A gallerist and an economist walked into an art gallery opening. The paintings on display featured the rape of dismembered corpses. The economist was horrified, but the gallerist said the work was good and the artist had a promising career. The gallerist was right. The artist is now a hot, emerging artist whose work sells for tens of thousands of dollars.
This is precisely what makes the art market baffling to outsiders. You’d think the value of art would depend on its aesthetic value; a picture you enjoy looking at on your wall. How could a dismembered corpse artist be remotely successful? Yet these paintings were classified as desirable by the art market.
To understand why, you must first understand the economics of art galleries in America and Europe. Almost all primary art sales—art bought from the artist as opposed to another collector—occurs through art galleries. Galleries set taste and prices—sets is actually an understatement. Galleries manipulate prices to an extent that would be illegal in most industries.
Someone with a financial interest controlling the market is worrisome. In any market, price manipulation causes distortions, shortages, and inefficiency. But in its own peculiar way the primary art market functions; contemporary art generates tens of billions of dollars of revenue each year. But would it work better with more regulation? Would that make art cheaper, more accessible and would there be more working artists? If you ask a gallerist why prices must not be “subject to the whims of the market” they’d probably tell you it’s to protect the artist. That sounds disingenuous coming from a party with a financial interest, but there is some truth to that statement. The nature of art as a commodity inherently makes efficient prices, meaning prices that reflect all available information about value, impossible. Value is subjective; the intrinsic value of a painting is paint and canvas—beyond that value is often a matter of taste. This is why the industry has developed an intricate signaling process where the approval of a handful of galleries, collectors and museums, determines what is good and valuable. Dealers who own and work at art galleries invest many resources in building the artist’s brand. But artists often take years to mature and have uneven periods, so any perception that an artist is over-hyped or overpriced can be anathema to his career. Value in art can be arbitrary but brands are fragile.
One of the worst things a dealer can do is over-price a work because they can’t lower the price when it doesn’t sell. Dealers may have an extraordinary amount of control over price, but desirable collectors are well educated consumers and won’t blatantly overpay. Galleries may drop an artist rather than lower the price of their work because doing so sends a bad signal about the value of the artist and the credibility of the gallery.
But perhaps it’s a vicious cycle. Prices can’t be trusted which necessitates more manipulation. If pricing were more meaningful perhaps artists’ careers would survive uneven periods or price bubbles for their work.