Essays

The Art Market Smells Like Money

by Mostafa Heddaya on July 16, 2013

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(image via Felix Salmon, $1.93Bn refers to recent Goldman Sachs quarterly results)

Last week, Atlantic Media’s business publication, Quartz, ran a 2200-word takedown of the art market by Allison Schrager. The story was accompanied by a helpful flowchart illustrating how deeply corrupt the art market is, and carries all the familiar signs of the minimally self-aware bloviation characteristic of the financial press. That Schrager, “an economist with a focus on pension issues,” seems to not quite be sure of anything she’s saying — the word “probably” appears with alarming regularity — is not the most repugnant quality of the piece. Rather, it’s how the story condemns and classifies “manipulations” as unique to the art market, a premise which serves to enact an obscene and pseudo-scientific rubric of market “legitimacy.” This is weak-minded pandering to Quartz’s readership, at once confirming that their suspicions of the cultural economy are well-founded and blithely setting aside the corrupt practices that plague the world of finance in identical and pervasive ways (and with far greater consequences for the general population). Like any good business writer, she begins her story with an anecdote of dubious verisimilitude, a trick that substitutes a rigorous thesis for a cheap gambit —an alliance between reader and scribe forged in their mutual ignorance:

A gallerist and an economist walked into an art gallery opening. The paintings on display featured the rape of dismembered corpses. The economist was horrified, but the gallerist said the work was good and the artist had a promising career. The gallerist was right. The artist is now a hot, emerging artist whose work sells for tens of thousands of dollars.

Should you, as a reasonably thoughtful person, find the point strange, the appeal to ignorance bizarre — in a sea of art world sycophancy and manipulative oligarchs, what does this anecdote establish, exactly, about corrupt pricing? — the asinine punchline is spelled out in the very next sentence. “This is precisely what makes the art market baffling to outsiders.” Couldn’t the very same thing be said about the subjectivity of many Silicon Valley valuations, for example?

William Powhida, "A Guide To TK" (TK) (larger version here)

William Powhida, “A Guide to the Oligopoly Market” (2013) (click to enlarge, large version here)

The truth is, Schrager’s bad taste aside, the art market, though corrupt in its own right, demonstrates identical pathologies to the world of finance, from venture capital to hedge funds, yet the difference is that the fiction of legitimacy that sustains those industries actually costs working people real money. Many critiques of the idiosyncratic elements of the art market are legitimate and important, focusing in, for instance, on the artificially poor pricing for female artists, as Greg Allen did in 2005 for the New York Times, or forceful and definitive, like Andrea Fraser’s essay, “L’1%, C’est Moi,” composed for the 2012 Whitney Biennal.

But Schrager’s piece, its forced populism aside, is actually a remarkably bad work of market reportage simply because of its inability to place market manipulation in a coherent context. The crux of her argument, which is that the market is manipulated both at the price (supply) level and the demand (buyer) level, is true of virtually every market in existence. Though most in the art world likely haven’t worked on a bond issuance or an initial public offering of stock, influence peddling and supply manipulation is exactly what gets influential investors coveted spots on oversubscribed (lucrative and desirable) issuances.

The Facebook IPO imbroglio recently brought this matter to the fore, but it’s a pervasive phenomenon in the primary market for securities: blue-chip investors get favorable access to issuances in exchange for implicit guarantees to hold the security, which in turn keeps the price buoyant after the offering and makes the issuing bank look good. Capital markets bankers consistently talk about how oversold “the book” (the list of buyers) is for their issuances, as investor demand usually outstrips the size of the issuance by several multiples. This is literally the same behavior Schrager critiques the galleries for engaging in, adding that “If an owner sells a gallery’s art, then the gallery will often cut her off from future purchases.”

Galleries, like the issuers of securities, are jockeying to protect the initial market for their goods — nobody wants to launch their stuff on a flipper. The second key component of Schrager’s argument is that “the perceived value of art” is boosted by high-profile buyers — the tastemaker effect. This is manifestly true of any industry in which public relations people are employed, but is especially true of the venture capital industry, where the valuations of companies are increasingly decoupled from any real arithmetic, relying instead on the convoluted calculus of promise and buzz. Sticking to the Facebook example, their more prestigious, Silicon Valley-agenda setting venture capitalists secured significantly more favorable terms for their investments than shady Russian oligarchs looking for a piece of the same pie. (See also major tech journalists investing in the very companies they cover. Or PandoDaily.) And financial “tastemakers” move markets in securities every day and profit from it, though it usually goes by terms like “front-running” or “LIBOR-fixing.”

The indiscretions of the merchant class, of human avarice, don’t make for particularly stirring business-publication fodder, but the insidious nature of articles like Schrager’s is that they are a necessary part of legitimating corruption elsewhere. The financial press requires cartoonish demonizations of the art market to illustrate that it could be worse, that real fraud lies not with them but elsewhere, that culture is an indulgence of the silly ultra-rich, that once we venture outside of the “efficient market” — structured, global finance, facilitated by low taxes and minimal government meddling — we end up with this diabolical system, the art “market,” a seat of unfairness and villainy masquerading as high-mindedness.

As Andrea Fraser’s essay illustrates, the gilded age we live in has bred an unholy alliance between the criminal overlords of business and finance and global art, with the art fair as the traveling discotheque for these so-called masters of the universe, a safe space away from the unwashed pensioners they’ve bilked, where they can feel sophisticated, maybe even enjoy the sanitized and sycophantic company of some “interesting” artsy types. Where does that leave us, the junior-varsity profiteers, the coarse Quartz readers that we are? We have Allison Schwartz, who can muster some populist rage on our behalf: “This kind of work will always be expensive and keep us Real Housewives-watching, Thomas Kinkade-lovers priced out of that market.”

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  • Gabrielle Peck

    I agree with some of your points, but she is not making any claims that this type of corruption only occurs in the art world. In your rebuttal you rely too much on how the same types of issues occur in finance. Who cares? Of course it does; the world is corrupt. She is discussing the art world and how the corruption of galleries has made being an artist so damn difficult.

    • http://hragv.com Hrag Vartanian

      I think Mostafa is getting at the fact that there is a special disdain for the art world for populist types like Schrager, but in reality it is a mirror of the rest of the financial world.

      • Gabrielle Peck

        It isn’t a true mirror though, because only the Art industry has unlimited price ceilings. The public should have a special disdain for the art world.

  • Daniel Larkin

    I enjoyed your article Mostafa!!! I thought one of your strongest points was the impact that price manipualtion has in other markets on working class people vs price manipulation in the art market. When oil speculators drive up the cost of gas, it hurts a lot of workers. When competing collectors drive up the costs of paintings, who’s bleeding? i think most artists actually wish the speculative system would start working in their favor sooner and drive up their value. You are right to draw attention to some strange nuances

  • Cat Weaver

    Nice piece, Mostafa: great work! It actually made me withdraw a pitch for a story because I suddenly felt naive. Perhaps the art market is only as corrupt as the stock market? i.e. VERY — but not very differently. I will be more careful when I make comparisons from now on.

    • Mostafa Heddaya

      Thanks — though you shouldn’t withdraw your pitch! I don’t think my argument should at all preclude critiques of the art market. Just that any market criticism should be comparative, otherwise we creative artificial distinctions that hinder our ability to identify and correct systemic corruption. It’s just about having a sense of perspective.

      • Cat Weaver

        I don’t think any argument should preclude critiques; but I also think that your article points out that many of us, in assuming a distinction between markets, were taking a naive approach.

        I am revising some thoughts — and the dialog continues.

  • Judy57

    I think one of the biggest differences between the art market and the stock market is one of accessibility. I can buy a share of Google or Amazon for a few hundred dollars, and most stocks for much less. I may be able to buy a painting by an unknown artist, who may or may not ever succeed in the art world for the same price range. Work by newer artists, while more affordable to the “average Joe or Joanne”, are still not necessarily considered “affordable”. It is the rare middle class American who buys fine art. Art is strictly a luxury purchase, purchased by the most elite members of society, as a rule. But the average person does invest in the stock market, whether through 401K’s, mutual funds, or actual shares of stock. I can’t buy a share of “Favorite Contemporary Artist Z”. Until I can, it is difficult to compare the two markets; the art market is more closed, sort of like investing in Berkshire Hathaway, where a single share will set me back over $170,000..intentionally priced so that the average person is not their investor. In some ways, Kickstarter is the closest thing to Wall Street for an artist trying to raise capital…witness Amanda Palmer…her fans made an investment in her art/business.

    • Cat Weaver

      I may be wrong, but I think you can buy stock in some Zs. Hirst comes to mind: he’s a corporation, no?

      I’d beg to differ about accessibility (although I would have agreed with you before I read Mostafa’s piece here) — the stock market is just as opaque as the art market and the parallels line up for the most part: information is expensive,and therefore exclusive, the most proven is the the most expensive,and therefore exclusive (tepid 401Ks aside), w/out a portfolio/collection you are not taken seriously…

      I’m not completely sold on the idea that the art market is the same as the financial market; but the paralells are keen and the distinctions are not.

      Recently I’ve been reading about the laundering and marketing of stolen and looted art. I read that the art market was utterly corrupt with it and a kind of “wild west” (a phrase I’ve heard twice now from diferent experts… but the housing crisis showed us very strong parallel in the financial market.

      So I”m wondering about the “lack of regulation” arguments as well.

      Mostafa did such a great job with this article that it should change some ways of thinking — and introduce others…

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