Investment and Consequences

I am a committed capitalist and have long realized that market analysis is a function of not only understanding how markets work in the short run, but also over time. Whether it is day by day, month by month, year by year or even decade by decade, the investor has to understand that his investment will necessarily fluctuate down and yet, hopefully, also go up. It seems pretty simple, but in this era of huge wealth, it also seems quite complex, particularly in certain markets.

The contemporary art market is an unusual market for the foremost reason that many of the artists being traded for high prices are still alive and producing. How do you know an artist has reached his peak? How do you know that the artist won’t trash or disavow his earlier work? What happens if the primary collector of that artist leaves the market? The list of questions is longer than you might think, the most pressing being what happens if the entire field, contemporary, starts to go south?

Another side of the question is how does major investment in art affect it as a whole? It certainly enhances interest in art which is a wonderful thing. The question I have, however, is why do we like art? What does it do for us? The investment angle yields a tepid answer—because it might be a good investment. What is lacking is the appreciation of the art itself. After all, some of the big money contemporary art might be judged in time as being second rate and not worth anything.

Investment, therefore, almost inevitably affects a market in ways that change that market. The tulip craze in Holland in the early 17th century is a good case in point where the price of a single tulip, at its peak, was worth an entire estate, and at its nadir, an onion bulb. Markets, in other words, often lose sight of the existential value of what is being purchased and in doing so actually destroy all sense of appreciation for what is being traded. Monetizing something can have negative effects after all.

Is this the weak point of capitalism? Can excess be reined in? I am not so certain that it can. Human nature will capitalize on the moment. In the crash of 2008, it must be remembered that  the big banks were trading junk securities but those instruments were filled out by local bankers eager to cash in on the rush to lend money to people who had no chance of repaying it. The conundrum of capitalism seems to be in knowing when enough is enough. That is a tough lesson to learn.


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