Liquid capital circulating around the globe is being channeled into financial markets, real estate, luxuries, and increasingly, the art market, the main focus of this post. Considered one of the most unregulated and opaque industries, the art market has become the go-to place for the world’s richest individuals to invest their wealth, while avoiding, to the extent possible, being taxed on that wealth. Estimates are that billionaires (individuals/families with net wealth over one billion dollars) hold an average between US$5-50 million in art (McAndrew, 2018, pp. 294). While the value of an artwork has historically been considered aesthetic, as it triggers human emotions and prompts the appreciation of natural and human beauty, during the neoliberal era that we are in the midst of, it is increasingly considered as an asset in financial portfolios, competing in terms of store of value and source of capital gains (revaluation in the market value of the object) with stocks, bonds, real estate, and precious metals, among others (Solimano and Solimano, 2019).
The speculative demand for art is currently reaching ever-higher proportions and degrees of sophistication, led by the purchases of very rich individuals and families, either directly or through hedge funds, family offices, and investment funds. The wealthy increasingly view art objects as an opportunity for profit-making and capital gains. In addition, they are increasingly involved in the art sector through donations to public museums, board memberships, and the opening of private galleries.
This piece attempts to link the rise of wealth inequality (the top 1% control nearly 50% of global personal wealth; Credit-Suisse, 2018) and wealth’s increasing circulation — helped along by tax havens — that characterises 21st-century capitalism, with the art market. The growing importance of the art sector as a new channel for investing circulating wealth is apparent in the fact the annual turnover of the global art market is around US$60 billion (McAndrew, 2018). It is important to note that most transactions tend to take place at the high-end of this market and may be surrounded by opacity and, at times, practices of tax avoidance. In turn, issues of provenance and forgery are deemed relevant in the operation of the segment.
The global art market: Main features
The art market displays five special features important for understanding its growing role (and its limits too) as an outlet for investment by global elites.
First, higher transaction costs and (a relative lack of) liquidity are features of the art market that make it different from financial markets for equity and bonds. These financial assets can be bought and sold relatively easily, supported by a well-established institutional infrastructure. In contrast, in the case of artwork, the costs of finding buyers can be considerable and time-consuming, often requiring the intermediary services of auction houses and art galleries that charge significant fees for their services. On the other hand, prices for major artists can reach exceptionally high levels (Leonardo da Vinci’s Salvatore Mundi painting was sold at US$450 million in 2017), creating expectations of big capital gains for owners of valuable artwork.
Second, the art market is increasingly being financialised, with hedge funds, family offices, and banks actively investing in creating their own internal knowledge capacities oriented to offer advice to their wealthy clients on investment in the art sector.
Third, there is a growing concentration and polarisation developing between a small high-end segment of the art market oriented towards rich buyers (this segment is increasing in size with the concurrent rise in global wealth inequality) and a vast mass of galleries that generate the bulk of employment and trade, yet they do not capture high revenues as they are oriented to a middle-class or even popular market segment. In other words, it is a polarised market, with the bulk of the volume of sales (number of transactions) concentrated at the lower end of the market, while the higher value of sales (prices times quantities sold) is concentrated at the higher end of the market. The middle range of the market in terms of value and quantities is squeezed by the upper tail (in value) and the bottom tail (in volume). These trends are exacerbated by the presence of powerful dealers at international art fairs (an ever-increasing location for transactions as the cost of renting space for galleries is increasing), in cities like New York, Miami, Basel, and London, among others.
Fourth, the art market displays considerable sensitivity to macroeconomic cycles of expansion and contraction (or slowdowns), behaving in a pro-cyclical way, with aggregate sales/volumes rising in the upswings, and declining in the downturns of the business cycle. As shown in figure 1, both sales and volume fell sharply in 2009 at the bottom of the global financial crisis, yet recovered rather forcefully afterwards. The aggregate value of sales in the global market of art was US$63.7 billion as of 2017, up from US$39.5 billion in 2009, and preceded by US$65.9 billion in 2007. In addition, recoveries (and booms) in the art market often tend to benefit the high-segment of the market more, while downturns and crises may affect all segments.
Figure 1: The global art market: Value and volume of transactions, 2007-2017 (US$ million and thousands)
Source: McAndrew (2018).
In line with the asymmetrical nature of the market just mentioned, the recovery after the 2008-09 global financial crisis mostly favoured the large auction houses and large galleries, rather than those at the middle- or lower-end range. In fact, galleries with turnover in excess of US$50 million had yearly increases of over 10% in the post-2009 period, compared with declines in sales for dealers with sales less than US$1 million. Galleries with annual sales below US$250,000 performed worst in the market, showing that the recent recovery and boom in the art market has benefitted the ultra-high end in detriment to the rest.
Fifth, top collectors are increasingly using mechanisms for keeping valuable artwork outside the public domain and protected from taxation. This is the case with the so-called freeports, sophisticated physical facilities storing valuable artwork (and other luxury items such as expensive cars, wine, gold, and diamonds). Historically, freeports were tax-free facilities in ports used for storing goods while the merchandise was in transit to other destinations, the reason for which “customs authorities [allowed] duties and taxes to be suspended until goods [reached] their final destination.” Now the merchandise ‚in transit‘ is valuable artwork that may be stored a long time (several years) waiting for its price to increase. Such storage facilities for art and other luxuries can be found in Geneva, Zurich, Luxembourg, Monaco, Singapore, and Beijing. It is worth noting that freeports are located in roughly the same places as tax havens for receiving bank deposits, suggesting the existence of a global industry of wealth protection and tax avoidance that employs various vehicles to that end.
McAndrew, C. (2018). The Art Market 2018, Art Basel & UBS, Switzerland.
Solimano, A. (2019a). The International Mobility of the Wealthy: Pushing and Pulling Factors. Dialogue of Civilizations Research Institute. Retrieved from: www.doc-research.org
Solimano, A. (2019b) Hiding Financial Wealth: the Role of Tax Havens. Dialogue of Civilizations Research Institute. Retrieved from: www.doc-research.org
Solimano, A. and Solimano, P. (2019, forthcoming). Global Capitalism, Wealth Inequality and the Art Sector. Chapter for the Handbook of Transformative Global Studies. London: Routledge.
 Solimano, (2019a and 2019b) examines, respectively, the main pushing and pulling factors behind the international mobility of the wealthy and the role of tax havens in receiving financial deposits of the wealthy.
 The notion of artwork comprises pieces of fine arts, decorative arts, antiques, and collectibles. In regards to fine arts, a dichotomy has traditionally existed between modern art (including a variety of movements such as Impressionism, post-Impressionism, Fauvism, Expressionism, and Cubism) and contemporary art, which refers to works created after World War Two. This segment of the art sector accounts for the bulk of the volume and revenue turnover in the market (Solimano and Solimano, 2019).
 See Solimano and Solimano (2019) for empirical evidence on this.
 The high end of the market concentrates a very thin segment of artists, while the remaining majority of them supply the middle-range and lower-end of the market through galleries, dealers, and auction houses.
 Solimano and Solimano (2019).