CHAPTER 24
Compared with financial
markets, the art market is negligible in terms of size and speculative
activity. In 2007, for instance, annual turnover on the global art
market was estimated to be $48.1 billion (McAndrew 2009: 13) while average daily turnover on the global foreign exchange market in the
same year was $3.2 trillion, with $4 trillion by 2010.1
Nevertheless, in the last 40 years art has evolved into a recognizable
financial asset category that today is implicated in a wide range of financial
transactions. Works of art are used as collateral in order to secure
multimillion-dollar bank loans, they are or have been part of the portfolios of
pension funds, and since the late 1960s various attempts have been made to
establish investment funds that focus on art. As the cultural economist Claire
McAndrew claimed, “[t]he growth of art funds and other professional art
investment vehicles bears out the fact that both individuals and institutions
have now fully embraced the notion of art as an asset class for investment”
(2009: 27).2 In short, the art market has become or is in the
process of becoming financialized. By this, we mean that art markets have seen
the emergence of new financial instruments and that they have become affected
by “the increasing role of financial motives, financial markets, financial actors
and financial institutions in the operation of . . . economies” (Epstein 2005:
3; Aalbers 2008; Sassen 2001; additional definitions of financialization in
Krippner 2005).
The financialization of art merits the
attention of social scientists studying finance for a number of reasons. First
of all, in spite of the fact that the investment potential of art has long been
recognized (section one), its recent financialization has been resisted by both
members of the art world and of the financial markets. Members of the art world
have opposed the definition of art as an asset class and the commensuration
efforts which this definition entails (see second section). Members of the
financial community, in contrast, have hesitated to recognize art as a valid asset
class because of the art market’s lack of liquidity, transparency, and
standardization. Their opposition has, however, gradually eroded in a
three-stage process of increasing rationalization and scientization of the
market. As part of this process, art investment has been legitimated by
adopting role models, organizational blueprints, and market devices from the
world of finance (section three). Economists have played a key role in this
process of rationalization and scientization: they have developed price indexes
that, by rendering art recognizable as an asset class, function as boundary
objects (see fourth section). But in spite of the market-making efforts of
economists and other “institutional entrepreneurs” (cf., Battilana, Leca, and
Boxenbaum 2009), the financialization of art is hardly complete. This is predominantly
caused by continuing information asymmetries and failure to construct liquidity
in art markets (section five).
In contrast to the newer financial
instrument interest, art has been perceived as a store of value for hundreds of
years. “Paintings are as valuable as gold bars,” the Marquis de Coulanges
remarked in the seventeenth century (cited in Watson 1992: 157). In the nineteenth
century, the Rothschild banking family allegedly acquired art in order to diversify
its portfolio. The family invested their wealth by thirds: equities, real
estate, and the remainder in jewelry, art, and cash (Ferguson 1998). In the
early twentieth century, the forerunner of an art investment fund was
established by French financier and art lover Andre Level, who pooled together
money from 12 other investors to found the Peau de L’Ours (Skin of the Bear)
scheme. The funds were used to buy more than 100 works of art from artists such
as Picasso and Matisse, who were still in the early stages of their careers. In
1914, the entire collection was liquidated. The sales prices for the works
were, on average, quadruple the original acquisition prices (Fitzgerald 1995).
Small-scale, informal, and largely undocumented investment groups like the Peau
de L’Ours have continued to exist, not just in the West but also in the
emerging art markets of India and China. They are the art market’s equivalent
of private investment clubs in the stock market (see Harrington 2008).
The financialization of art is a more recent
phenomenon, however: since the late 1960s amateur art buyers have been joined
in a piecemeal fashion by large, professional investors, such as investment
funds, pension funds, and high net worth individuals who have ample experience
with and knowledge about financial markets. The financialization of art takes
off in the 1960s for at least two reasons: first of all, economists have
pointed at the high prices for art in that decade and the widespread media
attention these prices received (Baumol 1986). As early as the late 1950s, art
was framed as an investment in popular magazines and newspapers such as Fortune and The New York Times. Second, the interest in art for investment purposes
may be attributed to wider economic developments that made traditional
investments less attractive and prompted investors to look for alternatives. In
particular, worries about inflation helped to increase the legitimacy of art
as a hedge. British scholar Gerald Reitlinger wrote in The Economics of Taste, a three-volume historical analysis of the
art market, that “[b]y the middle of the 1950s, after two world wars, a world
financial depression, and a world wave of currency inflation, ‘art as an
investment’ had lost any stigma that it might once have possessed” (quoted in
Horowitz 2011: 159). It would be another decade before the first art investment
vehicles were launched.
The financialization of art
should not be seen as an automatic process propelled by dissatisfaction with
existing investment opportunities and the search for alternatives such as art.
In contrast, it has been a contested process which involved a definitional
struggle between two groups of actors (cf., Smith 2007): the financial
community and the art world, which each draw upon their own evaluation
practices (MacKenzie 2010) and invoke different orders of worth (Stark 2009).
On the one hand, members of the financial community seek to transform art into
an asset class, which requires standardization, commensuration, and
quantification. Reasoning from what Viviana Zelizer (2000) has called a
“Nothing But” perspective, in which two apparently distinct spheres—in this
case, the art world and the financial markets—are reduced to one on the basis
of some general principle, they define a work of art as “Nothing But” an
investment opportunity. As Justin Williams, one of the founders of the Art
Trading Fund, comments provocatively: “for me art is just a commodity, it’s a
cold thing. I have collected well, but I see art as a P&L [profit and loss
account] on the wall” (quoted in Johnson 2007a).
This definition has been
opposed by members of the art world, including art dealers, collectors, and
artists, who see art as a unique, incommensurable, cultural or aesthetic
object, and try to shield it from financial or commercial concerns. For these
actors, the art world and the financial markets are an instance of what Zelizer
calls “Hostile Worlds” (Zelizer 2000; Coslor 2010): they assume that an
intrinsic conflict exists between art and money and that the incommensurable
value of art is at risk once it is standardized and transformed into a
“speculative object” (Espeland and Stevens 1998). As one dealer put it,
investment funds are “dangerous, and unsafe for the market. They have not been
set up for the right reasons and are destroying the notion of what art stands
for, aesthetic beauty and to be admired in one’s private collection or in a
museum” (quoted in Mamarbachi, Day, and Favato 2008: 5). The definitional
struggles between these groups indicate that the art market, as Charles Smith
has argued, is not just a site where artistic goods are exchanged and prices
are set, but also a site where meanings of these goods are
determined, valuation
procedures are institutionalized, and rules regarding who may participate in
the market are established (2007).
These contradictory
definitions have direct behavioral repercussions, particularly in the market
for contemporary art. Art dealers, for instance, claim that they prefer to
“place” the works in the collections of buyers who are unlikely to resell them
or who may even have committed to donating them to a museum (Velthuis 2005;
Coslor 2011). In contrast, they avoid selling works to those they call
“speculators,” because they do not want to see those works return to a
commodity phase after their initial sale (Appadurai
1990)
. In other words, while liquidity is a prerequisite for
financialization, making the permanent selling and buying of an asset possible,
dealers in contemporary art actively seek to curtail this liquidity. To
accomplish this, they have stipulated a right of first refusal in selling
agreements and have informal blacklists of those collectors who have a
reputation of quickly reselling a work of art at auction in order to make a
profit. As one established New York art dealer put it:
You can tell a speculator very quickly. . .
. Just the kind of questions they ask, and what they ask for. It is almost like
they are wearing a sign on. A speculator would come, and look at your gallery
program, and ask for the two things that are most
sure to increase in value__ When we see each other, they know
exactly what I think
of them, and they know they cannot buy here, no matter
what they want to buy. (quoted in Velthuis 2005: 44)
Apart from definitional and
symbolic reasons, the rationale for these practices is that investors may
destabilize a market that is characterized by uncertainty regarding the
artistic and economic value of the goods exchanged (cf., Plattner 1996). Art
dealers seek to stabilize the market by setting prices according to widely
shared pricing scripts, which prompt them, for example, to increase prices in a
piecemeal fashion (see Velthuis 2005). In addition, price decreases, which
signal a lack of quality to collectors and harm the self-esteem of artists,
should be avoided at all times. The stabilizing efforts that dealers exercise
through these scripts can be hampered by investors reselling their holdings at
auction, which in turn produces price volatility. Because of the signaling
effect of prices and price decreases in particular, art dealers seek to avoid
this volatility (Velthuis 2003; Coslor 2011).
As a result of the oppositional evaluation
practices, the art investment community has remained by and large a separate
circuit within the art market (cf., Zelizer 2004). However, it has been
strongly linked to the auction houses, whose rationalized and commercialized
evaluation practices have been more in line with those of financial markets.
Unsurprisingly, the initiators of art investment funds have themselves
frequently worked at auction houses in the past. Links between the art
investment funds and the art world have also been established by art experts
such as ex-museum directors and art critics, who almost invariably are part of
the funds’ management or advisory team. Investment funds have recognized that
economic valuations in the art market crucially depend on what Lucien Karpik
(2010: 101) has called “an expert-opinion regime,” which “rests on choices made
by experts entrusted with selecting the best singular products.” In other
words, art investment funds rely on the artistic judgment of experts such as
museum directors, art critics, or others who possess, as Bourdieu (1993) put
it, the symbolic capital to consecrate art and thereby establish its economic
value. Moreover, art investors have an additional interest in relying on these
experts since they may have insider knowledge regarding art world trends and
informational advantage about, for instance, the whereabouts of specific works
of art that the fund wants to buy, or latent demand for specific works that it
seeks to sell.
The financialization of art has
not only been opposed by the art world, but also by the financial community,
albeit on altogether different grounds. Most members of this community have
not recognized art as a valid asset class, pointing to structural barriers to
the financialization of art, such as the heterogeneity of art, lack of
liquidity, and the nontransparent character of the art market. With the
growing financial interest, these barriers have been partially removed, in a
process of standardization, scientization, and professionalization. As has
happened in the past in financial markets (see, e.g., Preda 2009; Stark and
Beunza 2004; MacKenzie 2005), passion and intuition have slowly been replaced
in the art market by calculated, informed decision-making assisted by increasingly
abundant flows of information, increasingly sophisticated market devices
(Callon and Law 2005), and new stocks of knowledge. This process has involved a
wide range of actors such as academic economists, pension funds, auction data
providers, art market research companies, art appraisers, legal services,
insurance companies, and accountancies. Their often concerted efforts have
rendered the art market more transparent and predictable. Moreover, by adopting
organizational blueprints, market devices, and role models from the world of
finance, these actors have sought to legitimate this financiali- zation of art.
We can identify three key
stages in this process: the first stage (1960-80) is characterized by a small
number of pioneering parties who tended to be driven by a passion for art or an
adventurous investment spirit, rather than thorough knowledge and information
about the art market, a relatively scarce knowledge at the time. This first
phase saw the establishment of what would turn out to be one of the most
important market devices for art investment: the art index. In 1967, The Times of London was the first to make art explicitly
comparable to stocks by publishing a graph representing the price development
of art, akin to a stock index. As a journalist remarked with hindsight: “By
demonstrating that pictures could be thought of in this way, the index
guaranteed that they would be. It presided over a vertiginous rise in the value
of art, as moneyed individuals, corporations, even pension funds found that
they could justify the acquisition of a painting in exactly the same way that
they could a block of shares” (Hensher 2006: 23).3 In other words,
the index made works of art commensurable and stripped them of their unique,
heterogeneous character. It reduced the complexity of price developments on the
art market to a single chart or number. At the same time, it fulfilled the
symbolic function of classifying art as an asset class and making it comparable
to already existing investment categories (cf., Lounsbury and Rao 2004).
A related attempt to
commensurate and standardize art was made during this first phase by
securitization, usually through art investment funds. One of the first art
investment funds to do so was the Sovereign-American Arts Corporation, which
was conceived in 1968 by a group of British and American investors. They
bought “world art” made in the two preceding centuries, and hired advisors that
included former museum directors. By late 1969, when the company was about to
go public on the New York Stock Exchange, it owned 70 works of art, including
pieces by Kandinsky and Giacometti. The initial public offering was a success:
on the first day it was listed, the stock price rose from an original price of
$6 to $25.
In the years to follow,
similar initiatives would follow in the United States, Belgium, Switzerland,
Luxembourg, and Germany, often with support from established banks. Some of
these efforts catered to the interests of retail investors while others only
allowed access to high net worth clients.4 Apart from making the
investment market for art more liquid, these securitization efforts rendered
art more attractive for investment purposes because they allowed for
diversification, the use of expert advising, and the ability for investors to
do away with the sometimes intransigent problems of storage, security, and
caring for the actual objects.
One of the successful
investments in this early stage was the portfolio of art assembled by the
British Rail Pension Fund, which in 1974 began buying art and antiques as a
hedge against inflation, rampant in Britain at that time (Eckstein 2008).
Assisted in its acquisitions by Sotheby’s, the pension fund’s collection
eventually included more than 2,400 works of art in a wide variety of genres,
such as paintings, manuscripts, Chinese ceramics, African tribal, and medieval
art. It had generated $300 million in total after the bulk of the collection
was sold in 1999, the equivalent of an annual return of 11.3 percent (Caslon
Analytics 2008a).
Most of these funds,
however, turned out to be short-lived. Moreover, the Times- Sotheby Index was
discontinued in 1971, apparently at the behest of Sotheby’s chairman Peter
Wilson, due to a temporary art market bust (Haden-Guest 1996: 53). This bust
also caused the stock price of Sovereign American Arts Corporation to fall back
to half its initial public offering (IPO) price a year after it had been
launched. When the stock market recovered in the late 1970s and other
alternative investments became available, interest in the financial aspects of
art died down for a number of years. As The New York Times wrote in 1985: “The mutual fund approach to art, a hot
idea during the art boom of the 1970s, has no survivors” (Bender 1985).
A second wave of art investment
initiatives emerged in the late 1980s and early 1990s, a period when the art
market boomed, as it had in the 1960s. During this phase, transparency was
enhanced by the emergence of art price services which, like Reuters or
Bloomberg for traditional investment assets, began supplying potential
investors with systematic data about auction prices. Just as the advent of the
information society involved transparency in financial markets, with time
series and real-time data on a wide range of assets (see, e.g., Knorr Cetina
and Bruegger 2002; Preda 2006) this was also seen in the art market: before the
1980s, it was often unclear if, where, and against what prices works of art
were traded. 5 Data providers such as ADEC / ArtPrice or Artnet have
made art’s potential investment value easier to calculate, thereby reducing the
role of intuition in making investment decisions, in favor of some hard
numbers. These services can be seen to have democratized, rationalized, or
even “purified” the art market, just as they have done in other financial
markets (see, e.g., Levin 2005; Zaloom 2003). By making information available
more widely and at lower cost, they have reduced the importance of insider
knowledge and information retrieved in personalized networks. Moreover, in
providing additional information such as the medium in which the work was
executed, the size of the work, and its provenance, they have contributed to
institutionalizing certain standards for valuing art.
However, this
democratization and rationalization of data provision is not complete.
Nonsystematic information about trends in the art world, changes in artistic
taste, and inside rumors can affect the value of the artist’s body of work.
Inside information of this nature, such as future plans for a museum
retrospective, can only be obtained through personal networks, dense
interactions, and schmoozing with members of the art world (Storper and
Venables 2004). In fact, some data providers have found a market niche in the
sale of such idiosyncratic information, and it should be noted that insider
trading is not regulated in this market.6
Together with growing
information sources, plans to create art funds were again attempted in this
second phase of the financialization process; reflecting the further professionalization
of the sector, international banks such as Citigroup became involved. These
banks started to recognize the art collections of their wealthy customers as
part of their financial investment portfolios, and offered art advisory
services as a tool in customer management for private banking. While art
advisory is a service that many banks continue to provide, interest in
fund-based investment fell off as inflation decreased, the art market crashed
in 1990, and some initiatives such as an art investment fund by BNP Paribas
lost large sums of money.
The third transformative
wave has been through structured finance, as a new group of art funds
repackaged the investment as private equity instead of exchange-traded mutual
funds. In addition, building upon better information about the art market and
new thinking in finance, art has been promoted as a component of a diversified
investment portfolio. This phase has been characterized by mimetic isomorphism
(DiMaggio and Powell 1983), as role models and organizational blueprints from
the world of finance have been adopted by the art investment community, which
has increased legitimacy. For instance, the newly established art funds have
generally adopted the fee structure of “ordinary” private equity funds: an
annual management fee of 2 percent over the assets under management as well as
a performance fee of 20 percent over the fund’s annual return (“two and
twenty”). Potential investors of these funds are limited to financial entities
such as pension funds and individuals who meet the high minimum net worth
requirements, which vary by area and national regulations. The specific
investments are typically chosen and monitored by the management team of the
organizing private
478 OLAV VELTHUIS AND ERICA
COSLOR
equity firm. Neither the
exact amounts nor the returns made can be independently verified, because
private equity funds are not publicly traded and are therefore not obliged to
publish this information.
The scientization of art
investment has continued during this phase through the establishment of market
research companies that analyze prices and other market trends, and report
their findings through benchmarks, confidence surveys, and market outlook
reports. These market devices, which apply the analytical tools, discursive formats,
graphical representations, and market rhetoric of the world of finance to the
world of art, can be thought of as boundary objects which bridge both worlds
(Star and Griesemer 1989).7 Like the use of bookkeeping in the past
(Carruthers and Espeland
1991)
, they fulfill both the technical role of informing an
audience of art collectors and the rhetorical role of convincing this audience
as to the soundness of investing in art. Some of these devices, such as the
indexes produced by art consultancy firm Art Market Research, are distributed
to the wider investment community through Bloomberg, one of the world’s leading
data providers and trading platforms for financial markets. Thus, the ability
to reach financial market traders through their native platform further promotes
and legitimates art as an investment good.
 |
The scientization of art
investment established by research companies and data providers has been
further reinforced by the production and dissemination of economic knowledge on
the art market. This knowledge, produced from the 1960 onward by both academic
economists and practitioners in the field, has been crucial in understanding
the investment potential of art. Since the early 1960s, economists have
regularly investigated the investment potential of art vis-a-vis traditional
portfolios consisting of stocks and bonds (for overviews of the literature see
Ashenfelter and Graddy 2003; Frey and Eichenberger 1995). Through the use of
sophisticated techniques such as repeat sales regressions and hedonic
regressions, they correct a key defect of the indexes commonly provided by
market research firms and popular media, which is the assumption that all art
is of equal quality. Those “naive” methods typically take the top percentage of
auction prices to represent the market, which is convenient, but may distort
market trends. This is because price changes may be caused by varying
characteristics of the works of art traded (such as their size or style) rather
than changing valuations of art per se. The more sophisticated methods
developed by academic economists can control for the extreme heterogeneity of
art and high variation in quality. As a result, these art indexes have
contributed to rigorously quantifying the art market.8
Most early studies have
found that investments in art slightly underperform in comparison to a
traditional portfolio consisting of stocks and bonds (see, e.g., Baumol 1986;
Frey and Eichenberger 1995; Pesando 1993). But more recent studies present a
mixed view. In a study that has been widely cited in the media and by art
investment compa-
nies, Jianping Mei and
Michael Moses constructed a repeat sales index and found that between 1875 and
2000 art had an annual return of 5.6 percent, which was a higher return than
government bonds or treasury bills, and almost equal to the return on corporate
bonds, if lower than the return on stocks (Mei and Moses 2002). However, the
differences in findings within the now substantial economic literature can
usually be explained by the data sources and methodology used, as well as the
genres, time period, and geographic area of focus.
Apart from studying the rate
of return, recent studies have also addressed the question of whether price
movements in the art market and in traditional financial markets are
correlated, in order to see whether art lends itself to portfolio
diversification. These studies often employ the capital asset pricing model
(CAPM) developed by academic economists in the early 1960s. Again, the results
differ. Mei and Moses found art had a very low correlation to traditional asset
classes, and concluded that “a diversified portfolio of artworks can play a
somewhat more important role in portfolio diversification” (Mei and Moses 2002:
1663). Other studies found that art indexes move in the same direction as
traditional assets, for example, as measured by a global equity index, meaning
that limited or no opportunities for diversification exist (e.g., Goetzmann
1993; Renneboog and Spaenjers 2010).
Almost from the outset, the actors involved
in the financialization of art have used this scientific knowledge to design
new products and legitimate their activities. In the early 1970s Christopher
Lewin, the Director of the British Railway Pension Fund, reanalyzed
Reitlinger’s three-volume compendium of art prices in order to examine the
investment potential of art (Horowitz 2011). Art investment funds typically
carry academic references in the fund prospectus. Moreover, some cultural
economists, such as Michael Moses, have actively promoted art investment by
acting as consultants to investment firms, marketing their own research to
such companies, highlighting this potential in the media, and regularly
participating in investment seminars. Moses is not shy about his active role in
constructing an investment market for art: “[H]e firmly believes that fine art
will become a basic asset class such as real estate assets. . . . He hopes that
his research will keeping playing an important role until his prediction will
become true” (Deloitte 2009). This could be interpreted as a type of
performativity effect (cf., Callon 1998; MacKenzie 2006), where rather than
just describing an investment market for art, economists help this investment
market come into being.
Despite our findings here,
we do not suggest that the art market has fully become an investment market,
even if recent efforts provide a bridge that allows art to be defined and
treated in this way. Much like the property markets, people have and will
continue to consume artwork, for decoration, social standing, and aesthetic
appreciation, whereas investment interests will wax and wane, depending on
market conditions and
investment alternatives.
Anecdotal evidence suggests that only a minor part of all art acquisitions are
made with a primary investment motive. For example, the media have
characterized the large sums that hedge fund managers such as Stephen Cohen or
Kenneth Griffin spend on art as indicative of the financialization of this
market. But while investment motives may have been present, it is more likely
that such buyers are interested in the status that art may confer, in gaining
access to a cultural elite or in constructing, as Tom Wolfe (2007) put it, “the
pose of a pirate,” which could assist in attracting clients to their funds
(see also Velthuis 2008). In short, even when hedge fund managers buy art, it
is predominantly bought for consumption or business motives, rather than direct
investment.
This relates to a specific
problem for art funds: some of those willing to invest in art prefer to buy
artworks directly, rather than in securitized form. The direct contact with
artists, dealers, and fellow collectors and the search for investment-worthy
treasures provides inherent nonmonetary benefits, on top of potential financial
returns.
Indeed, despite the many
flurries of interest, relatively few success stories—or even long-term
survivors—in the art investment fund industry exist. Although this may benefit
the few funds that are able to succeed and offer additional investment
tranches, the overall impression is that the industry lacks a strong track
record, making it more difficult for new funds to interest potential
customers. With the financial crisis and the subsequent crash of the art
market, several funds closed, while plans for new ventures were shelved.
According to some estimates, only 20 investment funds are operational worldwide,
of which only one has even a six-year track record (Adam and Mason 2005; Caslon
Analytics 2008b; Gerlis 2009; Picinati di Torcello 2009.)
Notwithstanding the
elaborate market-making activities by various actors, including data providers,
research companies, and academic economists, the financialization of art has
been incomplete—or is at least far from finished, especially when compared to
other financial markets. The institutional development of investment in art has
been limited: there are no tradable art indexes, derivatives to bet on a fall
in prices, or credit default swaps to trade the risk related to art-backed
loans, while hedging against a portfolio of works of art is virtually
impossible (Campbell and Wiehenkamp 2010; Ralevski
2008).9
One of the main reasons for
the incomplete financialization is that the art market remains highly illiquid.
As Carruthers and Stinchcombe (1999) have argued, liquidity does not emerge
automatically in markets but needs to be actively constructed. In order to do
so, three conditions need to be fulfilled: (1) trading needs to be continuous
by large groups of buyers and sellers, (2) market-makers need to be willing to
continuously maintain prices, and (3) goods need to be homogeneous and
standardized (see also Lepinay 2007). In art markets, none of these conditions
hold. First of all, trading is not continuous, but mainly occurs during a
limited number of dense, highly ritualized moments. As art adviser Jeremy
Eckstein put it: “You don’t wake up one morning, look at the FTSE, phone your
broker and say ‘get out of industrials and into impressionists’ . . . if you
are buying shares, you can sell them and know what price you’re going to get.
You can’t do that with art” (quoted in Mamarbachi, Day, and Favato 2008: 7).
The two largest auction houses, Sotheby’s and Christie’s, organize their main
auctions for modern and contemporary art on a biannual basis only, during the
so-called auction weeks in November and May. Other moments of dense market
trading include annual art fairs such as Art Basel or The European Fine Art
Foundation (TEFAF), where established art dealers in the high-end market and
their clientele meet in person.
The absence of continuous
trading is also caused by the long holding period of works of art, which
reflects art’s status as a collectible, rather than an investment good, and
which is made necessary due to high transaction costs and the unfavorable
perception of rapid trading of work at auction. A stock traded on the New York
Stock Exchange changes hands more than once per year on average. By contrast,
Mei and Moses found that the average holding period in a large sample of works
of art sold at auction was 28 years (Mei and Moses 2002; Watson 1992). This
means that works of art made by a specific artist or within a specific style
tend to be infrequently transacted, which increases uncertainty for investors.
Moreover, the long holding period also limits the underlying data available for
market measurement.
Second, although auction
houses at times fulfill this role, no formal or informal market-makers exist
to guarantee continuous trading. This is particularly the case for the
contemporary art market, that is, the genre where, on average, investors have
the ability to see the highest percentage increase in price. For the vast
majority of contemporary artwork, no secondary market exists, since no dealer
or auction house is willing to trade in these works. This, in turn, is related
to the highly uncertain and unstable value of these pieces: due to changes in
art trends or canons of taste, demand for certain styles may falter quickly. In
other words, the potential rewards here are high, but so is the risk.
Third, the art market is not
just characterized by heterogeneous goods, but also by an absence of shared,
stable standards of value. As Stuart Plattner argued in his ethnography of the
art market: “The bankruptcy of art criticism and evaluative art theory traced
historically to the triumph of the impressionists and the dealer-critic system
that marked them, means that value is mysterious, socially constructed, and
impossible to predict a priori without an experts’ knowledge” (Plattner 1996:
195; see also Moulin 1994). “There is a constant ebb and flow in art historical
reputations,” as a former well known art dealer and banker put it in The New York Times (Pogrebin and Flynn 2011). As a result, art
prices are inherently volatile.
The creation of liquidity
can be seen, as Carruthers and Stinchcombe have argued, as a problem in the
sociology of knowledge. Indeed, the absence of liquidity in the art market can
be attributed to a failure in converting the idiosyncratic, personalized
knowledge of individual market actors regarding specific works of art into
generalized impersonal knowledge (Carruthers and Stinchcombe 1999: 356; cf.
Carruthers 2010; MacKenzie 2010). Although information provisioning has been
improved by data services like art- price.com and artfact.net, more than half
of all sales in the art market do not take place at public auctions, but
privately, meaning that no price records are available (see McAndrew 2009). This
information problem is especially pronounced in the primary market for art,
where auction houses are not active, and which is dominated by private art
galleries who do not have to report prices or other figures such as profit or
turnover.
482 OLAV VELTHUIS AND ERICA
COSLOR
Moreover, a considerable
amount of the information necessary for the valuation of works of art, such as
the authenticity of an artwork or information about the career prospects of a
contemporary artist, is difficult, costly, or even impossible to obtain.
Generators of generalized knowledge such as securities analysts (Zuckerman
1999) are notably absent in the art market. As a result, information remains
asymmetrically distributed, resulting in high uncertainty and lack of
liquidity.
The lack of liquidity and
costliness of information mean that works of art cannot be bought and sold
easily; it is difficult to locate and match supply and demand, which in turn
results in high transaction costs. Buying or selling a work of art at auction tends
to involve a fee of up to 25 percent, while a private art dealer may ask
commissions of 20 or 30 percent. These expenses, together with high costs for
insurance and storage, significantly depress the potential returns. Moreover,
the threat of forgeries necessitates careful and costly tracing of provenance.
A final institutional
characteristic that renders the art market less attractive to professional
investors is its highly unregulated character. Large transactions are
frequently concluded with a handshake, while art dealers may represent artists
without written contracts (Lerner and Bresler 1998). Insider trading—in the
sense that assets are bought or sold because a buyer has insider knowledge
about conditions or events that will affect the value of a piece of art—is by
and large legal. Imperfect information and the unregulated character of the art
market may create opportunities for arbitrage that are attractive to some
investors, but the resulting uncertainty has the effect of deterring others. {g}
Wading through the
specificities of this market shows that the financialization of art has been an
evolving process, and is not yet complete. It is too early to tell if the
limits of what can be financialized and securitized have been reached in this
market, or if it is merely a slow process. Currently, art investment lacks
widespread legitimacy for both the art community and the financial community;
the former because of opposition to the redefinition of works of art into
speculative assets, the latter because of the market’s lack of standardization,
information, and liquidity. The creation of boundary objects such as art
indexes have helped art to become a boutique investment, but have failed to
capture widespread approval.
Research in the sociology of
financial markets indicates what path may be ahead for the financialization of
art. The current situation is historically far from unique. For instance, the
lack of legitimacy of investing in art and the “Hostile Worlds” discourse
invoked by members of the art world resemble the unfavorable eighteenth- and
nineteenth-century representations of financial markets outlined by Preda
(2009). It is therefore not out of the question that a further rationalization
and scientization of the art market could remove the cultural barriers that
have so far restricted its financialization,
THE FINANCIALIZATION OF ART
483
and
could assist the art investment community in their definitional struggle
against traditional factions in the art world.
Carruthers and Stinchcombe’s
portrayal of late seventeenth-century stock and bond markets reads like a vivid
description of the art market today, where “the absence of a centralized
financial market reduced the liquidity of both. Transaction costs were high,
debts were hard to value, market makers were absent, and it was difficult to
match buyers with sellers. Potential buyers and sellers were scattered about,
and it was costly to bring them together” (Carruthers and Stinchcombe 1999:
371). Within decades, however, and partly due to government intervention,
liquidity was constructed and the markets flourished.
Whatever the future holds for art, employing
these financial investment understandings opens up a notion of markets and
financial instruments as inherently evolving and developing. Further plans for
the expansion of art finance have already been put forward by market actors,
such as a tradable art index, art derivatives, title clearing, art buying
loans, funds of funds, and so forth. In this view, a failed investment is not
always a failed investment—failures can be seen as a natural step in the
process of experimenting to find the correct instruments to simplify,
standardize, and homogenize art, stripping each individual work of its
distinctiveness and grouping categories of art together in order to make them
comparable and commensurable.
0 Notes____________________________________________________________________________________________ 0
1.
The art market turnover includes both sales at art
auctions and by private art dealers. For the 2007 figures on currency markets
see BIS (2007); for 2010 figures see BIS (2010).
2.
For instance, the Metropolitan Opera in New York put up
two of its Chagall murals to secure a loan of $35 million from JP Morgan Chase
(see Wakin 2009).
3.
The Economic
Times of
India has also published an index representing the price developments of Indian
contemporary artists since 2006.
4.
For these early initiatives, see among others Anonymous
(1969); Anonymous (1970);
Anonymous (1975); Faith (1985); Glueck
(1969).
5.
Technically, the history of institutionalized data
provision goes back until at least the nineteenth century, when several
compendia of art prices were published in France and Germany (see Guerzoni
1995). In the course of the twentieth century various companies started
publishing annual auction price data books (e.g., Mayer in 1967, Hislop in
1968,
ADEC in 1987). By the turn
of the millennium, most of these companies had transferred their services to
the Internet.
6.
One example is the Baer Faxt, distributed since 1995 by
New York art adviser Joshua Baer to provide insider information on the art
market (www.baerfaxt.com).
7.
Artprice.com, which develops one of these confidence
indexes, states on its website that it is based on “the theoretical foundations
underpinning the Michigan Consumer Sentiment Index” (Artprice 2009).
8.
The repeat sales indexes eliminate heterogeneity by
compiling a dataset of works of art that have appeared on the market at least
twice, so that price movements can be attributed to identical works of art.
Hedonic indexes, which are also used for real estate, account for
heterogeneity by controlling for various
properties of artwork that may influence prices, such as the size or medium. As
a result, the performance of the index better reflects the actual return.
9. In 2007 the Art Trading Fund
developed a proxy hedging strategy, by shorting companies including Sotheby’s
and other luxury goods producers that were purportedly highly correlated to
the art market, but this strategy folded in 2009 (Adam 2010; see also Johnson
2007b).
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