I have been mentioning this book in recent posts, whenever talking about values of art. The value of artworks has long been a fascination, especially since the 80s when auction prices went crazy (think of the Japanese collectors paying tens of millions for Impressionists and Van Gogh). The source of high prices has always been mysterious, and The $12 Million Stuffed Shark: The Curious Economics of Contemporary Art by Don Thompson doesn't necessarily provide a complete answer. Right off the bat, it must be said that Thompson looks almost exclusively on the supply side of art values. He doesn't talk about the fact that money needs to go somewhere--that Japan in the 80s had excess money that could not be spent on rational investments (because all the rational investments had been made), so Japanese would spend insane amounts for real estate or artwork. Or that hedge fund managers in the 90s and 00s had gathered a huge quantity of wealth that had to go somewhere. So at least some of it went towards status building--hence buying expensive art, or high-profile philanthropy. Thompson touches on this, but the main thrust is where the artwork itself gets value before someone buys it.
He concentrates on the values added by dealers, auction houses, and, yes, collectors. The subject is very high priced art. The only dealers that add to the price of a super-expensive piece of art are dealers he calls "branded" dealers. Think of the Gagosian Gallery or White Cube. He has a taxonomy of dealers. Branded dealers are the top. They exist primarily in New York and London, with subsidiary locations (or reciprocal arrangements with mainstream dealers in secondary markets). Next are what he calls mainstream dealers. The most successful of these are still in art capitals like New York, London, Los Angeles, or Berlin, but they can exist anywhere. I think something like the McClain Gallery in Houston would count. But Thompson writes, better to be the 50th gallery in New York and to be number one in Baltimore. (This is yet another example of the clustering of particular industries and trades in certain geographic locations, despite globalization and the internet. A recent Harvard Business Review article discussed this phenomenon and why it was good thing for those industries, and why outsourcing was therefore bad.) A mainstream gallery is likely to be where an art career really begins. Below that are "High Street" galleries--artists rejected by or not yet ready for mainstream galleries and artists cooperatives. At the bottom are the vanity galleries. He discusses the chances for success for a gallery (low) and how each show by a new artist is a huge risk. The initial shows won't pay for themselves, and the odds that any given artist will still be showing (or worth showing) five years after her initial show is slight. Given this, for mainstream galleries, most of their investments in new artists are dead losses. But one blockbuster makes up for it.
But of course, a real blockbuster will be stolen away by a branded gallery. It may be better for a mainstream gallery to have an artist who never achieves blockbuster status, but reaches a certain level where he can expect reasonably good prices for his work for an entire career. Think of artists like Jim Nutt or Karl Wirsum (two of my favorites). They have their collectors and can command decent prices for their galleries, but are in little danger of being stolen away by Larry Gagosian.
The branded dealers do a lot of work to preserve their brand. The value of their brand is visible purely in the additional prices they can command for the art they sell. If it sounds like the difference between buying Tums and chemically identical store-brand antacids, it is. But a branded gallery, even though it is selling things, is more of a service. For example, let's say Gagosian is going to have a show by Cindy Sherman. You are a wealthy collector. Before the show, someone from the gallery might call you up and say, "Larry thinks you need this piece for your collection." Of course, Larry is intimately familiar with your collection. So you buy it sight unseen before the show even opens. Then, to keep you happy about your million dollar purchase, Larry does a lot of publicity for the show, buys lots of ads in Artforum and other magazines, etc. This publicity is not to help sell the art--it has been presold. It is to use the gallery's brand to reassure the collectors they made the right decision. Given a show can generate millions of dollars in revenue, a $10,000 display ad is a small investment in continued relationships with wealthy collectors.
So dealers--the powerhouses of the art world, right? Wrong. From Thompson's point of view, certain "branded" collectors have more effect on the price of a work (if it is known that an artist is being collected by Charles Saatchi, for example), but most especially, Sotheby's and Christie's affect the price of art tremendously. Thompson goes into great detail about how auctions work and the types of deals they arrange, as well as detailing some of the things really big collectors do. Saatchi has been quite innovative as a collector (see for example http://www.saatchi-gallery.co.uk/yourgallery/), but more common things are to endow museums or collections within museums or specific art projects/installations. Obviously here in Houston, one thinks of the Menils.
What's missing here? Well, the art itself, for one thing. Thompson has some aesthetic opinions that leak through, but he keeps them to a minimum in the book. The quality of the art is irrelevant--a fact made completely plain by the fact that conceptual pieces which require no particular talent to create the physical part of the work can sell at auction for hundreds of thousands. He used the examples of Felix Gonzales-Torres's Lover Boys and Fortune Cookies. The first is a pile of candies meant to be eaten by viewers, the latter a pile of fortune cookies. They went for $465.000 and $520,000 in 2000 and 2003. Obviously anyone could recreate these pieces. They don't have unique existences--indeed, they are meant to either be eaten or be continually "refilled."You or I could make exact physical duplicates of these pieces easily.
Now folks who have read canonical works of art theory may be realizing that this "branding" thing is starting to sound a whole lot like Walter Benjamin's "aura" from the seminal "The Work of Art in the Age of Mechanical Reproduction". Benjamin posited that original, unique artworks had a value that derived from their uniqueness. But once it became easy to reproduce artworks (through printing, photography, etc.), that value was diminished. He said the difference in value between an original and a reproduction was a result of the "aura." "That which withers in the age of mechanical reproduction is the aura of the work of art." The "aura" was Benjamin's catch-all term for authenticity, uniqueness, etc. So if I buy a Sol Lewitt wall drawing (which means I have bought instructions on how to make a Sol Lewitt wall drawing), it's worth a lot of money. But if you just do it yourself, it's not worth so much (although it may be lovely to look at). The difference in value is the value of the "aura," which will be carefully maintained by the owners of that "aura" and their consignees. I think we can easily substitute the word "brand" in there. One of the on-going tasks of the art trade is to carefully nourish "auras" to keep values high. (The same is true with all culture industries. For example, the presence of a movie star adds to the value of a film. It doesn't make the film in any objective way better--but a star is a brand or aura that has inherent value.)
If an artwork was owned by a branded collector, or a branded collector is known to collect works by a given artist, it will be worth more. If an artwork is auctioned by a branded auction house, it will sell for more. If it is sold by a branded dealer, it will sell for more. And if the artist herself is lucky enough to be a brand, her work will sell for more. But Thompson seems to be saying that galleries, auction houses, and collectors are more important than artists. You want to know who is the least important? Critics.
Thompson goes into great detail about the mechanics of the art market, and how auction houses have come to dominate and threaten dealers, and how art fairs have risen in importance in response to the dominance of auction houses.
From a financial point of view, all this "brand" talk seems kind of touchy-feely. Where is the Black-Scholes model for artwork pricing? Obviously, there can't be one. For one thing, it can't be built out of market data, the way models cna be built for securities. This is because the art trade is opaque and largely unregulated. A researcher like Thompson can't get complete, reliable data about the prices for artworks. He can't create a Case-Shiller index for them--as interesting as that would be. It's frustrating for a data and models guy like me.
Be that as it may, it is interesting how a modern economist with a specialty in marketing in 2008 reaches (through a totally different approach) more-or-less the same conclusion as a Marxist philosopher from 1936. The question of price discovery is always important to economists, and always fraught with difficulty. Thompson doesn't provide a model, but a useful framework with which to think about art values.