An Economic Analysis of the Contemporary Visual Art Market in Australia, 1972-1989 J D Stanford, B. Econ., ASIA A thesis submitted in fulfillment of the requirements for the degree of Doctor of Philosophy, University of Leicester June, 1996 UMI Number: U086556 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. DiSËürtâtion Publishing UMI U086556 Published by ProQuest LLC 2015. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 ABSTRACT: An Economic Analysis of the Contemporary Visual Art Market in Australia, 1972- 1989 J D Stanford The analysis of the market is undertaken in both theoretical and empirical terms. The theoretical analysis finds that the dynamics of the art market are important but are difficult to formalise; the primary market is one where prices are set administratively; the secondary market, auction market, is the one where market-clearing occurs; success in the art market will come only to those artists whose works can command the same price in the secondary market as is set in the primary market; the overall market operates with considerable lags so that it may talce many years before artists’ work appear in the secondary market; and the dealers in the primary market play an important role as intermediaries. The results of the empirical studies carried indicate that the returns to owning art over the period, 1972-1989 have been high and higher than the returns to financial assets. The results of the Portfolio Study confirmed by the results of the resales aspect of the Auction Price Study and by examination of the performance of individual artists. The justification of public support for contemporary visual art is not very strong. Considerable doubt has been cast on the value of the proposed Droit de Suite scheme because the basis of the scheme that artists are exploited cannot be substantiated; artists have difficult in maldng first sales; most resales do not result in capital gains; the potential costs of a collecting scheme are substantial; and the introduction of the scheme will reduce the current demand for contemporary visual art. The criticisms of the Australia Council have been accepted as the activities of the Council work to advance the interests of artists and contribute to the oversupply in the market. MARKET IN AUSTRALIA, 1972-1989 CONTENTS LKTCWTARU^ M ACKNOWLEDGEMENTS vii ABBREVIATIONS vüi INTRODUCTION p 1 CHAPTER 1. OUTLINE OF THE WORK, THE INTERNATIONAL ART MARKET, AND REASONS FOR GOVERNMENT INTERVENTION IN THE ART MARKET Outline o f the Work The International Art Market p 9 The Primary Market p 11 Historical Development p 11 Artist Dealer System p 13 A h and Financial Investment p 15 Changes in Tastes in Painting p 17 The Secondary Market p 18 The Role o f the AH Museum p 22 Determination o f Art Prices p 23 Government Intetyention in the AH Market p 27 Public Goods p 28 Externalities p 30 The AH s as Public Goods p 31 The AH s and Externalities p 33 Measurement o f Options Values and o f Externalities ■ p 33 Willingness to pay Extt'a Tax fo r AHs and Culture p 34 Merit Goods p 39 Multiple Pi'eferences or ”Higher Values” p 40 The AH s and Merit Goods p 41 Rent Seeking p 41 Other Reasons for Government SuppoH o f the AHs p 42 AHs Policy and Public Administration p 43 Evaluation of Arguments Concerning Government SuppoH fo r the AHs and Especially the Contemporary Visual AHs p 44 CHAPTER 2. EMPIRICAL STUDIES OF THE ART MARKET AND FINANCIAL INVESTMENT IN ART Inti'oduction p 50 Studies o f Individual Artists p 50 Rush’s Study o f Auction o f Prices p 51 Portfolio Examples p 52 The Economist's AH as Investment p 53 A h Auction Studies p 56 Taxation p 69 Transaction Costs p 74 11 Critique o f Art Auction Studies p 74 Art Auction Studies and the Market for Contemporary Visual AH p 76 CHAPTER 3. THE CONTEMPORARY VISUAL ARTS MARKET IN AUSTRALIA Introduction p 77 p 84 Income o f Artists p 96 Collectors p 98 Commercial Galleries p 101 Total Sales in Commercial Galleries p 112 Non Commercial Private Galleries p 112 Scholarships and Prizes p 116 Major Prizes p 117 Public Galleries p 121 Regional Galleries p 121 AH Auctions p 123 Government Assistance to the Contemporaty Visual AHs p 124 The Austt'alia Council p 130 National Gallety o f Australia p 130 ArtBank p 131 Taxation Incentives fo r Donations o f AH p 132 Other assistance: Australian Creative Fellowships p 132 State Government p 132 p 134 «ÿWfMMMWy OMff COMCfMSioW p 134 CHAPTER 4. EMPIRICAL STUDIES OF THE CONTEMPORARY VISUAL ART MARKET IN AUSTRALIA Inti'oduction p 135 The Portfolio Study p 135 Characteristics ofAirists in PoHfolio Study p 137 Results o f the PoHfolio Study p 142 The Auction Pi'ice Study p 149 Disti'ibution o f Sales p 151 p 154 Size o f A h Works p 155 Calculation o f Average Real Pi'ice p 156 Double Sales p 162 Real Capital Gains on Resales p 165 Estimated Real Rate o f Return on Resales p 167 Individual Artists p 168 Consistent Evidence o f Large Real Gains in the Australian Contemporaty Visual Ati Market p 174 CHAPTERS. A MODEL OF THE ART MARKET Introduction p 175 A Model o f the Market for Contemporaty Visual AH p 176 The Demand for Contemporary Visual AH p 177 Expectations in the Art Market p 179 The Artistic Market Place p 183 The Exhibiting Dealer's Gallety p 184 Price Détermination in the Cottîempomry Visual Ali. Market p 186 The Supply o f Contemporary Visual Art p 187 Aiiists and The Theoiy of Superstars p 188 Factors Affecting the Supply o f Art Works p 196 Ptice Determination in the Contemporary Visual A ii Market The Static or Instantaneous Case p 197 Dynamic Analysis - Low Sales p 200 Dynamic Analysis - Increased Sales p 204 Transition to the Auction Market p 207 Conclusion p 210 CHAPTER 6. MODEL ANALYSIS Introduction p 211 The Australian "Droit de Suite" Proposal p 214 The Australian Copyright Council Proposal fo r Droit de Suite p 215 Formal Analysis o f the Australian Droit de Suite Proposal p 218 Empirical Study of Resales in the Auction Market p 224 Taxation Incentive fo r the AHs Scheme p 227 Improvements to Taxation Incentive Scheme for the AHs p 230 Conclusions p 231 CHAPTER 7. THE GOVERNMENT AS A PATRON: NATIONAL CULTURAL POLICY TOWARDS THE CONTEMPORARY VISUAL ARTS IN AUSTRALIA Inti’oduction p 233 The Goals o f Policy p 234 McLeay Committee Views p 234 Comments onMcLeay Committee Views p 237 Arguments Advancedfor SuppoH o f the Arts in Australia p 239 The Instruments to Implement Policy p 242 Net Benefits p 243 An Oversupply o f Artists? And Do Aitists Subsidise AH? p 244 Is There an Oversupply o f Places at AH Colleges? p 245 Alternative Policies p 248 Subsising Sales o f AH Works p 249 An Alternative Proposal p 254 Conclusions p 255 CONCLUSIONS p 257 APPENDDC 1: DETAILS OF ARTWORKS BY ARTISTS INCLUDED IN PORTFOLIO STUDY p 263 APPENDIX 2: DETAILS OF ARTISTS IN EMPIRICAL STUDIES p 265 APPENDDC 3: DATA USED IN EMPIRICAL STUDIES p 291 BIBLIOGRAPHY p 382 LIST OF] Table 1.1 Types of Private Commodities and Public Goods, Following Millerson Table 1.2. Willingness to Pay for the Arts, USA, 1975-1987 Table 1.3. The Market for Arts, Consumer Spending on Culture and Leisure, United Kingdom, 1976-1984 (current prices, GBP, million) Table 1.4. Arts Attendance in Britain, 1984/85 Table 1.5. Attendance at Museums and Galleries, Britain, 1984/85 Table 2.1. Price Increases, Impressionist and Post-Impressionist Schools Table 2.2. Three Portfolio Studies by Rush Table 2.3. Changes in the Price of Paintings, The Economist Survey, 1979, 1983 Table 2.4. Changes in Sotheby’s Art Price Index and in Inflation, U K and USA, Selected Years Table 2.5. Summary Findings of Empirical Studies of the Monetary Return to Art Table 2.6. Differences between Empirical Studies Table 2.7. Financial Return to Art and Other Investments, Selected Years Table 2.8. Real Rates of Return of Paintings before and after 1950 Table 2.9. Variables Used in Two Empirical Studies with Hedonic Regression Table 2.10. Comparison of Rates of Return, Baumol and Frey and Pommerehne Table 3.1. Main Achievement of Visual Artists, Australia, 1986-87 Table 3.2. Estimates of Number of Contemporary Visual Artists, Australia Table 3.3. Involvements in Cultural Activities, 12 Months ended March 1993, Australia, ‘000 Table 3.4. Training Undertaken by Visual Artists, Australia, 1980 Per Cent of Visual Artists Table 3.5. Sources of Income by Major Categories from Primary Creative Income, Visual Artists, Australia, 1986-87 Table 3.6. Distribution of Income from Primary Creative Activity, All Arts Sources and All Income, 1986-87, Per Cent of Artists Table 3.7. The Exhibiting Dealer Gallery - Profile of a Gallery and its Artists Table 3.8.