What Can the Art Market Tell Us About Our Economy?

When compared to more traditional investment options, the contemporary art market is highly inefficient – but this hasn’t dampened the enthusiasm of buyers and investors.

The contemporary art market has left its critics standing. Many presumed that it would be one of the crisis’ first victims as collectors tightened their purse strings and investors redirected their funds to safer areas. Yet somehow, the art market has boomed beyond expectation.

It is ironic that, in this period of economic turbulence, this inefficient little market has become more stable than the giant financial institutions. On the same day that Lehman Brothers filed for bankruptcy, Sotheby’s auction house raised nearly $100 million for the work of British artist Damien Hirst.

Many in the media have viewed the art market’s boom with suspicion since the start of the crisis, and they have been keen to pounce every time a market correction occurs – corrections are to be expected from any fast-growing market. They have presented the market’s success as a mystery and suggested that the market has somehow become disconnected from the underlying economy.

But the art market is not disconnected – it cannot be. Rather, it is a perfect reflection of the current state of the global economy.

New Art Investors

A new breed of collector is stalking the auction house: many corporate investors have increased their exposure to fine art in an attempt to diversify away from the financial markets. You would be forgiven for presuming that art is a high risk investment considering the subjective nature of art appreciation, yet corporate investors have brought with them more reliable valuation methods to an industry reliant on historical post-auction data.

A whole industry has sprung up around the needs of these corporate investors: there are now a number of fine art funds that trade artwork as you would any other commodity and indexes with which to more accurately anticipate future trends. Earlier this year, intelligence provider Artprice.com launched its Art Market Confidence Index, aimed at providing serious investors with more reliable metrics for the art market.

Many buyers are using art purely as a tool for financial gain which, in turn, has pushed up the price of the market. It is sad that the growth of the market has made it difficult for legitimate museums and public galleries to purchase new stock; a larger proportion of our international art heritage is finding its way into private collections. Of course, private collections are nothing new, but is the financial motivation behind the purchase (and therefore the price) changing the way we look at art? Should we be worried when art becomes nothing more than a commodity?

New Art Collectors

Salvation comes from an unlikely source. The image of the elitist western collector is slowly being eclipsed by the cash-rich Russian oligarch – reportedly, a third of the buyers at the Damien Hirst auction mentioned above were from the ex-Soviet Union.

These new Russian buyers have injected the art market with liquidity. Although the investment potential of art may influence their purchases, their primary interest is aesthetic – they are in search of unique and sophisticated items to complement their luxurious lifestyles and new-found wealth.

The art market has boomed because it has attracted these new breeds of investor and buyer. In this respect, the art market has not disconnected itself from the realities of the global economy – rather, it reflects the global shift in economic power: western capital is moving away from financial institutions into other areas, oil and gas-rich BRIC countries have a major economic advantage and investments from cash-rich countries are cushioning the downturn in certain sectors.

Perhaps the ultimate lesson to be learned about our economic system is that, given time, all bubbles burst. Time will tell.

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