The Global Economics of Fine Art

"After this event horizon, art economics are driven by supply; and demand plays a much smaller role."	The economics of the fine art market are similar to the economics of most other markets. The prices are driven by supply and demand. Contemporary artists are very volatile since they can dramatically increase supply, diminish the quality or fall out of favour. The variables are large on both sides of the equation. This is reason for the high-risk level of investing with Contemporary artists. When an artist dies the supply of his or her art becomes fixed or diminishing. Both the quality and the quantity of the works from his or her life are known. Strangely enough, the death of an artist is the most pivotal point of his or her career. Vincent Van Gogh is a prime example. He sold virtually nothing while he was alive. However, his art has set numerous auction records during the last decade. His death and the subsequent development of the historical perspective of his importance have made all the difference. There were other artists alive at the same time who sold their works for large sums yet they are nearly forgotten today. Again, it is viewing an artist’s career in a historical perspective that causes these changes. After seventy years, nearly everyone is gone who knew the artist personally. The art then is evaluated on its own merits, not upon the personality of the artist. History is rife with examples of art fashion being driven by mood and the identity of an artist and his or her style. At the turn of the century, Barbizon school paintings were much more valuable than were Impressionist. Now the situation is greatly reversed. There is an event horizon, after the passage of enough time. After this event horizon, art economics are driven by supply; and demand plays a much smaller role. World-wide there is an increase in prosperity. This has been the general financial trend since the beginning of the industrial age. With an increasing population that holds increasing disposable income, it is only natural that there is an increase in demand. It is this increase in demand that has been driving the art market for the last few generations. Supply gradually decreases as paintings are lost or de-attributed. Thus the increase in demand and the decrease in supply have placed the market in a constant growth mode. During economically tight times, there is less disposable income and the market can falter. This happened during the early 1990’s, but today prices are higher than they were during the "Bubble Years." To understand the effect of economics on individual paintings, it is necessary to look at the global picture. There is an economics adage that states, "If the demand is constant, the global price of the total supply remains constant." The import of this statement can best be illustrated through the following simplified example: "Let us say that there was an artist named Fino who lived in the seventeenth century. Let us say that Fino painted 100 paintings in his lifetime. Let us then say that the average value today of a painting by Fino is 10,000 US dollars. The total or global value of all of the paintings by Fino is, therefore, one million US dollars. If there is a discovery of an additional 100 paintings by Fino, the global value of all paintings by Fino will remain the same. However, since there are now 200 paintings, the value of each individual work is diminished. The average value will now be 5’000 US dollars. Instead of a discovery of an additional 100 paintings, let us say that there is a fire at a museum that houses 50 of the 100 Fino paintings. Let us say that all fifty paintings are completely destroyed. The global value will remain the same at one million US dollars for the world supply of Fino’s paintings. However, the value of each will double to 20,000 US Dollars." Although this is a highly simplified example, this principle of economics is of crucial importance to anyone involved in the art business as will be seen in the following paragraph. The only events that really have a large effect on the art market are depressions or large changes in the supply. At the turn of the century there was published by a scholar named De Groot a catalogue of approximately 1,000 works by Rembrandt, the world supply. During the 1930’s a different scholar named Bredius published a new Rembrandt catalogue saying that there were only about 650, and some of those works were considered iffy. The result was that those that were included in the Bredius book increased in value by nearly double over those that were excluded. In spite of the economic depression of the time, there was a sharp market spike in Rembrandt prices. In the 1980’s a group of experts were sponsored by the Stichting Foundation to re-evaluate the body of works attributed to Rembrandt. These experts only evaluated works from the first half of Rembrandt’s painting career ending in 1642. The number of works in their catalogue was approximately 150. The original team then disbanded, however a scholar has since picked up the project and is now trying to complete the remainder the Catalogue that covers the second half of Rembrandt’s painting career. It will also include a few works that he feels were missed by the first team. Although the work is not yet published, it is generally assumed that there will be approximately an additional 150 to 200 paintings in the new volumes. This will bring the total number of Rembrandt’s to approximately half of the number in the Bredius volume. These paintings are all attributed by the use of subjective analysis, which is, at best, an educated guess. When the Stichting group’s first volumes were published, Rembrandt prices spiked at about double, which was to be expected. This occurred because the apparent world supply of Rembrandt paintings was diminished by one half. Veritus Ltd. is currently completing its digital verification programme on Rembrandt. Veritus findings indicate that the subjective methods of evaluation were generous by a factor of four. Students of Rembrandt painted a large number of paintings that currently hold the very best of subjective expertise. Some of these works do bear genuine appearing signatures, but it was the custom for the master to sign works from his studio that met his standards. Unfortunately, they are still not works by Rembrandt, but by his students. No one should be critical of the experts who went before the age of technology. The experts did the best they could making their educated guesses. But an educated guess is still merely a guess. Using standard economic theory, the paintings that hold digital verification will greatly increase in value while those which do not pass the objective forensic testing will decline in value. There is more information about the price escalation effect in the Art Investment Section which can be reached through the Economics Core Area. It seems certain that the single largest effect on the economics of the art market during this century and during the forthcoming century will be Digital Verification.
"To understand the effect of economics on individual paintings, it is necessary to look at the global picture."
"The experts did the best they could making their educated guesses. But an educated guess is still merely a guess."
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