Do Brush Strokes Make Bank?

The Eco­nom­ics of Ridicu­lously Ex­pen­sive Art

Indwe - - Contents - Text: Bron­wyn Coate: Lec­turer in Eco­nom­ics, RMIT Univer­sity/www.the­con­ver­sa­ Im­ages ©

What would pos­sess some­one to buy Leonardo da Vinci’s Sal­va­tor Mundi for $450 mil­lion? You might think it’s an in­vest­ment – af­ter all, it was pre­vi­ously sold for just $10,000 in 2005.

From an eco­nomic point of view, art can be an in­vest­ment, al­though the re­search shows art in­vest­ing has mixed re­sults. Art also has what econ­o­mists re­fer to as “psy­chic ben­e­fits”. It is some­thing to be en­joyed, ex­pe­ri­enced or flaunted, and this may be the key to the high price paid for Da Vinci’s paint­ing.


As an in­vest­ment, art’s per­for­mance varies wildly and de­pends on a num­ber of fac­tors. For ex­am­ple, art­works as­so­ci­ated with move­ments that are cur­rently fash­ion­able will out­per­form other types of art, which ex­plains why con­tem­po­rary art is cur­rently out­per­form­ing im­pres­sion­ist art. The strong de­mand for con­tem­po­rary art cou­pled with limited sup­ply has re­sulted in some pre­vi­ously over­looked artists, such as Keith Har­ing, now be­ing em­braced by col­lec­tors.

But it is typ­i­cally the works of lead­ing artists that are in hot de­mand. Re­cent anal­y­sis found that just 25 artists (in­clud­ing Jean-Michel Basquiat, Andy Warhol and Ger­hard Richter) ac­count for $1.2 bil­lion of the $2.7 bil­lion in world­wide art auc­tion sales for con­tem­po­rary art sold at auc­tion in 2017.

Only two women, Agnes Martin and Yayoi Kusama, made it onto the list of top 25 con­tem­po­rary artists. This is in­dica­tive of is­sues around gender rep­re­sen­ta­tion in the arts and the pro­cesses by which artists’ ca­reers and rep­u­ta­tions are es­tab­lished.

Aca­demic stud­ies of art as an in­vest­ment have mixed re­sults. For in­stance, re­search of the Cana­dian art mar­ket found that the re­turns are lower than in­vest­ing in the stock mar­ket. How­ever, the study iden­ti­fies other ben­e­fits to hav­ing art in your port­fo­lio, such as it be­ing more di­ver­si­fied.

But re­search based on around 35,000 paint­ings by lead­ing Aus­tralian artists show the fi­nan­cial re­turns av­er­age be­tween 4 % and 15 %. Re­turns for paint­ings by lead­ing Aus­tralian artists, in­clud­ing Brett White­ley and Jef­frey Smart, ex­ceed stock mar­ket re­turns. The study also found that oil and water­colour paint­ings, as well as those sold by cer­tain auc­tion houses, had higher prices.

So-called “mas­ter­pieces”, such as those by Leonardo da Vinci, ac­tu­ally per­form worse fi­nan­cially than the art mar­ket as a whole. How­ever, be­cause art also pro­vides ben­e­fits through con­sump­tion (prestige, dec­o­ra­tion, etc.), it is dif­fer­ent to shares and bonds. The re­turns may be lower, but art is still at­trac­tive to in­vest in.

The Aus­tralian art mar­ket re­flects what has hap­pened in the global mar­ket for con­tem­po­rary art, with the five high­est priced Aus­tralian works sold in 2017 ac­count­ing for al­most 10 % of the to­tal value of all works sold.

And while the re­cent sale of Earth Cre­ation 1 by the late in­dige­nous artist Emily Kame Kng­war­r­eye has not at­tracted the at­ten­tion of the Leonardo sale, its price of A$2.1 mil­lion is nearly dou­ble what it sold for at auc­tion a decade ear­lier.


The aes­thetic plea­sure of art, a feel­ing of be­ing chal­lenged or in­spired, is sub­jec­tive and dif­fi­cult to mea­sure. But that doesn’t mean the con­sump­tion of art doesn’t add to its value.

Econ­o­mists use the terms “psy­chic re­turns” or “psy­chic ben­e­fits” to de­scribe the ben­e­fits of con­sum­ing art. This is bro­ken down into three main ar­eas.

One area is the sat­is­fac­tion of sup­port­ing the arts and artists. This mo­ti­va­tion is es­pe­cially im­por­tant for those who do­nate their col­lec­tions to mu­se­ums or oth­er­wise sup­port the arts. While this mo­ti­va­tion is im­por­tant, it is not di­rectly re­lated to auc­tion prices.

Then there’s the psy­chic ben­e­fit which comes from the “func­tional” (or dec­o­ra­tive) ben­e­fits of art that is used to adorn spa­ces. This is gen­er­ally the clos­est to the artists’ in­ten­tion when they cre­ate the work in the first place.

There’s also the prestige that comes from pos­sess­ing art – es­pe­cially as it is used to dis­play good taste, wealth and power. For ex­am­ple, en­trances and foy­ers of of­fices of­ten dis­play large, striking works of mod­ern or con­tem­po­rary art.

This is what econ­o­mists call “con­spic­u­ous con­sump­tion”. As peo­ple be­come wealth­ier, their de­mand for high­end art in­creases. In­deed, art has a long tra­di­tion of be­ing used as a state­ment of power, in­clud­ing by the church.

What drives the art mar­ket, es­pe­cially at the up­per ech­e­lons, is a cu­ri­ous mix of in­vest­ment and con­sump­tion, fu­elled by a limited sup­ply.

The work of fa­mous artists pro­vides a sig­nal of qual­ity and as­sur­ance to the mar­ket and so their work is cov­eted by the rich and pow­er­ful. The unique­ness and rareness of th­ese pieces not only spurs de­mand, but re­stricts sup­ply, cre­at­ing a per­fect storm to drive prices up. Al­though, even this doesn’t en­tirely ex­plain the high price paid for Leonardo’s Sal­va­tor Mundi. Anal­y­sis of the sale sug­gests the mar­ket cam­paign by the auc­tion house was sig­nif­i­cant in achiev­ing such a high price.

But aside from its trade value, art can have cul­tural value and so­cial sig­nif­i­cance that does not neatly trans­late to mar­ket prices. So while Leonardo’s Sal­va­tor Mundi sold for $450 mil­lion, non-trad­able mas­ter­pieces such as Michelan­gelo’s ceil­ing of the Sis­tine Chapel aren’t worth­less. They’re “be­yond price”.

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