The Economics of Art

By Michael McCullough

From the Soft to the Nonexistent Middle Market

Andy Warhol is quoted as saying “[a]n artist is someone who produces things that people don’t need to have but that he – for some reason – thinks it would be a good idea to give them.” I don’t know if this is an accurate quote, but it does touch upon some important concepts in today’s art market. What made Warhol so brilliant was his understanding of how surplus capital in an economy enables an artist to make a business out of giving people things they don’t need. And underlying this notion of serving a nonexistent demand is the truism that selling art is even more of a game than making it.

For gallerists who don’t understand this concept, the art market has become a difficult place to do business. For the past six years, those selling in the middle market have found it difficult to find buyers for low and medium priced works. This is not generally true for larger galleries who report strong sales in higher priced works. Many people have contemplated the motivations of buyers at the high end of the art market, as opposed to the more important question of what makes this type of market possible in the first place.

The difficulty of thinking about art as a commodity is that the supply side of the equation works differently in the art market when compared to other industries. In most markets, the supply fluctuates- both up and down- based upon the capacity of producers to meet demand; if demand falls then producers cut production. In contradistinction, artists give art to the world out of their need for expression, something necessary for their survival; most artists would continue creating art regardless of whether anyone purchased their work. In essence, the production side of the art market might be constrained when there is excess demand, but production would exist in some form or another even if there were no demand at all.

Consequently, the gallerist has to act as the regulator of supply, releasing works to the market in order to manage demand. And the better the gallerist is at creating demand and regulating supply, the more successful the gallerist will be. This might sound like market manipulation, and it is, but you have to remember that the supply side of the art market works differently than other markets.

Think for a moment about the most quintessential of American purchases: the automobile. Americans not only adore their cars, but need them in order to function in society. Except for in a few major cities, it’s not possible to live and work in the United States without a car. Necessity drives car purchases in the first instance, and vanity only enters the picture when you consider all the extras that you really don’t need but might desire anyway. Americans don’t buy art in the same way they buy automobiles. As Warhol points out, art is not a necessity for most people; it’s a luxury or, as some people in the art market like to call it, a “vanity” purchase. Most American homes are devoid of original artwork, especially of a quality recognized by art critics as important art.

I should add that none of this analysis reflects upon the art itself. Yes, art can be uplifting, and it can make us think about the world in a different way, and our cars can’t do that. And, yes, artists play a very important role in our society. But that role is not a function of the market. This is the crucial point. People pay large sums of money for artwork because they want to own, and thereby control, the dissemination of the artists’ output. Collectors want to be associated with a certain works of art because it either suits their aesthetic needs or it somehow reflects their style or philosophy. These are individual tastes and motivations not easily quantified in a market-type analysis. This is why it’s so difficult to predict trends in the art market because only the top gallerists and major collectors are in a position to understand them.

The only constant assumption in art market is that art is purchased with excess capital. Throughout history and in all economic systems- from Ancient Egypt to the Qing Dynasty China- a surplus of capital in an economy is necessary in order for the arts to flourish. Steadily since the end of the Second World War, industry in the United States has produced surplus capital and those surpluses have to be expended somehow. The first task was to build roads, then it was about creating great achievements in science and last came the focus on the arts. In any society, when the wealthy have amassed sufficient wealth, they have time to spend it on other things: in their pastime, the wealthy become art lovers.

Currently, we have the greatest disparity ever between the wealthy and the middle class in the United States and, indeed, throughout the world. In consequence of this, successful artists don’t pander to the bourgeois tastes of the middle class. Today’s art is big, bold and expensive. And in the great cities of our world dwell the wealthy art collectors who worship this aesthetic.

It comes as no surprise that Jeff Koons was a commodity broker on Wall Street for six years before making it as an artist. He, like Warhol before him, seems to understand the nature of markets and the needs of surplus capital. Some people might wonder if a giant, metallic-blue balloon dog is worth $5 million, not realizing how ridiculous the question sounds. You really shouldn’t expect a serious answer to such a dull question. These inquiries originate from people who neither have the money to buy art nor the imagination to apprehend why somebody else would. And you don’t have to be a genius to understand this concept; my father, who is neither an economist nor philosopher, told me as a child that “something is worth whatever somebody is willing to pay for it. Period.”

All of this might sound cynical but it’s really not. For at least the last century, the dominant world view among artist and intellectuals has been materialism, wherein art has become a game by which people distract themselves from the meaningless of life. The great detraction of materialism is the dullness and pointlessness of things, thus the search for happiness, beauty and wisdom becomes ever more important. People acquire certain artwork because they believe it reflects who they are or who they would like to be, and then everybody who visits their apartment or house can see them on view. And the more art they buy of a certain artist or genre, the more they are invited to exclusive events and the more access they have to the art. Thereafter, they are recognized by the market as an important collector, and the literati toady them immediately for the need of something to write about. Have you noticed how newspapers are now filled with editorials and lifestyle pieces, only because they are cheaper to write than hard journalism?

None of these trends in the art market are likely to change anytime soon. Then again, very few people stand to benefit from them.

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About mcculloughllc

Michael McCullough has extensive experience in art, cultural heritage, and international trade matters. He is a former associate counsel to Sotheby's worldwide where he advised the company on the sale and financing of fine art, the decorative arts, cultural property, antiques, jewelry and special collections. Mr. McCullough is credited with the development and implementation of global policies and procedures related to the acquisition for consignment and sale of some of the greatest artworks in the world. Mr. McCullough is also experienced in U.S. Customs regulations, international trade agreements, export controls, economic sanctions constraints, anti-corruption rules, U.S. Fish and Wildlife regulations, and other government agency requirements. Mr. McCullough has represented clients before U.S. Customs and Border Protection, the Department of State, Immigration and Customs Enforcement, the U.S. Fish and Wildlife Service, the Food and Drug Administration, the United States district courts and the Court of Appeals for the Second and Fourth Circuits.
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