Velthuis, O.

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60 Visual artsOlav VelthuisThe visual arts is the sector of the art world where old, modern and con-temporary works of art are produced, distributed and consumed. Thesector comprises three different types of economic actors and institutions:actors who exchange works of art on the art market, cultural institutionsand organizations which provide financial support to the visual arts. Firstof all, this chapter discusses these three types of actors in turn, before elab-orating on the dynamic interaction between them by focusing on commer-cial art galleries.Participants in the art marketThe visual arts are centred upon the art market, where producers (artists),distributors (for example commercial galleries, auction houses, art consul-tants) and consumers (private collectors, companies) exchange art objects.The visual arts sector harbours two different markets: the primary market,where artists sell their work for the first time, and the secondary or resalemarket. Some artists sell their work directly from their studios. Others tryto find an intermediary institution such as a commercial art gallery or anart consultant, who represent their work and sell it by means of postedprices. Although the economic value of art on the primary market is highlyuncertain and uniform standards of value are lacking, auctions are neverused to ‘solve’ economic uncertainty on this segment of the art market.In most Western European countries and the United States, only a smallpercentage of artists can make a living from selling their work on the market.Works made by an even smaller percentage of living artists are traded on thesecondary market. This means that only a limited number of all artworks thathave been sold on the primary market will ever appear on the market again.Since data on the primary market barely exist, this section of the visualarts has been largely ignored in cultural economics (see Rengers andVelthuis, 2002). Instead, most studies focus on auction sales on the secon-dary market. A caveat of these studies is that they assume explicitly orimplicitly that art is bought for speculative reasons. In reality, however,motives for buying art are manifold. For instance, collectors acquire art forthe aesthetic utility they expect to derive from looking at it, and for statusmotives (Grampp, 1989): art is amenable to what Thorstein Veblen hascalled ‘conspicuous consumption’: by consuming art, people can distin-470guish themselves from others. Financial reasons for buying art are likely toprevail on the secondary rather than the primary art market, since the eco-nomic value of art needs to be established to a certain extent before itbecomes attractive as an investment object. On the secondary market,guideposts exist for economic appraisal, such as previous sales of works bythe same artist, as well as the artistic judgement of the artist’s œuvreexpressed by cultural institutions.Cultural institutionsApart from economic agents who participate in the art market, the visualarts sector harbours various cultural institutions. These include museumswhere artworks are exhibited and preserved, ‘alternative’ exhibition spaceslike artists’ cooperatives, art schools and the art press (art magazines, news-papers and book publishers that devote considerable attention to the arts).In addition to their cultural functions of exhibiting and reviewing art,putting artworks in a historical or critical context, and educating artistsand their audience, these institutions participate in the economy of thevisual arts. Museums, for instance, are a source of demand on the artmarket. They also have an indirect economic impact on the art market:museums, as well as the art press, are gatekeepers, which means that theymake a selection from the large ‘pool’ of œuvres and individual artworksthat have been made throughout history. Gatekeepers allocate scarceresources to this selection of artworks.In economic terms, this gatekeeping role of cultural institutions serves toreduce information and search costs for economic agents on the market: acollector may economize on these costs if he wants to acquire art by takingthe judgement of cultural institutions into account. By channellingresources to a limited group of visual artists, cultural institutions alsoenhance superstar phenomena within the visual arts. Finally, these culturalinstitutions generate ‘credibility’ or ‘belief ’ in the artistic value of artamong an audience of museum visitors and art collectors.Several empirical studies (see Frey and Pommerehne, 1989; Galenson,2000) indicate that the ‘cultural judgement’ of museum curators and artcritics, on the one hand, and the ‘economic judgement’ of the art market,on the other hand, are correlated. This can be interpreted in different ways:either collectors derive extra utility from consuming artworks that culturalinstitutions deem important or the taste of collectors is directly influencedby the choices of cultural institutions.1Financial support for the visual artsThirdly, the visual arts include institutions that provide financial sup-port for the arts. Governments provide indirect and direct support forVisual arts 471individual artists and for cultural institutions such as museums. Just asrevenue from selling artworks on the market is only one source of incomefor visual artists, virtually no museum relies on entrance fees exclusivelyfor its operational budget. In most Western European countries, govern-ment support is direct, in the form of subsidies to cultural institutions orgrants to individual artists. In the United States, governments provide indi-rect rather than direct support for the visual arts by means of tax expen-ditures. If individuals or companies make cash or in-kind donations tocultural institutions, the amount can to a large extent be deducted fromtaxes. In themselves, these private donations constitute a third type ofincome for artists and cultural institutions, apart from market revenue andgovernment support. Donations and gifts can take many forms, such asvoluntary work performed by individuals in cultural institutions, charita-ble institutions whose members donate money to museums on an annualbasis or people who provide their art-producing partners with the meansof subsistence. Thus the visual arts relies on an eclectic range of economicsupport.Contemporary art galleriesWith their manifold relations to other economic actors in the visual arts,commercial art galleries are the central nodes or the ‘crucible’ of the artworld (Fitzgerald, 1995). As will be shown, the economic structure of thevisual arts unravels in the daily operations of art galleries.Art galleries and other market actorsArt galleries mediate supply and demand on the art market. In order to doso, most contemporary art galleries represent a limited number of artistson a long-term basis (Rengers and Velthuis, 2002). This means that, likemuseums, they serve as gatekeepers to the art market: they make a selectionof the many artists who seek to be represented on the market after leavingart college. Since commercial art galleries engage in a long-term, suppor-tive relationship with their artists, they have an interest in establishing afirm market and a consistent price structure for an artist’s work. Thisexplains their antagonistic relationship to auction houses, which do nothave long-term relationships with artists, and have no incentive to avoidvolatility in their prices.Economic exchange between artists and their galleries can take threedifferent forms: employment, direct acquisitions and consignments. In thepre-modern visual art world, dealers occasionally employed artists to makecopies of a popular original image (De Marchi and Van Miegroet, 1994).Apart from dealers, courts frequently employed artists. In the present day,employment relationships are only found at the lower end of the market,472 A handbook of cultural economicswhere art is sold by art gallery chains or art wholesalers. The artists theyemploy produce standardized artworks in semi-mass production.Another type of exchange between artists and dealers is direct acquisi-tions. In this case, the dealer acquires artworks from an artist, and directlycompensates the artist for them. After property rights are transferred, thedealer can decide when and at what price the artworks will be sold to a col-lector. For instance, he may decide to keep artworks in his inventory if hewants to speculate on future rises in the price level of an artist’s work.However, within this system the dealer runs the risk that the economic valuewill never be realized. This system of direct acquisitions has been referredto as the French system, since it was mainly used by French art dealers inthe late nineteenth and early twentieth centuries. Today, some dealers withextensive financial resources still buy works directly from artists if they con-sider the market for these works to be firmly established. Also direct acqui-sitions are the dominant type of exchange on the secondary art market.Most commercial art galleries represent artists on the basis of consign-ments: the artist consigns his work to a dealer, who exhibits the work in thegallery space and attempts to sell it. If a work is sold, the dealer receives apredetermined percentage of the selling price; if the work remains unsold,the dealer can either keep it in its inventory, without transfer of propertyrights, or the artist can take the work back. In these consignment relation-ships, risk, which is high given the uncertain economic value of contempo-rary art, is shared between artist and dealer. A second advantage for adealer of selling art on the basis of consignments is that the capital inten-sity of his enterprise remains low: since the dealer does not buy works fromthe artist, he does not tie up capital in his inventory.Although standard, legally binding, contracts exist for consignment rela-tionships, they are often conducted without them. The reason is that com-plete terms cannot be stated in a contract (Caves, 2000). For instance, anartist cannot be contractually enforced to continue producing valuableworks of art in the future. Second, if a contract were written up, it wouldbe difficult for one party to monitor the other and ensure that all terms ofthe contract are complied with. Third, litigation is expensive in the case ofbreach of contract and may damage the reputation of the artist and thegallery. Transaction costs involved in developing a contract, monitoringand litigation are in other words high in the case of consignments. Finally,it is questionable whether a dealer can expect financial compensation fromsuccessful litigation.Art galleries and cultural institutionsApart from mediating supply and demand, art galleries that operate on theprimary art market actively ‘promote’ the artists they represent. This meansVisual arts 473that they constantly bring the work of artists to the attention of culturalinstitutions: they try to make sales to museums and stimulate museums toorganize exhibitions involving the work of these artists. Art galleries alsoencourage art critics and art historians to review their exhibitions, or com-mission them to write catalogue texts. The economic rationale of suchactivities is that they enhance the economic value of the art sold in thegallery. These activities underscore, on the one hand, the cultural role ofeconomic actors like art galleries, and, on other hand, the economic role ofcultural institutions like museums and the art press.Art galleries and financial supportThe main source of the revenues of art galleries is sales on the market.Nevertheless, art galleries can benefit from non-market sources of incomesuch as government subsidies and gifts. In countries such as theNetherlands, art galleries receive government subsidies, in spite of theircommercial nature. This support enables them, for instance, to participatein costly international art fairs. In the United States, art galleries helpprivate collectors to negotiate favourable tax deals if they buy art at thegallery and subsequently donate it to a museum. Apart from benefitingfrom direct or indirect government support, art dealers participate in adense fabric of reciprocal gifts and favours to and from collectors andartists. For instance, dealers acquire artworks directly from an artist orrefrain from taking a sales commission if the artist needs the money. Likecommercial publishers, dealers often use a system of internal subsidization;this means that they compensate the loss they make on artists whose workis less marketable with profits they make on commercially successfulartwork. In return, some artists occasionally donate a work to their dealer.Likewise, in return for favours from a loyal collector to a dealer, such asbacking the gallery financially, the dealer may reward him with ‘first choice’when an artist’s output is in high demand. In short, the marketing activitiesof commercial art galleries suggest that the visual arts is a complex system,where different types of institutions and different types of exchanges con-tribute to the production, consumption and distribution of art objects.Note1. Most economists reject the latter effect, since it violates a core assumption of neoclassi-cal economic theory that tastes are constant.See also:Chapter 3: Art auctions; Chapter 4: Art markets; Chapter 5: Art prices; Chapter 55: Supportfor artists.474 A handbook of cultural economics

Visual arts

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