“The Scream,” painted by Edvard Munch in 1895, sold at a record price of $119.9 million on May 2.
A few belated thoughts on the economics of art in the wake of the $120 million price fetched by Edvard Munch’s “The Scream.”
Claude Monet was one of the most successful businessman-artists in history. Even in the 19th century, he sold a painting for the equivalent of today’s $375,000-$750,000, about what a high-price painter of today might get. In June 2008 (pre-Lehman collapse) “Le bassin aux nymphéas” (water lilies) sold at Christie’s for $71 million dollars ($80 million with fees). But just a year later, a much larger “Nympheas” failed to reach the minimum bid of $30 million and was withdrawn, “drawing gasps from a packed saleroom,” according to Bloomberg.
Bottom line: You could have made — or lost — a fortune on an artist who has always commanded the highest prices, in life and death. How sure, then, is any investment in art?
It simply isn’t, though rare indeed is the collector who doesn’t think about the economics of art: fair price and true value.
The concepts of price and value are not to be confused. “Value” is abstract and elusive. “Price” is here and now: whatever the market will bear at the moment. A cynic might paraphrase Oscar Wilde: An economist is someone who knows the price of everything and the value of nothing. (For the record, Wilde was defining “a cynic.”)
For centuries, philosophers tended to equate value and price. Starting around the time of Adam Smith, the thinking tended to equate price with cost of production. Thus, if something’s cost was low, its price should be too.
This notion persists. A year’s dose of the drug Ceredase, which treats a rare genetic condition of bone deterioration, was selling for $300,000 last I looked. But since it costs a miniscule fraction of that to produce, it’s been a source of great controversy, and many consider the price a gross injustice. Indeed, the same might be said of a multimillion dollar Monet, especially considering how fast he painted and how long he lived.
But economists have come to understand that a Munch or a Monet, like a drug, car or diamond, is simply worth what it will bring, and that in turn depends on the amount available (the supply) relative to what people want (the demand).
Supply, of course, is pretty simple to calculate, especially in the case of “The Scream,” a one-of-a-kind. But demand is trickier. Demand has to do with how badly people want something: the amount of satisfaction it provides. But satisfaction to whom? And how can you quantify satisfaction anyway?
In the case of Ceredase, you can at least imagine some sort of consensus estimate. A human being avoids a crippling fate. We may all be able to agree, within broad limits, as to what that’s worth. But how many people would agree on the value of a Munch? And how many people? Without competition, the low bidder wins.
The great Rembrandt van Rijn himself, long after he’d attained genius status, provided surprisingly little satisfaction to a surprisingly large number of people, including the most famous art arbiter of the 19th century, John Ruskin. (“Vulgarity, dullness, or impiety will indeed always express themselves through art, in brown and gray, as in Rembrandt,” wrote Ruskin in purple prose.)
But if beauty truly is in the eye of the beholder, how can the value of an artwork be safely arrived at?
Sad to say, with great difficulty. Rembrandt himself provides a case in point. Perhaps his most famous etching, “Christ Preaching,” is better known as the “hundred guilder print” because it once brought that lofty price (several thousand of today’s dollars) at auction during his lifetime. Less well-known is the fact that the bid was Rembrandt’s, part of a dogged effort to drive up the print’s value and establish a new price level for his etchings. (In economic terms, he was artificially pumping up demand.)
It took several hundred years for Rembrandt’s prices to firm; in 1882, a painting of his sold for $1.6 million in today’s prices (as are all figures cited from here on). Rembrandts have been climbing steadily in price ever since. But for every Rembrandt, there’s a Thomas Gainsborough or a Jean-Louis-Ernest Meissonier.
Gainsborough did portrait commissions in the late 1700s for the equivalent of something like $10,000. One hundred years later (1876), his “Duchess of Devonshire” sold for $1 million, and in 1921, his ubiquitously reproduced “Blue Boy” sold for more than $6 million. But in the 1930s the art market crashed and a Gainsborough went for about $200,000 (1935); another, for closer to $30,000 in 1942. In 1887, a painting by Meissonier, the French academic realist, brought the equivalent of today’s $1.5 million; in 1940, one sold for $5,000.
The Salon masters have since made a comeback, as has John Singer Sargent (another spectacular boom-to-bust investment), among others. The prices of the best-known impressionists and post-impressionists, on the other hand, have gone up and up throughout the 20th century.
Art prices might seem to be especially volatile, then, especially if you believe Burton Fredericksen of the Getty Museum, who has been quoted as saying that the only artists to have maintained consistent values for the past 500 years have been Raphael and Leonardo.
The standard reason given for the volatility of value is that art collectors are both fickle and few in number, leading to a thin market and low demand. It might not require many people losing interest in an artist to depress the price.
But if art prices in general are “volatile” and “fickle,” one needs to ask: compared to what?
The prices of all conceivable investments are subject to swift and sudden changes, even though millions of people own them. And the history of investment booms and busts is older and more dramatic than the volatility of the art market.
Economic historians long like to tell of so-called “tulipmania.” When Rembrandt was 31 years old, for example, it reached its peak in his native Holland. At the top of this speculative craze in 1636, one tulip bulb (of a particularly colorful and sought-after virus-influenced variety, the Viceroy), sold for “two last [loads] of wheat and four of rye, four fat oxen, eight pigs, a dozen sheep, two oxheads of wine, four tons of butter, 1,000 pounds of cheese, a bed, some clothing and a silver beaker” — tens of thousands in today’s money. After the market crashed a year later, the bulb was virtually worthless.
(Incidentally, the great Dutch seascapist, Jan van Goyen, speculated on a batch of 10 bulbs, paying roughly the cash equivalent of the items above, plus a picture by Salomon van Ruysdael and another by himself, not yet painted. He died before delivering his work, bankrupted by the tulip crash. Major van Goyens and van Ruysdaels sold for something like $1,000 in today’s money back then; today, they fetch $100,000-$150,000 at auction, while tulips, of course, sell for a few bucks a dozen.)
The story of tulipmania has taken some hits from scholarship in recent years, as well as from some economists who claim that bubbles are impossible, on the theory that if things are worth what the market brings, then that must be their true value.
But it’s a circular argument. Most sane observers would agree that bubbles happen, and long before the dot-com or mortgage-based securities collapses, history proved the point. Consider the “South Sea bubble” of the early 1700s on which millions of British pounds were lost, including thousands by the warden of the Royal Mint, Sir Isaac Newton, a fellow who should have known that what goes up must come down.
The examples can be multiplied ad nauseam, for even the seemingly safest investments. Silver, a measure of value for millenia, rose to $50 an ounce in the late 1970s — today’s $150 or so. By the time we did a story on Warren Buffett investing in silver in 1998, the precious metal had lost a good deal of its luster, and,
inflation-adjusted, more than 90 percent of its value. Gold? Oil? Look them up.
Compared to many other investments, then, art has not been especially risky. Moreover, when an art dealer utters the time-honored cliche — “You can’t hang a stock or bond on the wall” — don’t scoff. S/he may sound self-serving, but the fact is that art has a use value as uncharacteristic of other investments as volatility is typical of them.
Is “The Scream” a steal at $120 million? A scam? In art as in oil, who knows? Are we talking Rembrandt or Rossetti, Michaelangelo or Meissonier? Chardin’s prices have held since the 18th century; Rosa Bonheur’s “The Horse Fair” sold for the equivalent of $1.2 million in 1887, was eventually acquired by New York’s Metropolitan Museum and went on to spend the first half of the 20th century in its warehouse. By 1914, a Bonheur was bringing less than $20,000 at auction.
As for oil, in Rosa Bonheur’s lifetime (1822-1899) technology transformed it from worthless muck to “black gold.” Advances in solar energy could turn it back into dross just as quickly.
So finally, in terms of making long-run price predictions, we can only fall back on the words of the 20th century’s greatest economist, John Maynard Keynes. “In the long run,” wrote Keynes, “we are all dead.” To which the art dealer might add: “But in the meantime, isn’t life a lot nicer with beautiful things on the wall?”
This entry is cross-posted on the Rundown– NewsHour’s blog of news and insight.