ESSA

ESSA

Playing Art Monopoly Could Starve Museums


Oren Bahari

By

May 3rd, 2018


Oren Bahari discusses how current contemporary Art Asset Management may place the next Picasso in a Warehouse


Precious Art has always been an invaluable public good, it has acted as the avant-garde for societal change and creative thought, or at least it was until it started going on websites like invaluable.com. Now, everything has a price. You can buy an artefact from Ancient Egypt, ancient wedding ring or a famous Aboriginal artwork to put on your counter. No longer can we rely on the philanthropic good deeds of the rich and powerful to purchase masterpieces. No longer can we suggest that cultural grants will fit into tightening government budgets. We are on our own.

A new trend in art auctions has developed in the past decade causing the magnitude and price of art sales to increase dramatically. This increase was triggered by financial innovation and economic incentives. For a long time art was traded on the Black Market to avoid  purchase and capital gains taxes. Moreover, it was cheaper to buy an art piece if the auction was not televised. Therefore, sales of art were limited and discreet due to the opportunity cost of art being so high. As result of limited legal art sales, national governments were losing a potential source of income. In response to this issue, the Swiss government created warehouses called ‘Freeports’. The freeports where essentially duty-free zones for artwork placed next to airports. Instead of the government taxing the gains, they would just tax the income of these privatised warehouses who sourced their money on per unit storage fees.

The policy implemented by the Swiss government was was a massive hit, as it allowed the underground economy to come into the limelight. This innovative policy decision brought all the artwork from around the world to Switzerland, providing a huge boost to the income of the Freeport and therefore corresponding taxes from those warehouses. Now, when art was sold the artworks would not even move, all that would happen is that label on who owned the art would be changed. Countries everywhere saw that their artworks were being shipped to Switzerland and they caved. All of a sudden, many countries had multiple ‘Freeports’ and artworks stopped being held in museums. It is much more efficient to have art in a warehouse at the airport then mounted on the wall at the Louvre. However, this efficiency is problematic. In creating an efficient financial system, we may have stripped the very nature of artistic value for society. Art has become what someone else will be willing to pay for your lot number in a warehouse.

The trading of those label ownerships is usually undertaken at auctions. Nothing is more pretentious and more ambitious in art asset management than the Sotheby Manhattan Midsummer Auction. Truffles are served with crape condiments and you have to prove you have enough money in your bank account before you are let in. Many people are just there to signal that they are important, and apart from the procurement specialists and wealthy elites, many go just to find a ‘cultured’ yet affluent partner. In art asset management, most specialist buyers look to purchase works in the 1-2 million range, selling them several years later at over a 500% return. Recently, Haitian Artist Basquiat sold for $110 million, Marc Chagall, Les Amoureux went for $267 million from rivalry bidders and the “Last Leonardo” sold for over $450 million by ‘Christie’s’. Most notable was that the artwork by Jean-Michel Basquiat was sold at a Vickery Auction.

William Vickery discovered an efficient solution for price discovery by enacting a sealed auction, where you pay only the second highest price submitted. He won the Noble Prize in Economics for allowing preference intensity without it influencing the price. This technique allows for even more efficient pricing of assets whose value is based on what you predict people will pay for it in the future. With greater efficiency trading, we get even greater demand and further commoditization.

Long gone are the days when new art was considered fundamental to society and public good for all, now they are stored in a cloaked basement for eternity. Art does not care about a ‘Housing Crisis’ or low unemployment figures and can be transferred faster than Bitcoin, and that is the reason it has become so attractive for investment. Hopefully, its commoditization does not dissipate the reason we value it in the first place.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

Founding sponsors

 

 

Partner

Gold sponsors

 

 

 

Silver sponsors

 

 

 

 


Affiliates