter-images
Characterising the art market over time
A theoretical analysis of culture and art by an economist may seem either odd, inappropriate, or irrelevant both to economists ("that's not serious economics") and to those involved in the world of art (some egghead wants to reduce art to a discussion of supply and demand"). However, in the last twenty-five years, the arts have received a growing amount of attention from serious and respected economists. Beginning with Baumol and Baumol (1966), several books have investigated economic aspects of the arts in general including such topics as the cost characteristics and pricing behaviour of arts organisations, the supply decisions of artists, policy analysis of government agencies and the rational for government subsidies to the arts [Blaug (1975); Throsby and Withers (1983); Globerman (1983) and West (1986)].

As a subset of this literature, studies of the visual arts have tended to focus on the financial performance of art an investment asset [Pesando (1991), and Stein 1989), for example]. However, there are a host of other interesting economic problems associated with the art market. Here are four examples:

1) What constitutes the value of an original art work and how does this relate to the notion of a "copy"? For example: "...if I did not buy this painting as an investment, and have always enjoyed looking at why should I be disappointed if some expert tells me it is a copy, not an original?"

2) How do art auctions work? Art auctions are interesting because art works have characteristics of both investment goods ("when the price goes up I'll resell for a profit") and consumption goods ("I like looking at that").

3) What explains the particular institutions that govern the business of the art market? There are a series of complex arrangements involving artists, galleries, dealers, experts, auction houses and buyers. Did the particular arrangements we observe evolve as the best solution to a particular set of problems?

4) What role should governments play in the art market? Can the government improve the efficiency of the art market through intervention and regulation, or is government intervention more to do with redistributing wealth from one group to another? Do government programs like Canada's recently dismantled Art Bank encourage the development of art markets -- do they help those they are intended to help?

These are interesting questions, which I will not attempt to answer. However, they illustrate that the art market poses problems that may not be the exclusive domain of economics, but which can surely benefit from the scrutiny of economic analysis.

As a means of further stimulating some thought on the economics of art, let me present some perspectives and counter-images which demonstrate the existence of a diverse collection of transactions and exchange relationships in the art world.

Perceptions and counter-images

Stereo-typical images of the art world tend to draw attention to certain glamorous or intriguing aspects of the market and tend to obscure the variety of institutions which have governed art transactions over time. For example, the popular image of an art auction is one in which art works that originally sold for the price of a loaf of bread are resold for millions of dollars. . . . [S]uch instances do occur and are much publicized, however there are many recorded sales in which art works have appreciated in far more moderate terms and in some cases have diminished in value or even become obsolete.

. . . . 

As far as art buyers are concerned, at one time, the stereotypical art buyer was a wealthy aristocrat, who not only purchased art but also supported artists as a patron. Yet, the aristocracy were often cash strapped despite their wealth and far from being philanthropists as patrons, they rarely offered stipends or lump-sums without expecting something in return.

Art dealers and art experts play a role in stereotypical perceptions of how expert knowledge can translate into huge capital gains for those who can spot a "grand master" in the attic of an unsuspecting layman. This has fueled suspicions of collusion and the strategic manipulation of art prices through interactions between dealers and hired experts, such as the secret agreement between famous dealer Joseph Duveen and art expert Bernard Berenson. Yet, the research and expertise undertaken or contracted by dealers has in fact been a vital source of efficiency in the art market. The buyers who value a particular work have been efficiently matched with sellers and the provision of expert information has reduced inefficiencies relating to uncertainty over the authenticity of art works.

Finally, artists are often perceived to conform to the image of the poor, eccentric individual who is driven to create works that are rarely valued by society until or after his or her death. In contrast to this perception, history paints a somewhat different picture (sorry could not resist the pun). As a professional group, artists have been relatively wealthy during their lifetimes.

As regards government intervention, two forms of government regulation which are specific to the art market, and which pose interesting economic problems are "droit moral" (moral rights) and "droit de suite" (resale profit-sharing rights). Droit moral has become part of copyright law in Canada and works by assigning rights of integrity and paternity to the artist. The right of paternity means that an artist can choose to either associate or disassociate himself/herself with or from a particular work. The right of integrity means that after selling an art work, an artist can retain the right to prevent the alteration and/or mutilation of a work. Also, the right of integrity allows the artist to prevent a buyer from associating an art work with another product, service, cause or institution if it prejudices the honour or reputation of the creator. In Canada, these moral rights can be waived by the artist if he/she so chooses (this is not true in France or Germany).

Droit de suite, is not currently law in North America (with the exception of the State of California). Droit de suite is a regulation which endows artists with an inalienable right to share of any profits that might result from the resale of an art work at auction. Under the regulation (which is law in France, Germany, Italy, Brazil and a number of other countries) artists must receive a fixed percentage of the resale profits. However, artists are not required to cover a share of any losses that might be incurred if a work is resold for less than its purchase price.

Both forms of regulation are interesting because whenever the government changes the nature and allocation of legal rights, it is guaranteed to have an impact on how the market operates. It follows that while these regulations may have been introduced to help artists, they could create more problems than they solve. If an art buyer's rights are restricted whenever an art work is purchased, we would expect the value of the art work to decline from the buyer's perspective. Thus, artists may like the idea of participating in potentially large resale profits in the future, but they will not like receiving a lower initial purchase price as a result.

Characterising the art market over time

[Note: the material in this section draws largely on Vol. 1 of Reitlinger (1963) and from Grampp (1989).]

Historically, the art market has undergone many transitions in which the identities of and relationships between creators, dealers, experts and buyers have changed over time. Prior to the early part of the sixteenth century, artists did not paint on canvas and the art market was characterized largely by personal service contracts between buyers and artists for creations that would not be resold except as part of the buyer's domicile. Up until this time, therefore, artists (painters in particular) were skilled tradesmen who were relatively wealthy and who did not create without the certainty of a sale. Once art works became transportable, pictures which gained prestige value became tradable and the art resale market was born. Of course, this represented a double edged sword for living artists at the time for although the transferability of their work added value to it, they also faced competition from an increasing stock of works by past masters. Nonetheless, Reitlinger (1960) reports that by the middle of the 17th century, the art market was well established in France, where the Royal Academy of Fine Arts was founded in 1648 and in England where in 1650, Charles I received a price of £2,000 for a painting by Raphael.

An artist's life in 17th century Italy and Holland was still geared to well defined personal service contracts. It was common for unestablished artists to sign contracts in which they agreed not only to supply the "patron" with a certain number and type of art works, but also to work as house servants in return for an allowance. Upon the establishment of a reputation, the next step was for the artist to leave house service and open a studio. Even then, art works were largely created as the result of a forward contract with a specific buyer. Exhibiting art for sale as a method of obtaining income for artists was regarded as a last resort.

Around the middle of the eighteenth century, the market witnessed a sensational art sale when the King of Saxony purchased "Sistine Madonna" by Raphael in 1754 for £8,500. It was around this time that the first regularly scheduled art exhibitions by living artists were held both in London and Paris. The French exhibitions were regulated through the Royal Academy and the art selected by jury and exhibited in the "Paris Salons". The salons enjoyed a brief period of open access in the period 1791-1798 following the abolition of the Royal Academy. However, a jury system was reinstated in 1798 and the Academy restored (under the new name; Academie des Beaux-Arts) in 1816. While art exhibitions were popular and well subscribed to at this time, the majority of artists in the eighteenth century made their living by painting portraits or by acting as dealers trading the works of past masters. Reitlinger states that by the 1780's, painters were amongst the wealthiest men in England, with artists such as Renolds charging two hundred guineas for a full length portrait which aside from the head would be painted by his apprentices or their assistants. Reitlinger also reports that during the 1790's "...there were no less than 28 English and Scottish painters residing in Rome and trading in old masters and antiques".

Other wealthy painters of the time include the American painter Benjamin West, who resurrected the popularity of subject paintings in Britain and who, after an opulent life (which included being paid an annual allowance from King George of £1,000 per year for thirty-seven years), was worth well over £100,000 when he died in 1820. West's career can also be used to illustrate the unpredictable nature of art prices. In 1814, West created his massive painting "Christ Rejected by Caiaphas" and was believed to have refused an offer of £10,000 (he sold another smaller painting "Christ Healing the Sick", two years earlier for £3,150). Some twenty years later, the same painting was discovered rolled up in the back room of a small store. The depreciating value of his works was also evident
in 1829 when a series of 14 works he had painted for the Chapel Royal at Windsor Castle was sold for a total of £546, with one painting selling for a mere £26.

Three significant events occurred in the art market during the second half of the nineteenth century. Firstly, independently wealthy aristocrats were being replaced as the buyers of art by the mercantile classes, who in addition to wealth actually had the cash with which to buy. The English aristocracy needed funds to maintain their estates and with the enactment of the Settled Lands Act in 1882, they were free to sell off the family heirlooms. Secondly, in the late eighteen hundreds the Academie Des Beaux-Arts excluded works by the Impressionist school from the Paris Salon exhibitions. This dealt the Impressionists a severe blow, since at this time, the Salons were the art market in France, with a daily attendance of up to 10,000 and as many as 5,000 pictures being displayed at one salon. An English market that was uninterested in French Impressionism and a huge increase in the number of artists and paintings in the market, meant that Impressionists received low prices for their works. According to Reitlinger, it was these circumstances that generated the stereo-typical image of the starving artist:

"The 'starving artist' was a product and a victim of the exclusive Paris Salon between the 1840's and the 1890's. He (the starving artist) began with Meryon and ended with Van Gogh and in England he was a rarity. In late eighteen century England, even a journeyman painter belonged to a prosperous class of tradesman. A fashionable portrait painter was a merchant prince, besieged by clients and dining with the great".

The suggestion is therefore that the "starving artist" was an anomaly that somehow became a stereo-type. Furthermore, Grampp (1989) suggests that it was the low prices of Impressionist work that attracted American buyers in the first place and that the market for their work would not have developed so quickly if they had not suffered through this period of low prices.

A third event in the late nineteenth century and early twentieth century, was a price trend which occurred in both the English and French market. Art prices began to follow periods of brief crescendo upon an artist's death followed by decline. Shortly after the death of the English painter Turner, his paintings appreciated rapidly in value and were acquired in preference not only to works by living artists but also to old masters. Only once did a painting of his sell for more than £1,000 during his lifetime, but shortly after his death in 1851 "The Grand Canal" was sold for £2,205 (1860), it was resold in 1875 for £7,350 and again in 1885 for the reputed price of £20,000. However according to Reitlinger, the rate of appreciation fell off before the turn of the century, sending the market for works by his followers into decline. This phenomena also occurred in France where the works of Delacroix (who died in 1863) and his contemporaries appreciated in value from 1865-1880 and then fell into decline, as they were usurped by Millet (who died in 1875) and the "Realist" school. These works now appreciated but only until the early 1900's, when they were superseded by the "Impressionists" following the death of Renoir in 1919. The sale prices of Renoir's work did not surpass £3,500 and rarely exceeded £900 during his life, but in the period 1919-1932, sale prices ranged from £4,000-£50,000.

Between 1929 and 1945 the art market was characterized by the effects of the depression, followed by the Second World War. Then, in the late nineteen fifties, a new sort of art market evolved, in which according to Reitlinger, buyers looking for old masters outstripped the available supply and turned their attention to "the inferior prizes" thereby bidding up prices. The effect of this was to severely curtail the number of endowments to art galleries in the US., and to encourage endowments back to the pre-war levels, the government introduced a 30% tax deduction. This created an incentive for museums to overvalue works in order to enhance their tax value in return for endowments andbequests, and the result was inflated sale prices.

The sixties and seventies saw a growing market for contemporary art which blossomed with the auction in 1973 of 50 art works (paintings and sculptures) by contemporary art collector Robert Skull. The total revenue generated by the sale was $2,200,000 including $240,000 paid for Jasper John's "Double White Map" (1965) and $180,000 paid for Willem de Kooning's "Police Gazette" (1955). In addition to demonstrating the financial viability of collecting contemporary art works, the auction also gained notoriety for an incident which took place involving Skull and artist Robert Rauschenberg. Scull sold two works by Rauschenberg at the auction for a total of $175,000, having purchased the works from the artist for $3,400 some fifteen years earlier. Following the auction, Skull was publicly confronted by the artist who was angered by the amount of money Skull had made from the resale. Rauschenberg later proclaimed "From now on, I want a royalty on the resales and I'm going to get it". However, as an investor Skull did achieve spectacular returns on his initial investment. Bloch et al (1988), point out that the rate of return on one of the works ("Thaw", purchased for $800 in 1958 and resold in 1973 for $85,000) was no more than could be earned by an investor who purchased IBM stock over the same period.

Nevertheless, the growth in sales of contemporary art works continued throughout the seventies and into the eighties which was characterized by an increasing number of big sales. Nash (1989) suggests that although "Notre Dame" by Julian Schnabel sold for $93,000 at Sotheby's in 1983, it would have fetched less than $10,000 a few years earlier. The big sales of contemporary works by living artists continued through the eighties, peaking with the sale of de Kooning's "Interchange" for $20.7 million in 1989, a year which witnessed the sale of Van Gogh's "Portrait of Doctor Gachet" for $82.5 million.

It appears that the development of a strong resale market for contemporary art by living artists in North America was the catalyst that ignited growing support for a droit de suite regulation, both in Canada (where it was considered for adoption under the revision of copyright) and in the US where it was proposed by Senator Kennedy. However, to date droit de suite has not been adopted at the federal level in either country.


© William G. Morrison is Assistant Professor of Economics at the School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario, Canada.