There's No Speculative Bubble in the Art World

Lauren Schuker has a big piece entitled "Art's Anxiety Attack" in the weekend WSJ. Let's see if we can detect a theme here:

The soaring prices for art in recent years partly reflect booming financial markets, with hedge-fund managers delving into collecting and the creation of new wealth in Russia and China. Those factors have fueled speculative investments...
Now speculative investments of all sorts are coming under increased scrutiny in the wake of the subprime real-estate lending meltdown...
In the early 1990s, problems in the real-estate market set off a freeze in speculative investment and luxury spending that contributed to the collapse of the art market...
Some dealers and collectors say it's possible that the speculative excess seen in contemporary art could come down to earth...

I don't buy it. A speculative bubble is one driven by people buying assets which they intend to sell, sooner rather than later, at a substantial profit. It's often driven by the "greater fool" theory of investing, which holds that even if what I'm buying is overpriced, all I need to do is hold on to it for a few months and there'll be someone willing to pay even more for it anyway.

The recent run-up in art prices might be a bubble, but it's not a speculative bubble. The new wave of art buyers, be they hedge-fund managers or Russian oligarchs, isn't buying art with the intention of flipping it at a proft. Art remains a means of spending money, not of making it. In fact, one of the reasons I am convinced that art hedge funds are doomed to fail is that no one has ever successfully speculated on art. The people who get rich in the art world are the people providing a valuable service: dealers, consultants, and, of course, the artists themselves. The collectors are rich too, of course, but they didn't get that way by buying and selling art.

There's a very good reason for this. Tech stocks are fungible: your share of Microsoft is worth exactly the same amount of money as mine, and they're both really easy to sell. The speculative bubbles in the property market have tended to take place in markets like Miami condos or Orange County McMansions: places where one property is much the same as the next. Art, by contrast, is neither fungible nor liquid: my Hirst is probably worth much less than your Hirst, and neither of them are particularly easy to sell.

People do sell art at a profit, of course. Given how valuable much art has become over the past few years, it's only natural that collectors will be tempted to make millions of dollars by consigning their paintings to Sotheby's. But that's not the reason they bought their paintings in the first place.