Speculation in the Art Market

Includes: BID, SPGZ
by: Felix Salmon

Callen Bair, responding to my post on speculative bubbles, tells me that there is speculation in the art market after all. Who are these speculators?

They're rich; they want to spend their money; and it might as well be on something that broadens their social horizons and might even make them some money. Potential profitability is one of those niggling factors in the back of this kind of collector's mind. So why shouldn't we assume that if art prices take a swan dive — or threaten to do so — these collectors will be less likely to buy that sculpture?

Callen is quite right that an imploding art market will definitely put the dampeners on buyers' appetite for art. But she's wrong if she thinks that's evidence that a speculative bubble exists.

One clue is when Callen says that these purported speculators "want to spend their money". Spending money is what Steve Schwarzman does on crab claws or birthday parties; it's not what speculators do with tech stocks or Miami condos. Those are bought, or invested in: there's no implication that once the money is spent, it's gone.

Art is expensive, and anybody spending a lot of money on art is likely to want some kind of reassurance that it has a good chance of retaining its value, and maybe even of appreciating. People feel much better about their Warhol, which is worth ten times what they paid for it, than they do about their Fischl, which is worth a quarter of what they paid back in 1989.

Certainly, people are willing to pay more money for a painting if they think it has a good chance of rising in value. If that happens, you see, they haven't really spent any money at all: they've just converted it from cash into art, just like buying stocks doesn't (in their mind) count as spending either.

But none of this means that such people are speculators. A typical art buyer wants to buy something which will increase in value – that's perfectly normal. But when the purchase is made, there's no specific intention to sell the piece at a profit within the next couple of years. The "potential profitability" that art buyers are worried about is theoretical profitability – how much is the art going to be worth. It's not real-world profitability – how much the buyer would be able to receive for the piece, in practice, if they sold it in a couple of years' time.

Which isn't to say that if the art market goes through the roof, and their dealer asks them nicely, the buyers won't part with the work for a substantial profit. But for a speculative bubble to exist, you need much more than that: you need people buying art in the sole hope and expectation of selling it at a profit, and you need those people to have visibly succeeded to the point at which other people start to crowd into the market in an attempt to replicate those money-making strategies.

But there are precious few art collectors (as opposed to art dealers) who have made a lot of money in the art market. Perhaps David Geffen might be one, insofar as he bought well and then took the opportunity to sell when he thought he might need a lot of cash on hand to make a bid for the LA Times. But he's no speculator, and I don't think many people are trying to follow his lead.