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Art business economics lessons.

Have observers been too quick to apply ideas drawn from economics and finance to the art world and its markets? The fundamental traits of the art trade make it resistant to classical economic theory --and to the expectations that it entails

In our interconnected world, it is commonly assumed that interdisciplinarity is a good thing: that ideas borrowed from one field and applied to another will provide new perspectives and insights. What is all too often forgotten, however, is that each discipline has its own language and ways of thinking, developed over time and informed by underlying ambitions and assumptions. A concept borrowed from one field may or may not be applicable elsewhere; the uninformed imposition of a paradigm can create unrealistic expectations, and punish existing successful practice in the discipline to which it has been misapplied. In recent years the arts--and the cultural and creative sectors more widely have been inundated with the language of economics. This should come with a very big health warning.

Modern theories of the markets, finance and economics have their roots in the classical economics of the 18th and early 19th century, including Adam Smith's proposal that for the common good, markets are best left to regulate themselves according to natural competitive forces or the metaphorical 'invisible hand'. But can such theories be applied to the art world, and more specifically to the art market(s)? Here, I want to consider just three common criticisms of the art world and its market that rely on assumptions drawn from economic and financial theory. Are these criticisms fair, or even relevant?


The art market is irrational

A general underlying assumption of economic theory is that in well-functioning markets, all individual participants behave 'rationally'. That is, people make choices to maximise their utility. Of course, this assumption is not very realistic--and not just in the art market. Human nature is vulnerable to a whole range of forces that can cause people to make 'irrational' decisions. Arguably, most people are irrational, most of the time: mood, tastes, fashions, trends and even the time of year or weather can affect us. Measuring the art world by its distance from a theoretical ideal of rationality seems even more peculiar when discussing aesthetic goods and experiences.

At its core, a response to a work of art is by its very nature emotional, not rational. Furthermore, when we interact and engage with an artwork, we don't measure it according to the degree to which it meets a predetermined set of criteria--such as how blue, big, or bright it is--in the way that we can measure how fast a car accelerates. With art, we have an instantaneous, emotional, even physical response to its entirety. In his farsighted book, Creative Industries: Contracts between Art and Commerce (2000), economist Richard Caves has described such goods as having a property of 'infinite variety', which is why standard econometric models that try to measure the financial performance of artworks by breaking them into a finite set of constituent parts or variables struggle when applied to the arts.


The art market is not transparent

This criticism is often levelled at the art world, and cited as the root of misdemeanour and misbehaviour. If only we could make the art world transparent, lament the critics, we could rid ourselves of crime and create a well-functioning marketplace. This desire for transparency is in part based on the assumptions derived from economic theory that in 'perfectly functioning markets' all agents have full information about all others' behaviours. When someone buys something, the price, timing, and other relevant information is immediately and openly visible to everyone else. This is indeed one of the arguments for trading art via auctions. Furthermore, if someone comes to such a classical market they can immediately see if a good is still available or if the market has cleared.

But the art market is not like most markets, because it is made up of unique goods. There are no global items because every object is individual--items are only similar, but not the same (and in many cases they are not even good substitutes for each other). Transactions in such markets are not determined by supply and demand but are enabled by expert agents such as dealers and auction houses. They are specialists in matching the preferences of unique consumers to unique objects within unique contexts. In this sense, the art market is not really a market at all, in the way that markets for, say, potatoes or oil are (where all items are effectively the same) and in which consumers are primarily motivated by the relationship between price and quantity--and not by an emotional response. Because goods are unique and supply is essentially fixed, price is mainly driven by demand, which effectively has no upper limit in the art market because it is determined not just by wealth but by taste and desire.


The art market is inefficient

The so-called 'efficient market hypothesis' is much debated in the literature of financial economics. At its most basic, an 'efficient market' is one in which prices always 'fully reflect' available information. Although this assumption comes in various forms, it remains a central tenet of modern theory about financial markets. The art market is often criticised for being highly 'inefficient'. Prices often puzzle and confound observers: they do not seem to reflect all available information but are instead skewed towards the beliefs of key players and taste-makers. Why, commentators ask, do some artists popular with the public not sell as well as others who are widely critiqued but command astronomical prices?

One possible explanation regards quality. In most markets, there is a broad acceptance of what constitutes quality and the associated risks that are priced into the market. Second-hand cars, for example, are significantly less expensive than new cars, partly because assessing their true quality and reliability is difficult. Sports cars are more expensive than normal cars because they are faster and better built. The market can cope with broadly accepted measures of quality that are reflected in prices.

In the art world, however, there is no universal view of quality. Segregation by quality is nearly impossible because of the uniqueness of the goods on offer. The ability to trade in this world is determined by the expert dealer or auction house, agents with the most comprehensive sets of information on individual objects and consumers. This naturally results in asymmetric information sets across the market; and to measure the success of such a world by the degree of efficiency is a misguided approach.

In his recent book, Managed by the Markets: How Finance Re-Shaped America (2009), Gerald F. Davis argues insightfully that the language and ideas of economics have increasingly permeated all walks of life--to the extent that even behavioural and social norms have been distorted and damaged by a 'financial' way of thinking. The art world may be one of the final bastions holding out against this trend, but it is not immune: we have all heard of 'art as an investment class'. This is not to argue that interdisciplinary approaches have no use; borrowing from other fields can bring a depth of understanding if done with care and caution, and if accompanied by respect for field-based practices and aims. But art is not economics, and economics is not art. So here's to the irrational, emotional, inefficient, uncertain, opaque art world. We need it.

Anna Dempster is Head of Academic Programmes at the Royal Academy of Arts, London.

Caption: Jussi Pylkkanen, global president of Christie's, presiding over an Impressionist and Modern Art evening sale in February 2015
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Author:Dempster, Anna
Geographic Code:4EUUK
Date:Sep 1, 2017
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