By Hind Essoussi

The perception of Art as a profitable form of investment was fueled by the economic boom. The Art market was just one manifestation of the global speculative bubble which also encompassed equity, bonds, and shares. In the period between 2003 and 2007, Sotheby’s saw a 600% increase in turnover – from $218 million in 2003, to $1.3 billion by the end of the five years. However, estimates now suggest that during the boom, the Art market was over-rated by up to 50%; it was only following the financial crisis of 2008 that the Art market corrected itself. Needless to say, those markets most affected by boom and that had experienced exponential increases, were those most affected by bust; emerging Art markets, such as the Indian market, and the Contemporary Art market (wherein sales fell by 76.2% post-2008) are just two examples of markets that were hit hardest.

In accounting for the bust in the Art market, several factors must be considered. Firstly, the Art market’s historic correlation with the financial markets; just as the global downturn affected investor confidence in the stock exchange, so too did the Art market suffer from increased caution on the part of investors. Moreover, the bust was exacerbated by the shift in purchasing power away from established art collectors, towards new money – those sorts of collectors lambasted by Charles Saatchi as “vulgar”. Established collectors had acted as market regulators; their stepping away from the market led to the spiraling prices of artworks and the market’s descent into a free-for-all. Thirdly, the legally-binding guarantees offered by Christie’s and Sotheby’s – in a bid to secure prize lots and undercut competition – had disastrous financial ramifications for both of the rival auction houses. The extent of insider-dealing was highlighted by the 2002 price-fixing scandal, which resulted in Sotheby’s being fined £12 million by the EC for rigging the market in collusion with Christie’s.

For some, an unregulated global market worth $65 billion may seem counter-intuitive. The lack of transparency and professional standards within the Art market may evoke the wider culture of recklessness and irresponsibility within which it operated; the same culture which gave rise to the lending and borrowing habits that precipitated the economic crisis. However, whilst the Art market must undeniably learn from its malpractices, the uniqueness and lack of fungibility of Art make any proposed regulation notoriously difficult to implement. Government regulation of the Art market is potentially more damaging than utile. Indeed, the Art market’s response to the economic crisis was underpinned by an understanding that the industry must come together and take steps towards greater self-regulation.

The post-2008 Art market scene can certainly been seen as much calmer than the frenetic sales that characterised the boom period. In summation, the greatest change is the new-found emphasis on “blue-chip” artworks. In auction houses too, a discernible shift has occurred. In addition to smaller and more focused sales, the emphasis has been on the quality, provenance, and rarity of the artworks offered. Simultaneously, there has been a concerted strategy to protect key markets such as Andy Warhol, Damien Hirst, Jeff Koons, and Takashi Murakami. Purchased by hedge-funds, the value of these works was deliberately insulated by being kept away from the volatility of the markets. Thus, at the highest echelons of the Art market, the value of artworks has not crashed for the simple fact that their market prices are not visible and not known.

The recovery of the Art market hinges on the re-establishment of investor confidence – a factor that no amount of government regulation can willfully orchestrate. Instead, the Art market has had to adopt strategies integral to its survival in a time of economic downturn. Thus, auction houses developed sales that gave the impression that the Art market was recession-proof. Through a policy of astute selectiveness of the artworks offered for sale, (which perhaps marks a return to the connoisseurship underlying the collecting practices of the pre-boom period) the Art market appeared to be doing well in a financial climate of uncertainty. Furthermore, the practice of guarantees greatly diminished and speculators – whom, at one point, seemed to be creating a viable career out of Art speculation – much wounded by the bust, stepped away.

These moves towards greater self-regulation, together with the fact that sales for October 2011 were 63% higher than October 2010, suggest that the Art market is, once more, picking up. Prima facie, the media hype regarding high-end sales and the setting of new auction records suggest that the market is entering a new phase of boom. To all intents and purposes, it appears as though the market is saturated with high-quality artworks. However, at the middle and lower ends of the Art market the situation is far less promising. Sales in smaller, independent, local and regional galleries, as well as the sales of recent graduate-artists, complicate the idea of a new Art market boom.

At present, it is difficult to accurately postulate the long-term stability of the Art market. What is clear, however, is that confidence-building is essential to the Art market and increases transactions. Private transactions have continued – mostly for reasons of guaranteeing purchaser anonymity and securing better prices. Auction houses continue to account for 50% of all sales. However, it would be reductive to say that there have been no positive changes in the Art market in the last decade. In terms of transparency, insider-dealing has to some extent been off-set by the proliferation of Art market analysis and data providers (consider – Art Tactic, Art Insight, Art Net, ArtFacts, ArtInfo, Art Markets Research (AMR), ArtPrice, and the Mei Moses Index). Globalisation has radically shifted the dynamics of the Art market and seen major market expansion and engagement. Certain artists, galleries (such as Hirst’s Gagosian Gallery), and art fairs (such as Art Basel) have been transformed into big, global brands. It would not be much of an exaggeration to claim that every major city now hosts a biennale or art fair. London’s Frieze Art Fair, for instance, only opened in 2003 yet attracted circa 70,000 visitors in 2010.

While the connection between commerce and Art is irrevocable, the global Art market is vastly complex. It may be too early to say what the future of the Art market will be but moves towards greater transparency, as well as a more selective approach on the part of auction houses, suggest that the Art market is capable of adapting to the global economic situation without government intervention. The multifaceted nature of the Art market offers unique opportunities for its development through industry self-regulation, but confounds one-size-fits-all government legislation. There is something intrinsic, elemental, and powerful about Art, that the market almost seems inadequate to capturing, and which government regulation would almost certainly crush. Just as aesthetic theory situates beauty in the eye of the beholder, so too does economic theory posit that the value and worth of an artwork is something that can only be ascertained by the individual purchaser. Let, then, the invisible hand rule the Art market just as the invisible force of Art indelibly moves us as humans.

Hind studied History of Art at Courtauld Institute of Art. She Tweets at @HindEssoussi