The art bubble

A David Hockney painting has sold for $90m , and it couldn’t happen* to a nicer guy. Actually I have no idea whether Hockney is nice, but he’s certainly an endlessly interesting, provocative artist with whose work I never tire of engaging.

*In fact it didn’t happen to him: I think he’s doing OK, but this sale was by a speculator/collector and it didn’t put this awesome sum into the artist’s pocket.

What, though, does this event mean? Philip Kennicott reflects on the event in WaPo. He explores two questions, one right and interesting (how can a painting be worth so much money?) and the other partly wrong (is it right to spend so much on a painting when there are homeless and all the other real needs?).

OK, let’s consider the first one. As far as we know, what was sold was the physical chattel; not the copyright for reproductions or web posting, not the right to think about it while writing blog posts, not the right for other artists to riff on it in future work. An asset’s value is the discounted time stream of the economic value it can create put to its best use, and the best use of a physical painting, once it has been photographed to create a high-resolution file for various purposes, is to hang on a wall and be looked at by people. The economic value thereby created is in the heads of that audience.

If we put that Hockney to work like any other asset, a dozen people might practically be engaging with it at once (it’s fairly big).  On exhibition eight hours a day, every day of the year, that’s 12 x 365 x 8 = about 35,000 person-hours of engagement per year. The Mona Lisa maybe gets this level of attention, but it’s an upper bound on our estimate for sure. I have seen Hockneys, including this one, on display in several first-class museums and there are rarely more than a half dozen people looking at any of them.

An asset worth $90m has to return about $4.5m worth of value per year at 5%, so for this painting, the viewers have to think it worth $130 per hour.  Good seats at the opera cost about that, but they aren’t eight hours a day all year. Again, twelve people at a time (however long each stands in front of the work), all day every day, forever.

Obviously this whole story is a fantasy; no-one would spend real money on a proposition like this (and if a museum bought it to display, the trustees and the responsible curators need some remedial reality training).  Prices like this are speculative “bigger fool” bets; someone expects to sell it for more than $90m–but this just moves the question one buyer down the line. If an asset doesn’t eventually create value commensurate with its price, we’re talking about tulip bulbs and the sociology of a chain of fools, not economics and not art.

Kennicott’s second question implicitly compares the sale to different ways the $90m could be spent, but this importantly confuses price and cost. When a rich person (or anyone) sells a painting to someone else, no cost has been incurred; the buyer has just transferred control over a bunch of assets to the seller, and control over the painting went the other way. No economic resource–not human labor, not paint and canvas, not sandwiches–is been used up (as it would  if someone commissioned a new work of art, perhaps an enormous outdoor sculpture, that actually cost $90m to make), and the world is no less able to house the homeless or cure cancer or offer public concerts.

It is true that the buyer could have done all sorts of good work with that money, and then real resources (the staff time of his foundation, or the medicine he might ship to Yemen) would be used up and not available for something else. We might well explore the psychology of someone rich enough to buy this painting who prefers to use his money to show off to his rich friends in this way, but that’s a different issue.  Where Kennicott’s question really does bite is when a museum makes a purchase of this kind, or someone gives it the painting instead of a check for $90m as Kennicott hopes, because to the museum, that’s really a cost. Within its scope of action, there’s $90m less to…to…well, there’s quite a list: conserve the art it already owns, build 90,000 more square feet of gallery to show lots more paintings in, hire educators and curators to increase the value of visitors’ engagement, bring its future visitors (school kids) to the museum to get them addicted to art, put on classes for amateur painters…the mind reels. What we know is that there’s no chance possessing that painting will create $90m of value. Especially $90m of net value, because it will displace some other painting from the wall, out of sight into storage where it will no longer be looked at.

Pierre Bourdieu described a consequential, if not important, function of art: it’s ammunition in a stalemated war between élites of money and of education for social dominance. Today’s art prices are evidence of that exercise running wild in a new gilded age, and the “art market” is a financial bubble in which “success” has almost nothing to do with the art itself, or for that matter engagement with it as art. After all, so much of the art is sitting unseen in Swiss warehouses like gold bricks in Fort Knox , while ignorant, insecure millionaires trade titles to it for fun, like Monopoly houses.

Author: Michael O'Hare

Professor of Public Policy at the Goldman School of Public Policy, University of California, Berkeley, Michael O'Hare was raised in New York City and trained at Harvard as an architect and structural engineer. Diverted from an honest career designing buildings by the offer of a job in which he could think about anything he wanted to and spend his time with very smart and curious young people, he fell among economists and such like, and continues to benefit from their generosity with on-the-job social science training. He has followed the process and principles of design into "nonphysical environments" such as production processes in organizations, regulation, and information management and published a variety of research in environmental policy, government policy towards the arts, and management, with special interests in energy, facility siting, information and perceptions in public choice and work environments, and policy design. His current research is focused on transportation biofuels and their effects on global land use, food security, and international trade; regulatory policy in the face of scientific uncertainty; and, after a three-decade hiatus, on NIMBY conflicts afflicting high speed rail right-of-way and nuclear waste disposal sites. He is also a regular writer on pedagogy, especially teaching in professional education, and co-edited the "Curriculum and Case Notes" section of the Journal of Policy Analysis and Management. Between faculty appointments at the MIT Department of Urban Studies and Planning and the John F. Kennedy School of Government at Harvard, he was director of policy analysis at the Massachusetts Executive Office of Environmental Affairs. He has had visiting appointments at Università Bocconi in Milan and the National University of Singapore and teaches regularly in the Goldman School's executive (mid-career) programs. At GSPP, O'Hare has taught a studio course in Program and Policy Design, Arts and Cultural Policy, Public Management, the pedagogy course for graduate student instructors, Quantitative Methods, Environmental Policy, and the introduction to public policy for its undergraduate minor, which he supervises. Generally, he considers himself the school's resident expert in any subject in which there is no such thing as real expertise (a recent project concerned the governance and design of California county fairs), but is secure in the distinction of being the only faculty member with a metal lathe in his basement and a 4×5 Ebony view camera. At the moment, he would rather be making something with his hands than writing this blurb.

11 thoughts on “The art bubble”

  1. I wonder if there isn’t some other “value” that you haven’t explored here.

    I pay $2 for a lottery ticket with a grand-prize payout of $100 million. My chance of winning that prize is so close to zero to be negligible. Consequently my daughter, who took Econ 101 in college, says to me “Dad, how could you pay the fools tax. That lottery ticket has an expected value of 20 cents, and you paid $2 for it. I thought you knew better than that”

    Well, she missed out on Econ 310, where she would have learned about other ways of measuring value besides expected cash return on equity. She pays a ridiculous price for her Starbucks coffee, compared to my Seven-11 price, but she knows why–she feels she gets value from the enjoyment of both the coffee and the Starbucks ambience. Yet she has never appreciated that the value of her enjoyment is similar to my enjoyment of the two days that lottery ticket is stuck under the magnet on the side of my refrigerator. I look at it and I smile. I’m thinking of what I will do with $100 million when I win. But my enjoyment isn’t that I will win; rather it’s that for two days I will smile every time I walk past the refrigerator.

    Now think of a Bill Gates, or of somebody who has only two percent of Gates’ wealth, which already makes him rich beyond my ability to comprehend. It’s certainly not beyond the pale that such a megalodon of finance might also have an appreciation of David Hockney’s work, and might gain a lot of enjoyment from seeing that painting hanging on his living room wall every morning when he comes down to breakfast, and again every evening when he returns home from the office.

    So when he hangs if on a wall in his own house, and perhaps turns down an offer of $95 million for it next year, I for one will not begrudge him the enjoyment he gains just from admiring it as he has his evening martini before dinner. Hey, it’s his money; who am I to criticize how he spends it. Only his wife has that privilege. (And perhaps his accountant, if they’re close friends.)

    1. Your argument is an interesting flip side to the usual observation that, at the margin, money has little or no benefit for very rich people. So yeah, having that extra $90M in cash and negotiable securities might be not nearly as productive of utility for a super-rich person as seeing the artwork every day (or week or year or decade), or simply the knowledge that some other super-rich person doesn’t currently own it.

      But. If you don’t actually like the art, and you’re just buying it because you’ve been advised that it’s likely to increase more in value than other things you could plunk down $90M on, that says something about the sub-economy of the super-rich that makes synthetic default securities look positively sensible.

      1. paulw, this seems right. It’s well-known that many of these collectors don’t display much of what they buy — there are massive facilities for storing rich people’s art, after all (and I don’t mean museums *grin*). A lot of it does seem to be a certain kind of investment strategy. Literally a beauty contest (in the sense of Warren Buffett) both in the short-term, and the long-term. An

        But to Ken Rhodes’ point, I’m not sure we should care. So what if the rich buy art — even shitty shitty art (not saying Hockney’s a bad artist) — why should we care? The rich will spend their money on crazy stuff no matter what: yachts-with-yachts-inside, helicopter skiing, and on and on and on.

        One thing I find heartening, is the advent of mechanical duplication sufficiently precise, that no layman can discern which is the real painting and which is the replica. I’d love someday to have a few Monets on my wall, and honestly, don’t give a damn if they’re genuine or not.

        1. I should have added: If we believe that this really is a case of “the rich will spend their money on crazy shit yo”, then (as with megayachts) we, the public, have no good reason to subsidize them. Income from appreciating art ought to be treated as simple income, not capital gains, for example.

          1. Would you allow losses to deduct against ordinary income?

            Who cares how the rich spend their money? is not so simple. The Koch brothers spend theirs on politics to undermine our politics and our society to enrich themselves and their pals.
            We have had different examples, like Gates and Buffett. And Bloomberg. A very rich guy, Andrew Carnegie, said it was sinful to die rich, left his kids very little, and otherwise walked his talk, so we have Carnegie libraries, Carnegie Hall, Carnegie Institute for Science, etc.

  2. Michael, you raise interesting points. Re: tax treatment, if it’s taxed as income, it should be treated as income, right? So losses are against regular income, right? Today it’s treated as capital gains (usually).

    Re: the Kochs, I take your point ENTIRELY. We need much stricter rules and enforcement around what people are able to do tax-free with their money in the way of influencing society. All these “non-profits” that are basically lobbing outfits in disguise really piss me off. The IRS needs to come down on their asses.

    But really, I think you’re going someplace different? Public financing of electoral campaigns, and outlawing private financing? And ditto for all the private “issues advocacy” bullshit. I’d be all for that. All for it. Every time I read about the PALTRY sums being spent in British and French electoral campaigns, I cry out (CRY OUT) for that kinda thing in our country.

  3. I thank Ken Rhodes for the insight that, when one buys a lottery ticket, the pleasure that one derives from thinking about winning is the benefit one derives from the $2 expense. My wife occasionally buys a lottery ticket, and I have always explained to her why it’s a waste of money. I’ve seen the pleasure that she derives from thinking about all the people she will help (herself and me included) if she wins, but it never occurred to me that this pleasure is the benefit she derives from the $2 expense. So she’d thank you too, because I will no longer accuse her of having wasted $2.

    1. Heh. I wonder why, when you win the lottery the winnings are taxable as income, but you can’t write off as losses all the times you bought and didn’t win? If it’s an investment strategy, you should be able to, right?

      Turn that around and we can ask why, if art is like lottery tickets, you can write off losses, just like gains. Hm. One wonders.

      1. Has anyone tried to write off the cost of a losing ticket? Has the IRS or a federal court ever said that we can’t?

        1. Oh interesting. You -can-. But only offsetting gambling gains. I’d be fine with that as the criterion for writing off losses on art — only to offset gains on art.

          1. Sorry, I should have added: prompted by your question, I looked it up. Which I should have done before posting originally. Thank you for prompting me.

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