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The Circulation of Commodities

Thoughts on the Current Art Market

by GALERIE ST. ETIENNE

In the movie The Social Network, Facebook founder Mark Zuckerberg must choose between building a steady revenue stream via ad sales or going for a potentially much larger payoff by using venture capital to boost his startup’s reach and thereby its valuation. He selects the latter option. In real life, Facebook recently raised $500 million from Goldman Sachs and a Russian investor, based on a total company valuation of $50 billion ‑ an astonishing 140‑times the company’s estimated 2010 earnings. Zuckerberg and Facebook’s initial investors will probably reap their big reward through a future IPO, if they haven’t already done so through the burgeoning secondary market for shares in privately held companies. Whether Facebook or any of the other hot Internet startups, like Twitter, Groupon and Zynga, show a profit over the long term is momentarily irrelevant.

During the past decade, the art world has been influ­enced by a similar hunger for audacious returns. Small galleries act as unwitting incubators for mega‑dealers such as Larry Gagosian, who poach promising artists and then raise their prices exponentially almost overnight. Like Facebook, Gagosian’s empire, and the implicit worth of his “stock,” have been enhanced by rapid global expansion: eleven galleries worldwide, churning out some sixty exhibitions per year. The glamorous veneer of all this, according to a dealer quoted in a Wall Street Journal profile of Gagosian, makes buying from him seem a privilege worth any price. Gagosian’s annual revenues are said to exceed $1 billion; the galleries’ net earnings, of course, have never been publicly disclosed.

The commodity value of “blue‑chip” art is ostensibly affirmed by a certain number of high‑profile collec­tors buying or selling a certain number of high‑priced artworks, either through dealers such as Gagosian or at auction. However, it is sometimes debatable whether these collectors, and these sales, actually constitute a full‑fledged market for the artists in question. In 2004, hedge‑fund mogul Steven Cohen paid a well‑publicized $8 million for Damien Hirst’s pickled (and, as it turned out, rotting) shark. In 2007, Hirst upped the ante consid­erably by offering his diamond‑encrusted skull, ironically titled For the Love of God, for $50 million and then, in the space of a few months, capriciously raising the price to $ 100 million, The skull was subsequently “sold” to a group of investors who included Hirst’s London dealer, Jay Jopling his business manager, Frank Dunphy, and the artist himself. In 2008, The Art Newspaper revealed that Jopling was warehousing over 200 unsold Hirst objects, including dozens of paintings, six “classic” medicine cabi­nets and a pickled cow. Shortly thereafter, on September 15 and 16, 2008, Sotheby’s hosted a sale of 223 Hirsts created specifically for that auction. The sale was at the time deemed a major triumph, not only because 218 of the lots sold (many of them to new buyers), but because it seemed to confirm the vitality of the art market in the face of Lehman Brothers’ coincidental declaration of bankruptcy. Subsequently, however, Hirst’s market has become considerably more subdued, and some have questioned whether all the Sotheby’s transactions were actually concluded.

Auctions have long been a popular way to pump up the market, because they are public and because most of the key players ‑ the auctioneers, the press and a significant number of dealers ‑ share a  vested interest in touting record results and ignoring everything else. The vaunted transparency of auctions is often a fiction. Bidders can easily collude to either depress or raise prices, and secret reserves turn a portion of the bidding process into a theatrical performance. None of this is new, but the amount of money now at stake and the concomitant development of arcane financing arrangements increase the potential for abuse. Guarantees, when funded by the auction house, give the auctioneer an incentive to favor the guaranteed works over others in which the house does not have an interest. Third‑party guarantees‑in which a collector/investor funds a guarantee in exchange for a share of the profit above the guaranteed amount ­offer the guarantor (who is usually allowed to bid) an inside track on the lot in question and a de facto (and undisclosed) discount on the gross selling price if he or she ends up buying the work at the sale. The big‑ticket evening auctions are frequently dominated by the same few individuals, acting interchangeably as buyers and sellers. Synergy between a closely‑knit group of consign­ors and bidders is thought to have been responsible for the success of the sale‑within‑ a‑ sale “curated” by dealer Philippe Ségalot for the auction house Phillips de Pury in November 2010. While the 33 lots in Ségalot’s sale commanded an impressive $117 million, the 26 lots in the remainder of the auction brought only $19.9 million, less than the low estimate.

Today’s mega‑dealers and their mega‑clients reflect the ethos of a new global economy in which a relatively small elite has accumulated vast wealth and sees art as just another asset class, to be traded much like any other investment. The problem is, art does not behave like any other investment. Economists may generate fancy charts to show, say, that the market for Chinese art is rising or declining, but these charts have little bearing on how a specific item will perform. Every art object is unique. For example, in February 2010 an Alberto Giacometti sculpture brought $103.4 million at Sotheby’s, and in May of the same year another sculpture by the artist fetched $53.5 million at Christie’s. However, in February 2011 all the Giacomettis (of lesser quality and with lower estimates than their two predecessors) in the evening sales at Sotheby’ and Christie’s failed to sell.

Because the value of a given work is often determined by the subjective judgments and desires of a handful of collectors, art is notoriously illiquid. Art funds have repeatedly tried to solve this problem, but the unpredict­able nature of the market makes it hard for any such fund to generate consistent returns. Buying shares in a portfolio of artworks is not necessarily more secure than buying a single work of art, and it is a lot less enjoyable. While art may indeed be a good investment over time, the question is: which art, and how much time? In order to assess an artist’s investment potential, one needs to know not only whether the work has appreciated in the past, but whether there is a collector base large enough to absorb the number of works likely to come to market in the future. This last is a tricky point, because if prices rise too rapidly, the collectors who supported the artist at price “a” may be unwilling to step in at price “b.” That is why dealers, as a rule, like to feed works into the marketplace slowly, and to increase prices gradually, judiciously balancing supply and demand. Simultane­ously, dealers try to enhance the artist’s reputation by encouraging scholarship and placing works in major museum and private collections. Ideally, an artist’s mar­ket value should reflect his or her art‑historical stature. Since it takes time to build a lasting critical consensus and a solid market, art has tended to appreciate (if at all) relatively slowly. Crucially, however, the collections that have in the past appreciated most were not formed with investment in mind. Passionate engagement with the art would seem to be a more significant prerequisite  for cultivating the aesthetic discernment and knowledge necessary to make wise choices.

A great many dealers and collectors still operate according to the preceding tried‑and‑true principles. This contingent is, in fact, the core of the art market, far more numerous and cumulatively better funded than the high‑profile players who bat expensive artworks back and forth among themselves like so many ping‑pong balls. During the recent boom, the latter group pushed prices up for everyone, but now that casual speculators have been driven from the field, the machinations of would‑be market manipulators stand out in harsh relief. While auctions still generate a handful of stellar results, the once glamorous evening sales have become comparatively lackluster. The shrunken market makes it difficult for auctioneers to sustain a continuous stream of multimillion‑dollar bids. This sets up a vicious cycle, wherein consignors become reluctant to sell at auction, prompting the houses to offer unrealistic estimates, which increase the buy‑in rate and hence the reluctance to consign. Yet the core of the market remains solid ‑ per­haps more solid than it has been in years. Dominated by buyers who understand both quality and value, present circumstances encourage, indeed require, sellers to price works appropriately.

The question is: will these more sober attitudes hold, or will speculative excess once again permeate the art market as the economy recovers? The financial crisis, which propelled millions to the brink of bankruptcy and beyond, has only served to further concentrate the remaining wealth at the top. Free‑marketeers claim that markets are self‑correcting, automatically apportioning risk and reward, but during the boom investors figured out ways to off‑load the risks while retaining the rewards. Beneficiaries of this rigged game, many financial win­ners now long for its continuation. Present economic circumstances recall Woody Allen’s joke about the man who thinks he’s a chicken. Otherwise sane people support his delusion, because they want the eggs.

These reflections are taken from the  7/5-10/5, 2011 newsletter and current sale catalogue of the Galerie St Etienne, 24 West 57th St, New York. The Galerie St. Etienne is the oldest gallery in the United States specializing in Expressionism and Self-Taught Art. Its predecessor, the Neue Galerie, was founded in Vienna in 1923 by the late Otto Kallir and was a principal exponent of German and Austrian modernism during the period between the two world wars. See the Galerie’s site http://www.gseart.com