Art: Pre-capitalist conspicuous waste?

Here’s one way that capitalism works: you find a special idea, something truly innovative. Impressed by its genius, you invest, and magic is made. By which I mean, you make lots of money.

That description applies to all manner of stock picking, including venture capital. But it also applies, if you take a recent James Stewart column at face value, to the art world.

The headline on the column talks about “Investing in Genius,” much as you might invest in, say, a Steve Jobs startup. And it takes him no time at all to start citing dubious statistics about the “average compound return” on contemporary art. He’s not talking about art like it’s an asset class: he goes further than that. “Fine art is now firmly planted alongside equities, bonds, commodities and real estate,” he writes, “as an asset class.”

He even has a theory about which works of art are the most valuable:

Evan Beard, who leads Deloitte’s art and finance practice in the United States, said “the works selling for these high multiples are important works that art historians have deemed innovative and have had influence. People want to own original works of genius.” …
What does matter, Professor Galenson’s research suggests, is innovation by the artist. “It’s really incredibly simple,” he said. “Valuable paintings are innovative. Valuable artists are innovators.”

In other words, if you want to make money in the art world, just look for innovation, just as a venture capitalist might. Easy!

There are lots of things wrong with Stewart’s take on the art market, not least that it doesn’t make much sense. For one thing, it seems that Stewart considers innovation to be more of a driver of the first derivative of value than it is of value itself. He compares a $34 million Monet with a $5 million Kazuo Shiraga, and implies that Shiraga’s particular genius explains his 53% “compounded rate of return”, while the Monet, which is merely “very beautiful” (and, implicitly, maybe not so innovative), managed to achieve just 5.4%.

But if Stewart were right, rather than wrong, if art really was an asset class, then that would be much worse. The minute you become an asset class, people and institutions with money start allocating you capital on a top-down basis. You know, 50% stocks, 40% bonds, 6% real estate, 3% commodities… 0.5% art?

So, what if he is right? Think about it this way: world wealth has risen by $119 trillion over the course of 14 years. Which means that 0.5% of the increase would be $42.5 billion per year being spent on art. The real number? Total art spending was actually about $66 billion in 2013.

That’s real money, which, in a working capitalist economy, can and should be spent on productive assets. Instead, it’s being spent on utterly unproductive assets: billions and billions of dollars a year are going, in the name (at least partially) of “investment”, into paintings by long-dead artists. If rich people stopped paying billions of dollars for each others’ art, and started spending that money in the real economy, that would create jobs, growth, and even opportunities for working artists.

As Branko Milanovic explains,

If the demand of the rich were, over the longer-term, directed mostly toward non-productive assets, that is, to the Riviera and Manhattan real estate, old paintings or similar luxury items with fixed supply, we would go back to a pre-capitalist system, justly criticized by Adam Smith, for having led the people (mostly because of insecurity of property) to bury huge sums into unproductive assets like gold. The prospect for further increases in output will thence be limited. Rich countries could end up with both greater wealth and income inequality, and stagnant real output of goods and services.

Interestingly, that’s exactly what we’ve seen, over the past 14 years in which total global wealth has doubled. The idle rich increasingly spend their rents on art by dead people, which does no good whatsoever for the productive capacity of the global economy. And so the world stagnates, even as the rich get richer. (In small part thanks to rising art values.)

So by all means buy art — but if you do buy art, buy it in the primary market, from a living artist. And think of it as what it is: consumption, rather than investment. If art is becoming an asset class, then the whole global economy will suffer as a result.

Felix Salmon is a senior editor at Fusion