Does volatility have a place in the art market?
London. October 2018. A room of art auction attendees at Sotheby’s watch with shock and horror as the Banksy painting titled Balloon Girl passes through a shredder hidden within its large, ornate frame, the work partially self-destructing before their eyes. After the initial shock tore through the media and the art market, the original buyer followed through with the purchase of the new work, titled Love is in the Bin, for the price of 1,042,000 pounds sterling (Martin, 2019). Following a precedent of daring stunts and gimmicks, Banksy once again rattled the art world. But how will these repercussions be felt throughout the art market? In our current global context and an investment climate that relies increasingly on liquidity, safety, and security, the art market is challenged by Banksy’s daring stunt, which has the potential to undermine trust and security in the market and its major players.
The Art Market as an Institution
Art as a commodity is unique on the market because of its immediate utility through its aesthetic attributes and as a marker of social capital, but also its potential for resale and future financial gain. The international art market is managed by a few auction houses, including Sotheby’s, in major capital cities like New York, London, and Paris. The participants in the market are mostly individual collectors, museums, or private foundations (Gérard-Varet, 1995). To sell art at auction, the auction house first sets a secret reserve price, then publishes a catalogue with high and low price estimates, the low price estimate set at or above the secret reserve price. On the auction floor, art is sold using an English ascending price auction mechanism in which the highest bidder acquires the work and pays for a price the second highest bid (Beggs & Graddy, 2009).
As an economic institution, the art market suffers heavily from a lack of transparency and trust. The Financial Times describes a market that is secretive with little-to-no regulation. Prices are hidden and the market relies heavily on trust: there is limited transparency and it is incredibly difficult to trace the ownership of artwork (Dalley, 2018). The opacity and volatility of the art market can perhaps be summed up in one of Banksy’s other works, entitled Morons. Banksy critiques the tactics and exorbitant prices of the art market through his portrayal of an art auction room full of participants bidding for a work of framed text, reading “I can’t believe you morons actually buy this shit”. With limited record-keeping and enormous informational asymmetries, it is not surprising that the foundations of the art market are often called into question, with some demanding increased regulation or an international body for oversight.
An Uncertain World
In today’s uncertain economic climate, it is more important than ever that investment and economic exchanges have a secure and stable foundation. Economic uncertainty can be understood as Knight’s characterization of “unknown risk”, and the presence of this uncertainty is often revealed through decisions about whether or not to invest. Both macro-level factors, such as changes in prices and new technologies and expectations of uncertainty in monetary and fiscal policy, are considered signals of increasing uncertainty, which economists have attempted to model since the late 20th century. Researchers at the U.S. Federal Reserve Bank of St. Louis report unusually high amounts of economic uncertainty over the last few years, revealed by increased cash hoarding by firms and an increase in the Economic Policy Uncertainty index (Kliesen, 2017). As economic uncertainty increases, firms and individuals tend to shy away from risky assets in favor of safer options. According to Sotheby’s, art as an asset is increasingly a part of wealth management and investment, however, the biggest reported obstacle for investors is the lack of trust and opacity of the market. Furthermore, there is a shortage of supply of artwork as an alternative asset because few artists working in the late 19th and 20th centuries have produced works with lasting economic value (Going, going, 2007). As the complexities of our modern political economy further undermine perceptions of economic certainty, the secrecy and insecurity of the art market could nudge investors towards safer and more transparent markets.
Banksy’s Love in the Bin has challenged the already opaque art market by casting doubt on Sotheby’s, undermining trust, and even throwing doubts on the legal rights to the work. The act reinforces the worries of many market participants that it is not possible for buyers and sellers to find a fair price through the auction method (Pickford, 2018). In addition, Banksy’s scheme raises questions of Sotheby’s control over the auction process. Although the auction house has repeatedly claimed to have no knowledge of, or involvement in, Banksy’s prank, many have raised doubts about Sotheby’s alleged ignorance, and the auction house’s failure to examine the work’s unusually large and heavy frame (Dalley, 2018). Undermining trust in the major players in the art market could further weaken investor’s trust in the market and in art as an asset class, raising more questions of the value of investing in art in light of such uncertainty.
Although Banksy’s actions challenge trust and security in the art market, he nonetheless brings innovative dynamics to the world of contemporary art. This latest stunt is, to use the words of Joseph Schumpeter, creative destruction, the process that “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one” (Schumpeter, 1942). In destroying his old painting while simultaneously creating a new work, is Banksy also challenging the rules of the game and revolutionizing the very institution of the art market? This sort of shakeup could be just what the art market needs to progress, gain new energy, and keep in step with a dynamic, contemporary world.
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