Alfred Marshall stated in his book Principles of Economics, “It is impossible to evaluate objects such as master paintings […] since they are unique in their genre, having neither equivalent or competitor.” Art has always been an ambiguous subject of study for economists due to its atypical characteristics. Works of art have an increasingly marginal utility (in which perceived satisfaction increases with consumption, which is not the case for other types of goods) and a strong degree of uncertainty in its value. One of the necessary elements to comprehend the art market crisis of the 1990s is that it revealed a change of view of art: art is no longer considered an independent field within the economy but as a sector of potential investment.
The 1980s: a favorable macroeconomic environment for speculation
The art market began to globalise after World War II. The United States became an important player, and prices began to increase. However, it was following the 1980s that the prices saw a significant increase. During this time, the financial markets profited greatly from cash-flow and the economy witnessed a period of growth after the post-oil shock recession. Now there is a link between the growth of the economy and the art market: an increase in GDP invites investors to place their funds in the art market with the purpose of diversifying their portfolios or out of pure artistic interest. Additionally, Japanese investors began to participate in the art market as buyers, favored by a strong yen and a flourishing economy. The amount of artistic imports to Japan during this time rose to nearly 20 billion francs, around €3 billion. Finally, it was during the 1980s that businesses began to collect artwork: which was the case for IBM and Philip Morris, for example. These elements created a strong demand in the art market, with the number of buyers increasing. At the same time, the selection of works of art available was limited, and as a result, could not satisfy all demands. This generated an inflationist mechanism, with increased prices, a consequence of a stable supply and an ever-increasing demand.
The increase of prices allowed for an inflationary spiral: by selling masterpieces they had purchased, collectors could achieve capital gain. One of the characteristics of speculative bubbles is their self-perpetuating nature: the more prices increased, the more likely buyers were to speculate, resulting in an increase in art prices. In an article for the New York Times, Peter C.T. Elsworth described the context of that period: “ The growth of the art market during the 1980s reflects a decade obsessed with money during which billionaires replaced millionaires. It seemed that there was no limit.” In 1990, Portrait of Doctor Gachet by Van Gogh was sold for $82.5 million (around $124.3 million today). Artprice indicators registered a 600% increase in art prices during this time.
The explosion of the speculative bubble
During the Gulf War, the economic situation was dire: the American economy was in recession, marked by a lack of cash-flow in the financial markets, leading to the downfall of many financial institutions. Investors were less willing to invest in the art market. At this time, Japan experienced a recession with the introduction of a restrictive monetary policy and banking sector crisis, resulting in Japanese investors reducing their number of art purchases. The demand on the art market was less important, which is evident based upon its prices: between 1990 and 1993, they decreased in value by 55% according to Artprice. If a speculative bubble is a self-perpetuating mechanism, this is also the case for a deflationary spiral: when buyers retreat from the market, prices drop, reducing the demand as well.
The consequences on the art market were diverse. First, a decrease in sale prices: in a report on the art market spanning the last 25 years, TEFAF compares the maximum sale price of Picasso’s works before and after the crisis (between 1988 and 1995). Before the crisis, the record price achieved by the Spanish artist at an auction was $48.2 million; after the crisis, the record was $5.7 million. A second element of the crisis of the art market was the increase in unsold works. In autumn of 1990, 20% of lots offered at auction were unsold, and nearly 50% of contemporary artworks did not find a buyer.
Restructuring of the art market, consequence of the crisis
The crisis modified the functionality of the art market to the extent of which it had shaken many of its actors. Smaller galleries were deeply impacted: only the most resilient among them were able to survive. Nonetheless, they were threatened by the expansion of auction houses. Initially, their work had been complementary: art dealers were provided with auction house sales. From 1990, they adopted a more aggressive strategy by reaching buyers and sellers with attractive conditions: flexibility in commission fees, fixed reserve prices, and advances on proceeds from the sales, etc. The purchase of Van Gogh’s Irises by Alan Bond in 1990 is a crucial example: Sotheby’s gave an advance amounting to half of the painting’s price achieved at auction to the Australian buyer. As a result, galleries had to modify their operations in order to respond to this new competition. Georges-Philippe Valois clarifies this change: twenty years ago, a gallery “represented various colleagues in Europe and in America for resale. Then, galleries discovered that it was better to have branches in all countries, rather than showing their artists against other commissions.” The work of a gallerist has evolved into providing greater results in terms of sales. Galleries developed on a global level: this is the case for the Gagosian, which possesses fourteen exhibition spaces in eight different cities, as well as for the case of Perrotin.
In her book The French Art Market, Raymonde Moulin highlights the emergence of the “mega collector” figure, “both a cultural actor as well as an economic actor, [he] alternates between both roles, that of the art dealer (he buys, and eventually, resells), an exhibit curator, and as patron (donations and foundations).” As a result, the speculative mechanism has given central importance to buyers: the price that they are willing to pay is indicative of the aesthetic value of the work. Peter Ludwig, Panza di Biumo and Charles Saatchi have played a key role during this time, constituting large collections and propagating the promotion of artists. In 1991, Saatchi financed the work The Physical Impossibility of Death in the Mind of Someone Living by Damien Hirst. Samuel Kellers reflects on this evolution: he affirms that art critics “are no longer considered as philosophers – they are respected but not as powerful as collectors, dealers or curators”. Previously, they played the role of middleman between the buyer and the work. It is now possible to be in contact with the work of an artist by using the Internet and attending fairs, which have the advantage of greater speed regarding the transaction. The creation of Art Basel Miami in 2002 and Frieze in 2003 underscores this new craze for fairs.
Swiss collector Simon de Pury said of the 1990 crisis: “If it taught me anything, it is that he who keeps his cool can make extraordinary purchases.” This crisis has brought about a profound restructuring of the art market in which different actors have had to adapt, like galleries that have expanded their activities in the context of the fairs. In this regard, the concept of creative destruction developed by the Austrian economist Joseph Schumpeter, gives a satisfactory assessment of the crisis: for him, “the new does not arise out of the old but starts producing beside the old until it harms it”.