You are currently browsing the monthly archive for November 2008.

For one interesting take on “free enterprise,” check out Anthony Butkovich’s painting available on etsy.com for $425 USD:

According to the artist:

Free Enterprise is really about a trek into the wide open world of free markets.

Hmmm… celebrating free markets and the starship Enterprise? Now that is sophisticated taste.

Marci Alboher of The New York Times has an article published 26 November 2008 about how artists can become and indeed are becoming entrepreneurs. To some extent, from an economics perspective, they have always been entrepreneurs, assuming they sell their work. However, I’d like to think that the point of the article is to transform the image of artists a little bit, from lazy, if not moribund, cellar dwellers and cafe smokers into bright, energetic, perhaps restless spirits.

This is good!

Let’s look at the main example from the article:

Claudine Hellmuth… said that when she graduated from the Corcoran College of Art in Washington in 1997, career options for artists were limited. “You could teach, or do outdoor festivals, maybe get into a gallery,” she said.

…she took an intensive summer course in Web programming and design at George Washington University and then returned home to Florida, where she found work as an online designer. All along, she continued to paint on the side, thinking that her day jobs would support her. A layoff in 2001 proved to be a turning point.

“I now had the skills to use the Internet to my advantage,” she said. “I am so thankful that I left the art world for a little while.” With a little Web savvy, she says, it is relatively easy for artists to reach a global marketplace for their work.

Claudine later parlayed these skills into her own online store, etsy.com, as well as licensing agreements and numerous other smaller commissions. This ought to be inspiring to anyone: to artists, because they might realize they have more opportunities than they know if they just get out there; to entrepreneurs, because it’s really demand in the market that has not been fully supplied, meaning there is profit to be made; and to everyone else, because it suggests choices and living standards are rising as people devote more income to that demand. Take this other example:

Alexander Niles, 14, a high school freshman in Miami with dreams of making it big as a musician, is young to be focused on making a living. But he has already become an entrepreneur.

It all began by accident, he said. He was late in handing in his choices for elective classes and landed in a course on business. For an assignment to write a business plan, he turned to his passion, guitars, and decided to create a business building custom guitars for other people, something he had already done for himself.

Wow! This is certainly an example of what to do as opposed to what not to do with education today. Art teachers, cut this article out and to the following things:

  1. Make your students read this article.
  2. Make your students develop a business plan.
  3. Teach your students about contracts — the art of negotiation, the nuance of legalese, and the structure of intellectual property licensing.

The final element is perhaps the most important. Since time immemorial, artists and their sympathizers have argued that they need legal protections such as moral rights because they are powerless to negotiate. This is nonsense. Understanding that they have entrepreneurial power, they have all the bargaining power that they need. In other words, someone who signs a contract with a magazine to draw their covers at a certain compensation for three years had a choice. Both parties benefit from the contract. If the covers suddenly become very valuable, then the artist’s value will rise too, and there’s no need to cry about the magazine unjustly getting enriched: they took a risk on the artist. It may even be true that the artist can break the contract by the doctrine of efficient breach and be just as happy.

There are manuals in every Barnes & Noble for artists to pursue just these educational ends, but it really ought to be your prerogative to teach them yourself. There aren’t more valuable lessons you could be teaching, so from an economics opportunity costs perspective, it’s a no-brainer. These skills enable artists to live and fight. Moreover, the legal jargon isn’t as tough to understand as it looks and intellectual property licensing is quite easy when you get the hang of it.

Yes, even artists can change the world. The economics of changing markets are clear. To repeat Claudine’s point:

With a little Web savvy, she says, it is relatively easy for artists to reach a global marketplace for their work.

The costs to the transmission of information have shot through the floor. They are still present: time has value as an implicit cost and we should not forget that the internet, laptops, and the like are hardly free (nothing, in fact, is technically free). But the point is, compared to the past, these costs are extremely low. As a result, we are able to transmit information over far greater spaces (read: far larger markets) than ever before. That means that the number of consumers who might have the taste to enjoy your art work increases, thereby raising the value of your work. With the availability of auctions and quick responses to pricing, economics suggests that artists will be better able to realize the full amount that people are willing to pay — a corollary to the doctrine of the price discriminating monopoly, or even the perfectly price discriminating monopoly, which is able to charge all the prices that people are willing to pay.

The monopolist, in this case, the artist, wins because she or he is maximizing their profit. The consumer wins because the monopolist has an incentive to produce the efficient quantity of output, which basically means all the output that the market can handle.

Ergo, everyone wins. Capitalism with free markets and property rights: the rising tide that lifts all boats.

(h/t Art Market Monitor for the NYT link)

Earlier in November, I examined some issues relating to the role of markets in art, in particular, assessing the efficiency of their markets. Information and price signals comprise an important element of efficiency in markets. More specifically, price signals (a fancy term for prices) are information — without them, markets would cease to function. When prices reflect arbitrary preferences that do not correspond to supply and demand issues in the market, as when the prices adjust to reflect, say, government purchase of healthcare, then the signals reverberate throughout the system affecting supply and demand of everything even tangentially related with the affected prices. In the case of healthcare, government buying healthcare will distort the market value of doctor’s time (lowering it) as well as the supply of quality doctors (lowering it). Yet, the demand at cheaper prices will be higher than ever. ( The more fundamental point still is that the government expenditures would have been more efficiently spent on other goods because the money, when spent by consumers, would surely have been spent in a different manner because there has been a redistribution of wealth. )

This is all a bit of a helter-skelter analysis of markets, but let us turn to a master, Nobel Prize-winning economist FA Hayek, to make some sense of this issue. This is from his 1945 work The Use of Knowledge in Society and the emphasis is my own.

Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan. It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. […]

The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement. […]

The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction. This is enough of a marvel even if, in a constantly changing world, not all will hit it off so perfectly that their profit rates will always be maintained at the same constant or “normal” level.

And so prices instantaneously reflect supply and demand throughout the entire system. When you see the price of a car, you are therefore gathering information on all its inputs, ranging from the labor to the raw materials that went into its construction. Indeed, if it was an American car, you would know that for the same price you are getting a car with less inputs than a Japanese car, but that’s a story for another day.

As applied to art markets, this suggests no coordination of art sales is necessary to come to an efficient result in the marketplace. Prices of artworks reflect their supply and demand. Although Damien Hirst and Sotheby’s made a killing on Hirst’s work in September, if Hirst issued 1000 indistinguishable copies of every work he sold at auction, the price of all of them would be drastically reduced. The prices go down because the goods are no longer so scarce.

In a recent piece in the Wall Street Journal, Lee Rosenbaum, perhaps better known as CultureGrrl, argues that Sotheby’s, Christie’s, and other major auction houses need to increase the transparency of its sales. Rosenbaum makes an implied argument that the markets would be more efficient if the auction houses changed a misleading sales reporting practice. In summary, the auction houses like to inflate the amount of their sales by reporting the amount the work sold for at auction (called the “hammer price” because that is the highest bid outstanding when the auctioneer slams the hammer down making it a sale) combined with the buyer’s premium. The buyer’s premium is one very important way that the auction houses make money. For every work bought at a Sotheby’s auction, a certain percent, say, 20% of the hammer price, is tacked on to the hammer price. The buyer must pay that whole amount in order to receive the work. For example, if I had a winning bid of $100,000 on Koekkoek’s “Le vieux manoir,” then I would have to pay an additional $20,000 to obtain the painting.

So far, so good?

The catch is that before every auction the auction houses release high and low estimates of where the hammer price ought to come down. They usually have their own experts figure that out, and it’s a real specialty. These people are very good at it, though the appraisals are usually done far ahead of the time of the auction, in order to give time to print in the auction houses’ usually high-quality, glossy-gloss catalogs. Take my word for it, these catalogs are STELLAR. In any event, as Rosenbaum reports, the auction houses will report the hammer price plus the buyer’s premium and then say that the work sold for within the pre-sale estimate. But the estimate was just the hammer price, so they are really talking apples and oranges, as Rosenbaum says, not giving a clear picture of how the sale went.

Rosenbaum says this is a problem (emphasis mine):

This approach serves their interest in reporting a successful sale by producing higher totals and reducing the number of works that appear to have sold below their estimate. Yet it doesn’t serve the interest of the public in getting an accurate understanding of what really took place. Despite the fact that hammer prices of individual lots are announced as they happen during the sale, journalists who ask for them (or for a sale’s hammer total) afterward may need time and persistence to get the information — resources in short supply on a tight deadline.

Rosenbaum probably refers to auction house management, when she writes “their.” The idea is that if the management can make it seem like everything is okay, they stand to gain — by keeping their jobs and possibly more incentives to stay with the firm (higher pay, greater total compensation as with options, etc.). This seems intuitive to me. But what worries me is the discussion of the so-called public interest, along with the odd acknowledgement that  journalists are primarily responsible for the silly reporting, not the auction houses.

Whose interest is really marred by the auction house reporting tactic? Is it Joe the Plumber? No, he hates art. Is it the average middle class American person? Well, no, because they’re neither buying art from the auction houses nor owning stock in these firms. No, it seems as though Rosenbaum is merely trying to make the problem sound much grander than it really is. No one is affected by this. How could that be, you say, when you quote Hayek and say that price signals ripple throughout the system?

Lots of reasons. The public is not buying this art. Rich oil barons and investors are. Although some may have read the misleading figures and took them to mean the actual hammer prices, not the hammer prices + buyer’s premium, how that factors into the purchase decisions of other works is a great mystery. If a buyer is willing to pay $1,000,000 for a work by Matisse based in whole or in part on reading that a similar work by Matisse was purchased for $950,000 a week before, then the only question really is: why are we going to make silly regulations to protect her or him? They made a silly value judgment but it is theirs to make. Sotheby’s and Christie’s give disclaimers on their reported figures and depending on how efficient you think the market is, and I think it is increasingly efficient especially in art given the lowering of the costs for transmitting information, then the bidding prices already factor in the bidders’ awareness of these pricing nuances. The glory of the price system, as Hayek pointed out, is that the information could be dispersed amongst so many actors and that they need not have complete information, or anything resembling it. They can make their own appraisals and their own subjective assessments. These art collectors are not going to be spending their money on other things, so where is the distortion and pressing need for intervention?

The real question is: why isn’t Rosenbaum taking the journalists to task for being either a) stupid, b) willfully ignorant, or c) some combination of a) and b)? Let us revisit her sentence:

Despite the fact that hammer prices of individual lots are announced as they happen during the sale, journalists who ask for them (or for a sale’s hammer total) afterward may need time and persistence to get the information — resources in short supply on a tight deadline.

Rosenbaum implicitly argues that meeting deadlines is more important than getting the story right. Even if some editor had a gun to the so-called journalist’s head, the journalist could, and I know this sounds crazy, explain that the figure they are giving is the sum of the hammer price and buyer’s premium. Whoooooa! Revelation! You see, this isn’t about the auction houses, or markets, at all. This whole story, made a mountain out of a the figment of a mole’s imagination of a mole hill, is about journalists. It is about their gross incompetence, their laziness, their lack of standards, or some combination of the above. In any case, it is worrying, but not terribly surprising.

Look for more journalists covering each other’s asses, even in papers as respectable as the Wall Street Journal, and more blame to be unjustifiably placed on the ever-evil and regulation-needy markets. Of course, I do have to confess that Rosenbaum never explicitly says a regulation is necessary, only that the auction houses should come clean. I don’t think it’s a big deal, but I can see the point. Mine is only that no information is hidden, it is probably already already accounted for in other prices, and to the extent any problem exists, journalists are responsible. We need to stop giving them a free pass.

In this week’s Economist, an article details a sad development: the age of the scribe in the square is over:

The church has been there since 1736. For almost as long, scribes have gathered on its plaza to tend to correspondence, public and private. It was they who gave rise to the printing shops. They, too, who gave the neighbourhood its character. But they are now a dying breed, superseded by ever-spreading modern gadgetry. […]

[Rojas] mostly writes receipts for tradesmen—plumbers, construction workers and the like—or helps fill out tax forms. As a sideline, he types letters of complaint to government agencies, the city’s mayor or even to the president himself. In a full day’s work, he can still expect to see eight to ten customers. But business is down, he says, even over the four years he has been there.

The square’s scribes were once famous as stand-in Romeos, writing love letters. Sometimes, the same scribe would find himself handling both sides of the correspondence for a courting pair. But requests for such letters are now rare….

Of course, with the lowering of information transmission/creation costs, the role of these scribes has declined in the past. As new art forms develop, those locked in LOL-land, digital arts, and ever more numerous variations of them — a few are losing their way. There may come a day when the scribe in the square perishes from the earth completely.

At that day, their services will become more valuable than ever. After all, what Juliet would prefer a missive in an email over a letter obtained through the most important signals of investment from love, time and thoughtfulness?

This is an open letter to the hordes of persons coming to the blog, looking at a post written… just a small little post… about Masaccio: who are you? How are you finding this blog? Is there some link…? Help!

Recently, during a discussion in my Management of Multinational Corporations class, I stopped the Professor during his lecture. He had just said that there was a real question as to whether markets functioned best if managers engage in speculation or just regular investors engage in speculation. I insisted that the question was misleading, saying that the market functions best when both speculate, thereby incorporating as much information as possible into prices.

His response was to refer to the so-called efficient market hypothesis (EMH), arguing that it was indeed the proper question to ask, merely depending on whether or not we believe in the strong or semi-strong form of efficient markets. Clearly, this is kind of putting things backward. Governments influence the market in such a way that prices do not reflect all information, public and private, because trading on private information (so-called insider trading laws) amongst others prevent some of that, though thankfully not all. It is therefore very difficult to have a strong form efficient market. But none of that matters for the debate over efficient markets: clearly it would be better to have as much information as possible in the prices, so as to limit volatility and keep investors fully informed for future prospects.

In any event, the subject has come up recently on The Art Law Blog of all places. Currently, a mild debate has sprung up between the blog’s author and Halsey Minor, who is currently engaged in a lawsuit against auction mega-house Sotheby’s. When asked to pay for three works that he had won at auction, he initially claimed that he was waiting for money from others before he would pay Sotheby’s. A few days later, Minor requested documents from Sotheby’s detailing the nature of its proprietary interest in “Peaceable Kingdom” by Hicks, which I suppose has some redeeming artistic qualities…. But anyway, Sotheby’s immediately sued. Minor countersued claiming that Sotheby’s did not offer full disclosure and presumably had a conflict of interest of the type that would disquality someone selling a home… or something.

Minor is foolishly writing emails to Donn Zaretsky, author of The Art Law Blog. It’s not so much that what he’s saying is wrong — he’s arguing his case — but that is part of the problem. He should not be the one arguing his case, it should be his lawyer. But you can’t tell internet entrepreneurs that, not in their own domain. He claims that Sotheby’s is focusing entirely too much on what he said and when he said it, versus the key issue of their ownership stake. Zaretsky pointed out that the ownership stake was actually public knowledge, disclosed in one or two well known media outlets before the auction.

This is a bit of a tangent to the original point of the post, which is to discuss efficient markets in art. Zaretsky claims:

One odd note, for all the talk of non-disclosure, is that, as Lee points out, Sotheby’s interest in the painting had been mentioned in articles in the New York Times and Bloomberg (and perhaps other publications). […] If you accept any kind of efficient market hypothesis for art, it’s hard to believe that information wasn’t fully absorbed into the price of the work.

Theoretically, Zaretsky is clearly right, meaning that the deal was fair, which would preclude conflict of interests claims in many states. As someone who has only passed the Bar in Florida, I really have no idea what the law in this case will say, but nevertheless. It is worth noting that Zaretsky is not necessarily right. We can accept the EMH for art but not necessarily have it be true in this case, as the price signals could have only been sent to and received by one person, in which case the hypothesis would be meaningless. But Sotheby’s doesn’t work that way… the reason why? They understand that the wider market they can advertise to, the more value they are likely to get for the work at auction, as a virtue of rudimentary microeconomics because they are far more likely to find the person willing to pay the highest price.

I was struck by this COLOURLovers post about body art. If you want to see some really awesome body painting, check it out. My favorite are the ones that blend in with the background, but there are many types of body art and all are worthy of mention.

One note was odd in the post:

Considered by some to be the most ancient form of art – though it’s legitimacy as an art form is still debated – body painting has a long and colorful history…

Uhhh, how is its legitimacy as an art form possibly debated? The difference between it and traditional painting is that instead of almost two-dimensional depictions on canvas, this is on three-dimensional bodies. How does that difference make something not-art? It doesn’t. It’s a perfectly valid form of art, especially when considered in light of that most expansive and useful definition, that everything which is not nature is art.