EconoMonitor

Nouriel Roubini's Global EconoMonitor

Seven Things You Should Know About the Art Market

Recently, I wrote a newsletter about my views of the art market. Specifically, I addressed why, in my view, art had finally come into it’s own as a true asset class.

(I compiled a list of a dozen reasons why I believe that is so: If you are interested in reading that piece, you can find it posted here.)

As a collector of art, I have been thinking about the topic for some time. But while I was attending the World Economic Forum in Davos, Switzerland I participated in a panel discussion on the topic of economics and the art world, and my thinking crystalized.

During that panel discussion in Davos, I sketched out three main ideas about art:

  1. That art is a new and separate asset class.
  2. That there are a number of serious distortions in the art market that suggest that there is some shady behavior going on.
  3. That there is a need for regulation and reform of the art market.

Today, I’d like to pick up on a different — and somewhat darker — angle of the same story. Specifically, I’d like to address the third point in the list: The need for regulation and reform in the art market.

During my panel discussion, I was quoted in an excellent article in the Financial Times by associate editor and chief business commentator John Gapper, and Financial Times Arts writer Peter Aspden, as saying “While art looks as if it is all about beauty, as a business it is full of shady stuff…We should correct it or it will be undermined over time.”

As an art collector who is passionate about art, this sounds like a grim prognosis for something that brings me so much pleasure.

However, I do not believe that the outlook for the art market is all gloom and doom. I do believe, though, that the art market, like so many other asset classes, would benefit from smarter, better regulation.

Of course, if the art market is going to be regulated, that regulation must be done carefully by people who actually understand not just the art world but also the economics of the art market; otherwise, if the regulation is not clearly thought through, the risks we seek to eliminate will simply be replaced by new risks and inefficiencies caused by poor regulation and unintended consequences.

Here, in summary, are what I feel to be the most important points:

  1. Despite recent improvements that have been made, the art market is still opaque and not transparent.
  2. Art is used for both tax evasion and tax avoidance in the United States and abroad.
  3. Art can be easily used as a conduit for money laundering. Artwork can often be purchased without providing identification or other documentation, and then shipped anywhere in the world, which is not the case for transactions in other asset classes.
  4. Price opacity in the art market leads to insider information, which makes insider trading in art far more likely. The following two points will show other problems with the lack of transparency in art pricing.
  5. Prices of art are subject to manipulation. For example, the minimum and guaranteed prices used at auction houses may both help to inflate the prices of the pieces sold, which, effectively, is price distortion and manipulation.
  6. Price collusion has absolutely occurred in the art market in the past — most notably between Christie’s and Sotheby’s auction houses. In the late 1990s, a criminal investigation was launched on both auction houses, and in the year 2000, both agreed to collectively pay $512 million to settle claims. In fact, the principal owner and chairman of Sotheby’s auction house was convicted of criminal activity and was sentenced to a year in federal prison.
  7. Finally, like all assets, the art world is subject to cycles of price fluctuation — leading to booms and bubbles and then to busts and crashes, which hurts all investors and collectors in the asset class.

In addition to debates over whether or not the art market should be regulated, there will also need to be an ongoing debate about how the art market ought be regulated.

Perhaps the first debate that will need to take place in the ongoing process of how to regulate the art market is whether self-regulation is preferable to outside regulation.

Of course those in the art world would prefer self regulation, but there are many instances in other asset classes where self regulation has failed miserably. However, as I alluded to previously, outside regulation brings the risk of regulators misunderstanding both the art world and its economics.

To maintain art’s viability as an asset class, it is crucial that participants in the art market should agree upon clear, enforceable standards — including market transparency, price discovery, and identity verification — or risk serious consequences in the future.

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