From canvas to capital:
understanding the market for fine art
In 1890, Vincent Van Gogh created one of his final masterpieces, Portrait of Dr Gachet, depicting a doctor, with whom he stayed after his release from an asylum. He painted this just a few weeks before he succumbed to his psychosis and depression, penniless and believing himself to be a failed artist. In 1990, that very same painting sold at auction for $82.5 million.
Today, as economists, we sleep soundly at night knowing, no matter how ruthless the job market may seem, we are all sure to enjoy a reasonable income upon graduation. Meanwhile, earning a liveable income is a pipe dream for most artists. In fact, in 2022, artists working with public institutions earned a median hourly wage of £2.40, falling well below the minimum wage. The same year, the global art market was valued at $67.8 billion. How do these two instances coexist? One answer is an interesting dual-market system.
A problem emerges when many artists cannot make an adequate wage, forcing them to exit the market. Taking a neoclassical approach to this problem, it may seem justifiable: insufficient demand, so resources are freed up to be used in other sectors. However, The Value of Everything, by UCL Economist Mariana Mazzucato, can tell us why this argument is not satisfactory. Mazzucato argues that modern capitalism tends to reward individuals who exploit market dynamics for income rather than those who innovate and create wealth. Exorbitant incomes are usually justified as they are ‘productive,’ ‘create wealth’ or ‘take risk’. While art is not the focus of Mazzucato’s book, there is no reason the work of artists cannot be considered the same. Indeed, they ‘create wealth’ better than anyone; they can turn paints and a canvas into works that can fetch millions. Moreover, it is crucial to understand that financial value cannot be a proxy for cultural value. Art still has immense value to our society; we just do not have a measure for it, and we are not very good at rewarding the artists for it.
If art is to nourish the roots of our culture, society must set the artist free to follow his vision wherever it takes him.
- President John F. Kennedy
Admittedly, the most obvious problem facing most artists is the lack of demand for art. Art is a luxury good, and therefore not that high on everyone’s list of finances - it probably ranks quite a few places below mortgage payments and an air fryer. But, with the current value of the global art market, there is enough money to go around, if it were not all concentrated in the high-price market.
The High Society Market for Art
Some may remember the banana duct-taped to a wall that made waves in 2019, a piece of conceptual art titled ‘Comedian’. It sold for $150,000. To add insult to injury, when the banana gets old, you replace it, and it is still considered the original artwork. Despite these mind-boggling instances, the high-price market is actually easier to understand.
To begin, we can view the art produced by an artist as a monopoly market. Over an artist’s lifetime, there is limited supply of what they produce. There is a theory of the ‘death effect’ in art: when the artist dies, or is nearing the end of their life, the price of their art goes up, because there is no possibility of the artist producing more work and ‘spoiling the market.’ But, in concerning ourselves with scarcity, surely we are no longer discussing art for the sake of art, since the supply of similar works is not relevant to the meaning or quality of the artwork itself. We are discussing art as a status symbol or an investment. When using art as a financial instrument, the demand creates itself because people know the value of art will appreciate in the case of well-known artists (so called ‘blue-chip art’). Especially in the fortunate case that the artist is already dead.
Art can serve as a tool for the wealthy in two ways. Firstly, art is not subject to capital gains tax in several countries, such as Singapore, Luxembourg and Hong Kong, making it a tax haven for those lucky enough to sell their Picassos for millions. Secondly, the volatile nature of art valuations, relevant for tax calculations, commodity-backed loans, and insurance, make fine art a breeding ground for any number of financial tricks or crimes. Estimations revolve around how much a piece could sell for in a secondary market. However, given the unpredictable mechanisms behind price, valuations taking place in hypothetical scenarios are far from an exact science. It is an accepted fact of the art world that most fine art valuations are fraudulent.
And, so, we have our second big problem inherent to art: its value is what it’s perceived to be worth by whoever cares enough to value it. And when there are thousands, at stake, all parties have their own interests at heart, and financial value takes centre stage.
It is possible that some millionaires really appreciate (some) art and are willing to spend the money on it - I do not suppose to understand how the uber rich spend their money. But, to justify such exorbitant costs I would imagine the immense utility derived from expensive art is at least supported by its status, since, with that money, one could buy hundreds of impressive pieces. And in some cases we can be certain art is used for the wealthy’s advantage. Take Banksy’s self-shredding ‘Love is in the Bin’, one of the few pieces Banksy auctioned himself. In 2018, it sold for a little over $1 million. As soon as it sold, the frame in which it was held shredded the artwork, making it not only a genius symbol of rebellion against the wealthy, but one of his most famed pieces. In 2021, the buyer sold it for $18.5 million.
The Artists Left Behind
For the majority of artists, who are not yet famous, they face a meager path ahead in their struggle to appeal to the average consumer. There are two ways to (attempt to) earn a living off one’s art: a commercial route and a non-commercial one. However, both options have their issues, each forging a side of the proverbial double-edged sword.
The commercial route is considered easier to make money, but it relies upon a gallery discovering your work, listing it, and taking up to 50% commission when it is eventually sold to sit in a person’s house. However, this comes with lack of supply-side market power and it is generally not what artists want to do with their art. Within a gallery setting, we have a competitive market with, from the buyer’s perspective, substitutable goods. Similar to an ice cream store selling different flavours, the value of input costs is the same, and with no one telling us which flavour is better or ‘worth’ more than the other, the only differentiating factor is people’s preferences. But, this comes with little power for the artist.
Artists are forced to contend with the unfavourable terms of galleries, because they require the gallery to sell their art. One possible reason for this is the omnipresent imperfect information, which a gallery can mitigate. It takes time to shop around for art, we need assurances on durability and the esoteric nature of art means most of us would not know if we were looking at a ‘good’ piece of art without some expert opinion.
Many artists don’t necessarily want to take this route, as most want their art to be seen and consumed by the public. The second, preferred, route involves loaning works to or commissions from institutions such as the Tate Modern, which, as underfunded public institutions themselves, struggle to even pay minimum wage. This is the route by which artists can become famous, but far from financially secure.
Having established the dichotomy between the immense value of the global art market and the financial struggles faced by many artists — and why we should not be content that this is the case — it is clear that a change is needed. The high-price art market is played by the rules of the rich, while the remainder of artists are left to fend off poverty with their paint brushes. Some qualities of art — low demand from the general population and the financial or ostentatious interests of the elite — mean art is violently subjected to market dynamics, which threatens the cultural wealth of our society.