Experts who deal regularly in the art world, as auctioneers, appraisers, dealers or collection consultants share a common assumption that is not widely recognized in the extended world of art appreciation: that is, that art is a commodity like any other (oil, precious metals, corn, etc.) and, in certain broad terms, that it will behave on the open market like any other commodity—responding to the exigencies of supply and demand. Among a number of the components that separate art markets from commodities or financial securities markets, however, is the subjective element of emotional or aesthetic appeal. Art is viewed as an ‘investment’, of sorts. But for most buyers, the long-term value of the purchase will be measured by the pleasure of waking up each morning to see a painting, print or sculpture adorning the walls of one’s home. “What I did for love” is a phrase that won’t apply to too many decisions we make in our lives, but art purchases (with abject disregard for monetary appreciation of the object) is often and repeatedly, one of them. fine arts magazine    

Economists and art market-watchers have, of late, been intrigued by the trends in art purchasing, in auction houses, galleries and the secondary (re-sale) market, in the face of the recent and protracted global financial down-turn. Record prices are being fetched for important or rare works by some of the world’s leading artist of the last century or two. The market for Old Masters is also enjoying resurgence. Companies like Art Index, a Moscow and New York-based firm has been aggressively tracking market trends and reporting out on sales activity for thousands of artists whose work finds its way into public sales venues. For the last several years, New York University’s Stern School of Business professors, Michael Moses and Jiangping Mei, have been compiling data that allows them to track the long-term performance of fine art. The Mei Moses Index focuses on mature artists whose works commands significant prices at auction. They take a formulaic approach to comparing the current and original sales price of a work of art (even if that price is several decades, or even more than a century old!) to calculate an annualized rate-of-return.    

 

These companies also consider new ways of looking at art acquisition, given sky-rocketing prices for the limited number of currently-prominent and historically-important artists as their work becomes available, by variously offering, on-line and annually-updated print publications, summarizing the latest trend charts and tables of recent sales and metrics regarding past performance for the world’s top artists, as well as analysis of recent purchasing events in various international locales.    

Amazingly, interest in art as a centerpiece for an investment portfolio is not an entirely new idea. Daniel Gross, reporting in the June 21, 2006, on-line issue of Slate Magazine, ‘Painting for Profit’ (Is art a wise investment?) wrote that, ”In the 1970s, the British Rail Pension fund, with Sotheby’s assistance, famously committed about $70 million to fine art. The huge portfolio [ultimately included] works by Canaletto and El Greco and proved quite profitable—a compound annual return of 11.3 percent between 1974 and 1999… Britain’s rail workers were fortunate that the fund chose to cash in a bunch of Impressionist and Modern works at the height of the bubble in April 1989.”    

More recently, a number of researchers have initiated innovative programs that examine art-buying behavior in more objective terms—that is, by considering the commodities nature of the investment—whereby an investor group might attempt to leverage objective data with a clearer understanding of how art values are structured and impacted by forces like supply and demand, world financial markets and buyer behavior. Asset management firms like the London-based Fine Art Fund, created by a former Christie’s executive and the Artist Pension Trust, where artists contribute their pieces, to be pooled with those of other artists and then receive a stream of income down the road as the trust sells their pieces, continue to function. Another fund from a decade ago, Fernwood Art Investments, created by a Merrill Lynch executive and a veteran of Sotheby’s, never got off the ground.    

Gross also notes in the ’06 Slate article that, “[Interest in art as investment] is not surprising. Sure, the data shows that art performs well as an asset over time. But for the wealthy people expected to invest in these funds, much of the satisfaction of buying (or investing) in art is being able to hang it on your wall and show it off. Someone who is willing to commit a few hundred thousand dollars to art would probably be more likely to go buy paintings at Christie’s than invest in a private equity fund that buys paintings at Christie’s.”    

 

Nevertheless, companies like these, founded during a peak in art auction sales in the early 2000s, have continued to track art sales performance in various parts of the world, in an effort to develop economic models that can assist portfolio managers to securitize, index and structure art sector funds, with the goal of making the pooled-purchasing power of works of art, by a targeted investor-class, practical and profitable.    

Increasingly, experts in the field of economics, finance and art collecting are pooling information to investigate logical, factually-based approaches to art acquisition as an asset. Topics such as art securitization, asset management and global art market monitoring, index tracking and collective purchasing models for art, by established and emerging artists, are being factored in. This is a promising new field with a body of research now made possible by available computer-driven financial modeling methods and academic research that, in decades past, had been available.    

Two academicians interested in this topic are Neil De Marchi, Professor of Economics at Duke University, and his long-time collaborator and colleague Professor Hans Van Miegroet, Chair of Duke’s Department of Art, Art History and Visual Studies. Together they lead the Duke Art, Law & Markets Initiative, a new project conceived to investigate the factors that impact on art-buying behavior. I spoke with professor De Marchi about the historical and theoretical economic underpinnings of an approach to art valuation that emphasizes the subjective pleasure buyers can take in the art they buy.    

RF– If I have this right, you and your colleague have been focusing on the ways in which art can be treated like any other commodity or asset class; effectively working toward the creation of a sector fund, similar to any other mutual fund, focused on a particular category. Are there economic models that are sophisticated enough to target value and predict potential future performance for works of art?    

 

NDM- Indexed funds of carefully-defined and narrow segments of the art market are becoming more common, though auction price indexes of various categories of art and the artists who make it have been around for decades. The narrowing to a manageable number of artists who have enjoyed frequent exposure at auction and done well in the market, makes sense. Nonetheless, art is very different from the financial instruments that can be rendered substitutable one for another in derivatives markets, just as art auctions, which occur at discrete time intervals, differ from the continuous-time global markets for financial assets. There is a fascinating tension at work here. There are lots of grounds for being cautious about predicting art values at market. At the same time there are lots of reasons for thinking that unusual gains can be made. For example, information in art markets is often exclusive property, not openly shared, hence an advantage to some, not all. Moreover, transactions costs in buying and selling art are significant, though often negotiable. And art, as is well understood, is illiquid, which implies that if one ‘must’ buy there will tend to be an extra premium, and if one must sell, possibly a strong discount. Timing, then – and having the time – is everything. So the problem is not that unusual gains can be made in art, but that it is difficult to predict and difficult to control all the conditions that make it possible to reap those gains. Everyone knows these things, but we are learning more about them all the time, and the search for tangible assets such as art that might offset some of the movement in the other assets in a portfolio, is a strong lure. A safe prediction is that there will be lively discussion among experts about such matters. Art-as-asset has a long history.    

RF- No doubt, yet acquiring art for art’s sake seems to be a relatively recent phenomenon, historically. In an article by James Bloom, in the volume you edited with Hans Van Miegroet, ‘Mapping Markets for Paintings in Europe, 1450-1750’ (Brepols, 2006), he points out that, with the decline in tapestry production for wealthy patrons from the late fifteenth century, Flemish dealers began to market less expensive versions of figurative scenes on stretched linen, not least to Florentine clientele. ‘Collecting’ in the sense that we understand it today was still not de rigueur, but increasingly, influential Italian patrons included works on linen as an integral part of their aesthetic holdings. Bloom writes, “The wide array of social function manifest in collections such as those of the Medici include decoration, devotion, collection and curiosity. Flemish panels [on wood], of smaller format, [were] appreciated as jewel-like curiosities, kept in leather sleeves or boxes to be viewed as precious objects rather than hung as wall decoration” (pg 27). How do you view this historical trend, and what it can teach us about the intrinsic investment value of art?    

NDM- What you are referring to is an episode in which a lot of subject-matter that had been associated with tapestry was borrowed and became matter for paintings – in Bloom’s story, for paintings on linen but also for small panel paintings. It is true that both thin linen and small wood panels were cheaper than labor-intensive tapestries; but you are right, Bloom stresses not so much this cost element but that these substitutions with borrowed subject matter became something like a celebration of painting in and of itself. It was unexpected to find all kinds of subjects, some not quite seemly, packed together and perhaps highlighted in a distinct space. Their comparative cheapness made such paintings affordable to more people, but presumably the delights of depiction per se was a large part of what made paintings desirable. And, of course, once pleasure-yielding but otherwise largely useless things like hung paintings came to be bought – for all the reasons Bloom lists – but also, in time, exchanged, the question arises, what is the value of an object whose appeal is specific to a person? Some of its appeal must be shared by a new owner, otherwise it wouldn’t be bought, but the appeals to each cannot be compared; all we can observe is the amount of money that changes hands, and this might mean different things in terms of the pleasure the seller took in it and the new owner takes. Even if these were equal we could not tell. Economists would like to say the value is what someone is willing to pay, but this seems to miss something. This may be part of why deaccessioning paintings by a museum often causes so much distress: it is felt that something may be lost to future others whose valuation is unknowable yet ought not be dismissed. It might also explain the long history of attempts—not only by economists—to find some more objective measure of the intrinsic value of art.    

The 17th century French critic and art advisor, Roger de Piles (1635-1709) created a scheme – admittedly tongue-in-cheek – that assigned numbers to the qualitative elements that made a painting a painting. Employing four characteristics commonly regarded as defining paintingness – design (drawing), composition, coloring and expression – de Piles assigned a number to each on a scale of zero-to-twenty, for 56 well-known though dead painters. This did not solve the problem that the appeal of art might be a strictly individual matter; instead, de Piles interposed between individuals and their subjective valuations the critic’s measure of quality. This might be acceptable to many individuals if it expresses the prevailing expert judgement and they are willing to defer to the experts. Nevertheless, it doesn’t address the specificity and subjectivity of the pleasure taken in art. Rather it just changes the question.    

There is, however, an approach that addresses head-on the question of personal pleasure. This has roots in eighteenth-century discussion of the sentiments, among others by the moral philosopher Adam Smith, held in regard by many as an economist. Smith stressed our love of variety and craving for novelty and talked about properties of common goods, but also painting, sculpture and architecture, such as form, coloring, uniqueness, in terms of complex combinations of properties such as simplicity mixed with variety. Too much simplicity bores us yet too much variety stresses us; we should aim then at a happy medium, though without thinking that is the best position. It is not, because repetitions of the same diminish our pleasure. Such is the force of our desire for novelty. Smith’s views were summed up in something known as the Wundt curve, after a psycho-physicist of the late nineteenth century, and revived by the experimental psychologist Berlyne in the 1960s and 1970s.    

I find the Smith-Wundt-Berlyne tradition important because it takes seriously the fact that a lot of our pleasure in art is private and subjective. On the face of it it seems we have wandered far from your query about intrinsic value and (though you didn’t quite ask this) how, if at all, it relates to market price. Professor Van Miegroet and I have borrowed from this tradition and from a modern economist by the name of Lancaster, who suggested that we do not buy goods as such but we purchase bundles of characteristics that we find appealing. Our twist on this is that paintings too can be thought of as bundles of characteristics or attributes, and small family clusters identified in many cases where artist and price differ but the several paintings involved offer comparable bundles of pleasure-yielding attributes. If a potential buyer or collector can articulate his or her preferences and is willing to consider alternative artists and paintings to get value for money, then an art advisor can often suggest several choices. This approach uses market prices but also addresses directly individual pleasure, so it deals with the concern you voiced by uniting private valuations, on the one hand, with market prices, on the other. So, not a 17th century model, but an 18th century one becomes a useful array for comparing and contrasting art today!    

RF- By applying a list of objective criteria into the mix, we seem to be turning the value proposition in the art world on its head. The critic, the appraiser, the collector, the auction house audience—and their response to an artist’s oeuvre or individual painting—all appear to operate in a free market. We know that auction houses have a long and checkered history. Several contributors to both your ‘Mapping Markets…’ volume and your edited publication, Economic Engagements with Art (Duke Press, 1999), write that early auctions held in 17th and 18th century Europe were unregulated and chaotic affairs, where market values were laid claim to by vaguely-defined ‘authorities’, with limited and ill-defined criteria. Buyers, new to the art collecting field, consisted of a mixture of the newly-emerging leisure class and people of the middling sort: financiers, traders, professionals and some artisans and shopkeepers (Brian Cowan, Economic Engagements…, Ch. 13). Much has changed in today’s market, but there is the same push-pull between the in-house auction appraiser and the dealer/collector-driven retail market, when it comes to establishing and preserving value for any work of art or artist. As an economist, how to you see value/unit-cost being managed in a marketplace where the sought-after object is grounded in what, Seven Days in the Art World, author Sarah Thornton called, “an economy of belief” (pg 11)?    

NDM- Adam Smith, speaking of art works that were in limited supply, dubbed their prices ‘fancy’ prices, not anchored in cost of production but in desire, limited only by wealth. It is certainly the case that fancy prices can be manipulated, and the list of prevarications, sins of omission and commission by various players in modern art markets is long and well known. Much behavior of this sort can be interpreted as actions necessary for survival in a market where capital must be committed but under conditions of greater uncertainty, since there do not exist the same insurance possibilities other hedges as are available in financial markets. Some are due as well to the peculiarities of art, which is unlike, say, stocks in obvious though essential ways. Smith’s contemporary, the connoisseur Horace Walpole, mimicked Smith’s thinking, but spoke of an ‘imaginary” component to the prices being paid for old paintings. Walpole witnessed a surge in interest and cost for paintings, attributing it to renewed interest in the ancient Greek themes of propriety and beauty that accompanied the Enlightenment and the French view, at the time, that painters should represent poetic conceits, preferably in an elevated manner. However one expresses it, the fact is that there is a lot about art prices that are simply not objective. Some, like Walpole, find this troubling, and there is reason to be careful in buying art. At the same time, asking would-be buyers to articulate their preferences – or helping them to do so – and offering them a range of choices, each yielding comparable pleasure in terms of the attributes they tell us they like, but at a range of costs, seems an empowering way to engage buyers, especially those with little experience.    

RF- So, looking forward, do you think that scholars and other market experts working on this issue should explore ways of applying the lessons learned from history, as well as understandinging current market trends, in an effort to apply more objective criteria to art valuation. Equity markets in the U.S. have reeled under the effects of globalization and the evaporation of national boundaries, as one country’s problems can now ripple instantly through the entire global financial marketplace. Do you see an issue with modeling an art portfolio as a sector fund, with so many forces affecting perceived value and so many countries and their artistic output now vying for a place on the international art stage?    

NDM- Art markets display some of the unexpectedness we have come to associate with commodity and financial markets. For this, and also other reasons, as I have suggested, investing in art should be undertaken with caution. But what I would rather stress is that beginning and building a collection in art is rewarding in itself. Studies of the return to art as investment tend to ignore the psychic pleasure of seeking, acquiring and living with art, yet art has the distinct advantage over owning stocks or bonds that it supplies a sustained stream of pleasure – or can do so with careful management and reorderings over time of a collection. Even discovering and refining one’s preferences is pleasurable. These things, well managed and with good assistance, add to one’s sense of well-being with greater assurance than many alternatives. The key is to know one’s preferences and articulate them, which is what any creative and skilled consumer wants to do. The bundles of pleasure-yielding attributes appproach sketched earlier in our conversation is a way of doing just that. In this respect it is no different to acquire art than it is to buy a house or a car, to eat well or sustain one’s external environment. When placing a definable value on a work of art is viewed in this way it neither devalues or corrupts it; nor do we have to insist on the aesthetic components as distinct from taking pleasure in selecting and living with art. Pleasure-yielding attributes and skilled choice encompasses those things without isolating them artificially. I have not answered your question but I have repositioned it. We have still a great deal to learn about the behavior of art funds, that is to say art as investment; but we already know a great deal about consumption and can apply that to art. I hope we can talk about this as markets continue to rebound.    

by Richard Friswell, Executive Editor    

Visit these sites to learn more about art valuation, investment programs and statistical approaches to understanding potential future art value:    

The Skates family of services at: www.skatepress.com    

The Mei Moses Art Fine Art Index at www.artasanasset.com    

The artists’ pooled art program at www.artistspensionfund.org