The Strange Economics of Art
Veblen goods and the 2012 Whitney BiennialWent to see the Whitney Biennial with family yesterday -- it's definitely an artists' art show, that is to say, I had some trouble appreciating it. On the right, you can see a photo from Bloomberg of works by painter Andrew Masullo, which I did like very much.
Fortunately, the art world has a very interesting economics behind it. In fact, fine art is probably one of the most obvious candidates in the real world for the theoretical concept of the Veblen good.
A Veblen good has an upward-sloping demand function: as price increases, the quantity demanded increases. Thorstein Veblen originally explained this by considering "conspicuous consumption" -- demand is being driven by the cachet and social status associated with such goods, and as a higher price makes them connote a higher degree of status, they are more desired.
Via Felix Salmon, the Reuters financial blogger, we get a remark from Lloyd Blankfein, the head of Goldman Sachs, which captures perfectly the Veblen good function of fine art:
“Guess how much?” “Three?” “No.” “Four?” “No.” Blankfein flashes five fingers, says “Five….Five!” and breaks into a big wide grin.Blankfein's talking about the millions he spent on art in the Goldman Sachs lobby. Others have picked up on strong Veblen currents in the contemporary art market. Arguably, the freshness and lack of artistic heritage of much of this body of work makes it difficult to value in such a way that it is unusually prone to bidding up based on nothing else than the fact that, well, other people want it, and if you have it, you can be the who's who of the art world on that given day.
Had the work of Hirst not been able to be classed as a Veblen good then more people would have been snapping up the works currently on the market (regardless of the financial crisis) which can be purchased for considerably less than they they were sold for a year ago. Those discounted works by Hirst that are currently on the market and have been offered for sale over the past month or so are, however, not being snapped up. Now that Hirst isn’t setting various price related records left, right and centre and isn’t appearing in the headlines as the most expensive living artist – the appeal of his work has declined and the gloss is wearing off.The dynamics of pricing Veblen goods is something quite interesting to me. If you're Hirst, does that make the optimal comeback strategy to raise the price of your next work? It's quite hard, once one begins thinking like an economist, to begin to contemplate supply-and-demand when the law of demand has been inverted. A lower price, as anthropologist Stuart Plattner writes, "signals an artist whose career is declining," whose cachet is falling, thus lowering quantity demanded.
For those of you who'd like a graph of what a Veblen good in price-quantity space:
Let me explain. (I've added a few things to this model of the Veblen good you won't find elsewhere.) First, the demand curve for Veblen goods, I wrote before, was positively sloped. Why is mine an L? Because when the good is sought after as a status symbol, demand is relatively price-insensitive. (Refer to Blankfein's comment if you don't believe me.) Also, I think that the closeness of substitutes tend to be really poor within types of art -- there is tremendous level of sensitivity to "brand," or artist name, at the high end. But at lower prices, once you've scared away all of the
art snobs status seekers, there's still a market for art, albeit smaller and less lucrative. One can find local artists who work with diners and restaurants in what strikes me as a wonderful commercial symbiotic relationship, for example. Here, though, demand is much more price sensitive, and the art behaves as a normal good, i.e. an increase in price in this range tends to reduce quantity demanded.
Originally, I was just interested in demand, but I've added supply -- short and long run -- because I think it furthers our interesting discussion about how the market for fine art, particularly contemporary art, works. I assume that the supply of art is fixed in the short run, and this strikes me as reasonable, given the fact that I wouldn't expect artists to be able to respond rapidly to economic incentives. (I have some faith in the existence of a "creative process." Perhaps it is misplaced.) I also think that much of the preexisting supply is tied up in ways that will not incline their owners to sell given small variability in prices -- think museums and wealthy private owners of art. I also am reasoning backwards a bit from extreme price volatility at auction houses.
Before we move onto the long-run stuff, let's think about the behavior of this Veblen good supply-and-demand model in the short run. What happens when, at any given price, more people want fine art? Unusually, we'd represent this as an inward shift of the demand curve, at least in the top section -- when demand increases, all given quantities of art will tend to support higher price levels. What is the consequence of an increase in short-run supply? If we're on the Veblen good side, then prices should actually increase, only considering supply. But we should also consider demand here: demand for Veblen goods is driven by their scarcity and the social value. Thus from our model's perspective, the change in price will depend on the relative changes in supply and demand -- but from my anecdotal experience, it seems that demand is highly sensitive to any undermining of its rarity. Price tends to fall in the real world when the supply of a Veblen good increases.
This system doesn't strike me as very stable in the long run, at least for any given Veblen good market we are modeling. (I'm not saying that conspicuous consumption per se is unsustainable. My understanding is that it has existed since ancient Egypt.) This seems to me an empirically true observation -- there are lots of has-been modern artists. This is true in architecture, too, where the 70s-era buildings once considered trendy are now being demolished rather than reoccupied. The point is that this observation trendiness might be explained by the existence of multiple equilibria in the short run, one of which is picked in the long run based on the relative positions of demand and supply in that time frame. In the long run, I assume that supply is relatively elastic -- an artist has sufficient time, if he discovers a market, to produce his work. If an artist has glutted the market, or if the trendy demand is gone, then it's easy to see that the Veblen good is no longer, and that the given art is now a commodity and dissociated with status. If the art remains scarce over the long run, or if demand remains strong, then the art could end up in the high-status equilibrium, though this appears historically rare. Depending on how one defines the market, even, one might hypothesize that the supply curve may return to vertical -- the given artist will eventually die, and thus be unable to produce further supply of their art, regardless of the price.
And yes, if you were wondering, this is what I was thinking about at the Biennial.