Economics of Art

The economics of art is the study of how art and culture function within the economy. Economists in the United States have been researching and writing about the economics of art since the mid-1960s. In some respects, those individuals and firms that produce or consume art behave much as producers and consumers of general goods and services. However, there are some significant ways in which the behavior of art consumers and producers deviate from that of general consumers and producers.

William J. Baumol, an economist at New York University and a fellow of the American Academy of Arts and Sciences, is one of the original researchers of the economics of art. Viewing art from an economic standpoint means analyzing the art market during a period of years. During this time, economists will note trends of appreciation and depreciation of art.

Baumol has said that a person who endeavors to sell a piece of art will do what he can to maximize the value of the piece. If the basic economic theory of supply and demand is applied to the sale of artwork, it becomes clear that selling a number of artworks at one time will increase supply and lower the value of the individual artworks. Baumol illustrates this point by going over the details of two spring auctions of Andy Warhol's works in 1993, held at Sotheby's and Christie's. At these auctions, 16 paintings were offered for auction. Only two of them sold and for prices far below presale estimates. Before the auction, the art world had referred to these 16 paintings being made available as a "flood on the market."

Baumol has spoken of the factors that need to be considered in the case where an owner wishes to liquidate an art collection. The main consideration is in risking depreciation. While artwork can appreciate in value through time, the owner must be more concerned with depreciation as a primary concern. Pointing to Warhol as an example, Baumol notes that the artist was among the most important artists of the last century, yet he was not immune to the risk of a decline in value for his works. Therefore, Baumol concludes, the risk of depreciation is one that exists for every artist.

Warhol is not the only, or even the main example, of an important artist whose work has depreciated in value. John Singer Sargent was a significant art presence during his lifetime, yet his work fell into near obscurity at one point, which resulted in a decline in value of his work. Sargent's painting "San Vigilio" sold for 7,350 pounds in 1925. Not quite three decades later, the same painting was resold for only 105 pounds. This represents 19.3 percent in annual negative returns.

Baumol's main work involved researching sales of art during a 300-year period. This study looked only at artwork that had been held by an owner for a minimum of 25 years. The analysis carried out by Baumol found a very wide range in annual rates of return. These returns were anywhere from 27 percent in gains to losses exceeding 19 percent. More than 60 percent of the artwork included in this study were found to have lower yearly return rates than a modest government securities investment during the same course of time.

William N. Goetzman of Columbia Business School is also an expert on the economics of art. Goetzman created a database of art auction sales and used this as the basis of several articles on art as a financial investment. Goetzman said that there are three components to the value of art: expected future sale price, the cost of ownership and possible tax benefits and the social and aesthetic advantages that come with owning the art in question.

The final component in calculating the value of art speaks to the sense of personal satisfaction derived from the artwork and the sense of financial or social success that comes with owning a particular piece of art. However, the potential owner buys a work of art at his own risk. Goetzman has written: "The price risk of owning art is extraordinary. It is as much as 10 times the price risk of investing in a house, perhaps 50 to 100 in investing in a share of stock."

Economics of Art: Selected full-text books and articles

The Economics of Art and Culture By James Heilbrun; Charles M. Gray Cambridge University Press, 2001 (2nd edition)
Patronizing the Arts By Marjorie Garber Princeton University Press, 2008
In Praise of Commercial Culture By Tyler Cowen Harvard University Press, 2000
Accounting for Taste: Olav Velthuis on the Economics of Art By Velthuis, Olav Artforum International, Vol. 46, No. 8, April 2008
Art and Its Markets: A Roundtable Discussion Artforum International, Vol. 46, No. 8, April 2008
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