perspectives

For Pleasure or for Profit

The promises and perils of the art market

By YUGANK GOYAL | 1 August 2015

IN 2008, the Oklahoma City Museum received a package from a long-term benefactor, Mark Landis, containing paintings attributed to the nineteenth-century French artists Paul Signac and Stanislas Lépine. The museum’s registrar, Matt Leininger, was delighted—until he discovered the same works listed in the collections of the Savannah College of Art and Design, and the St Louis University Museum of Art. Those too had been donated by Landis, and it emerged that the philanthropist had been sending counterfeits, crafted by himself, to museums for 30 years. In an interview with the BBC, Landis explained that he enjoyed being “treated like royalty.” With no money exchanged—and with the burden of due diligence on the museums—Landis hadn’t broken any laws, and was never punished for his little con.

Contrast that to an art heist, unearthed last year, involving the Mumbai socialite Sheetal Mafatlal. Mafatlal currently faces criminal charges for the theft, planned and executed over two years, of paintings worth R100 crore from her husband’s family mansion. With the help of willing as well as gullible accomplices, including a celebrity photographer, a fashion designer, five sheikhs from the United Arab Emirates, business tycoons, policemen, politicians and bureaucrats, Mafatlal allegedly replaced numerous original works—mostly paintings by Indian masters—with fakes.

Landis pursued pleasure while Mafatlal chased profit, but both banked on the fact that value in the global art market—much as in other luxury markets—is based as much on connoisseurship as it is on conspicuous consumption. The art market is estimated to be worth $66 billion, making it one of the world’s largest unregulated markets—that is, unsupervised by the law. By this valuation, it is worth more than the gross domestic product of many countries, including Kenya, Luxembourg, Bahrain and Lebanon. Yet the idiosyncratic workings of this insular, informal market are little understood, making it extremely susceptible to overconfidence.

Over the last three years, the reputation of the Indian art market has been enhanced by its recovery from the hit it took from the global financial crunch. High-profile events such as the India Art Fair and the Kochi-Muziris Biennale have made a splash in the international art and finance communities. New records have added to the buzz: the 90-percent sold rate at Christie’s second auction out of its Mumbai office, which generated $12 million last December; an auction by the firm Saffronart this June that fetched $1.2 million for a canvas (in 2000, at an early Saffronart auction, the highest bid was $12,500).

Although the Indian market is still a drop in the global one (Christie’s first auction in China, last year, generated more than double the Indian one in December), art advisory services and art funds have proliferated here. These agencies fill the gaps in knowledge and information between buyers and dealers, evaluating both the expected returns and the prestige of any artwork traded. They also create investment funds, just like mutual funds, for art. The financial consultancy Deloitte and ArtTactic, a major art-market analysis firm claimed in a joint 2013 report on Indian art that “with the outlook turning increasingly positive, the interest in art among the country’s HNWI”—high net worth individual—“population is likely to grow.”

Growing sales are all well and good, but scholarly research provides a less exuberant view of future returns on art investments. In 1986, the prominent American economist William Baumol wrote a famous article, titled “Unnatural Value: Or Art Investment as Floating Crap Game,” in the American Economic Review. He argued that the history of art connoisseurship “tells us that the main lesson imparted by the test of time is the fickleness of taste whose meanderings defy prediction.” Setting aside the idea of high rate of return in art markets—other than as a form of aesthetic pleasure—he concluded that “if prediction as applied to stock prices is a losing game, it is certainly unlikely to be a winner in the market for works of art.” Though the article was controversial, its basic premise is economically sound, and still applies today.

To make predictions in this field, art investors rely on various kinds of indices. These indices move together, more or less, and all suggest that investments in art do not, on average, offer any more lucrative payoffs than traditional financial investments. The well-respected Mei Moses indices, published by the business professors and art advisors Michael Moses and Jianping Mei, showed a 6.7 percent average compound annual return on art for 2012, as compared to 6.8 percent for the S&P 500, an American stock market index. These indices offer only tentative conclusions on market trends, reliant as they are on patchy data, and very few look at currents in modern Indian art, for which information is particularly limited. Many studies seek to allay the euphoria often associated with art markets, recommending art only as a way to diversify one’s portfolio, not guarantee high returns.

Which is all to say that the art market is a risky playground. Everywhere, it operates through unwritten codes and norms, informal networks and collusive practices. Consider that, in 2001, the auction firms Christie’s and Sotheby’s, which then conducted 90 percent of the world’s major art sales, were convicted of price-fixing, resulting in fines totalling $557 million and the imprisonment of the chairman of Sotheby’s in the United States. The market’s informality is a product of infrequent trading, high transaction costs, a relative information vacuum, and a ubiquitous subjectivity. Perversely, the impression that the art world is an entirely lawless one, peopled by trickster artists and savvy intermediaries, also leads people to overestimate the potential of art as an investment.

In India, the inherent risks are exacerbated by greater inefficiencies, making the art market’s idiosyncrasy more pronounced than elsewhere. This market can hardly remain insulated from the existing culture of informality that characterises Indian businesses. In the Indian art market, when contracts exist at all, they tend not to be justiciable. Unlike many developed counterparts, fiduciary obligations are absent in formal sense. In New York, for example, arguably the global hub of the art market, relationships between dealers and artists, or between auction houses and consignors, are treated the same as ones between banks and their depositors in the eyes of the law. In India, where the jurisprudence of contract law is comparatively underdeveloped in the absence of precedence, the courts have given little indication of following that example. Rather than drawing legitimacy from the law of the land, transactions here run on verbal agreements rather than binding contracts, putting parties with weak bargaining power, such as artists, at a significant disadvantage against, say, powerful gallerists. With no regulatory intervention, the market’s more powerful agents set their own rules, to their own benefit. This imposes huge externalities on the market, substantially raising barriers to entry and increasing insularity.

For affluent participants, the less regulation, the better. The celebrated economist Nouriel Roubini noted at the World Economic Forum earlier this year that “whether we like it or not, art is used for tax avoidance and evasion.” India is a case in point.

Vivek Kanwar, a professor of law and the founder of the Winter School on Art/Law in Delhi (a conference I participated in this January) characterises the Indian art world as “small, cozy and yes, a bit corrupt.” He told me over email that, notwithstanding a few high-profile capers such as Mafatlal’s, managing “black money” through art, as with other investments, is more often a matter of tax evasion than laundering cash from criminal enterprise.

“People are right to be cynical,” Kanwar said, “but they don’t always know what they are cynical about.” It can be difficult to disentangle the Indian art scene’s vices from its virtues. “Fewer than 700 people are engaged with it full time, and that can be a wonderful space to be in, but it also magnifies the misdeeds of its individual members,” he explained. “In an informal and unregulated space, there is still a space for honour, generosity, and reputation, but everyone has their horror stories, and it might be worth exploring if these traditional virtues can be supplemented with legal constructs like contract and fiduciary duties.”

Formalising the market—insisting on written and registered contracts, with recourse to the courts; creating information resources to lower barriers to entry—would not guarantee greater financial returns, but would help prevent wrongdoing, and perhaps cool the enthusiasm about its investment potential. It might also remind us, as the Landis saga does, that art’s primary value lies not in financial gain but in a ludic subversion of rules. On April Fool’s Day three years ago, the University of Cincinnati held an exhibition of Landis’s counterfeit works. It was curated by Leininger, the museum official who exposed the fraud, with Landis as the guest of honour. Art, as an expression of unalloyed cultural freedom, is justified in its idiosyncrasy—and the April Fool’s event embodied this element of fun. But fun has more value if everybody can join in, and if it is recognised as such.

IN 2008, the Oklahoma City Museum received a package from a long-term benefactor, Mark Landis, containing paintings attributed to the nineteenth-century French artists Paul Signac and Stanislas Lépine. The museum’s registrar, Matt Leininger, was delighted—until he discovered the same works listed in the collections of the Savannah College of Art and Design, and the St Louis University Museum of Art. Those too had been donated by Landis, and it emerged that the philanthropist had been sending counterfeits, crafted by himself, to museums for 30 years. In an interview with the BBC, Landis explained that he enjoyed being “treated like royalty.” With no money exchanged—and with the burden of due diligence on the museums—Landis hadn’t broken any laws, and was never punished for his little con.

Contrast that to an art heist, unearthed last year, involving the Mumbai socialite Sheetal Mafatlal. Mafatlal currently faces criminal charges for the theft, planned and executed over two years, of paintings worth R100 crore from her husband’s family mansion. With the help of willing as well as gullible accomplices, including a celebrity photographer, a fashion designer, five sheikhs from the United Arab Emirates, business tycoons, policemen, politicians and bureaucrats, Mafatlal allegedly replaced numerous original works—mostly paintings by Indian masters—with fakes.

Landis pursued pleasure while Mafatlal chased profit, but both banked on the fact that value in the global art market—much as in other luxury markets—is based as much on connoisseurship as it is on conspicuous consumption. The art market is estimated to be worth $66 billion, making it one of the world’s largest unregulated markets—that is, unsupervised by the law. By this valuation, it is worth more than the gross domestic product of many countries, including Kenya, Luxembourg, Bahrain and Lebanon. Yet the idiosyncratic workings of this insular, informal market are little understood, making it extremely susceptible to overconfidence.

Over the last three years, the reputation of the Indian art market has been enhanced by its recovery from the hit it took from the global financial crunch. High-profile events such as the India Art Fair and the Kochi-Muziris Biennale have made a splash in the international art and finance communities. New records have added to the buzz: the 90-percent sold rate at Christie’s second auction out of its Mumbai office, which generated $12 million last December; an auction by the firm Saffronart this June that fetched $1.2 million for a canvas (in 2000, at an early Saffronart auction, the highest bid was $12,500).

Although the Indian market is still a drop in the global one (Christie’s first auction in China, last year, generated more than double the Indian one in December), art advisory services and art funds have proliferated here. These agencies fill the gaps in knowledge and information between buyers and dealers, evaluating both the expected returns and the prestige of any artwork traded. They also create investment funds, just like mutual funds, for art. The financial consultancy Deloitte and ArtTactic, a major art-market analysis firm claimed in a joint 2013 report on Indian art that “with the outlook turning increasingly positive, the interest in art among the country’s HNWI”—high net worth individual—“population is likely to grow.”

Growing sales are all well and good, but scholarly research provides a less exuberant view of future returns on art investments. In 1986, the prominent American economist William Baumol wrote a famous article, titled “Unnatural Value: Or Art Investment as Floating Crap Game,” in the American Economic Review. He argued that the history of art connoisseurship “tells us that the main lesson imparted by the test of time is the fickleness of taste whose meanderings defy prediction.” Setting aside the idea of high rate of return in art markets—other than as a form of aesthetic pleasure—he concluded that “if prediction as applied to stock prices is a losing game, it is certainly unlikely to be a winner in the market for works of art.” Though the article was controversial, its basic premise is economically sound, and still applies today.

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