Growth of the art market
Does the art market behave in a counter or pro-cyclical manner?
The unfortunate or fortunate fact about art markets is that they are controlled by people to whom money is not the problem. An additional $100s are pennies that make no major difference. The collect works of art as a hobby and make money out of them not out of necessity but as a mere hobby. Art collecting and selling is more of a game for the big players and not a serious investment portfolio.
This is the big reason why traditional market behavior does not apply to art works and antiques. It has been indicated in this paper that artworks prices are not dependent on environmental factors in the way stocks and other financial investments are. This is because of a phenomenon called the hedge model. Rather than quality and market forces determining the value of an artwork often, the prices of the artworks are dependent on the whims of the elite who can afford to through as much around and in their egoistic maneuvers maintain the prices of certain items high while items of real values are undervalued in the market because these big shots have not yet given it much attention or interest. Therefore, the law of demand applies here but demand is so controlled by the coffers of a few that it does not bite as it does in the financial market.
Therefore, to a high degree of accuracy, one would say that normal market behavior does not apply to the arts market. The intrinsic value of the item is not the issue. Often it is value as perceived or dictated by the moneyed collectors that carries the day. Therefore, linear progression or appreciation of an art item is not guaranteed. It does not follow that an item will appreciate in value over time. Rather, it all depends on if an item catches the eye of a moneyed collector or not. The people with money are basically using art items as social marks. They are also using art as a status statement and therefore, not very good items identified with class because of already hyped prices continue to appreciate while really good items depreciate because nobody has given them the magic touch yet.
Based on the aforementioned, it can be argued that the behavior of arts markets is largely counter while the behavior of investors in arts itself is highly procyclical. The markets are largely counter because it does not go by traditional market dictates. Normal markets behavior is that when the economy is smarting from inflation, prices of items ought to be high. However, due to hedging, the arts markets are impervious to the effects of inflation. Normal market behavior is that when thing get thick people should be letting go of their investments and probably investment values ought to be falling. Again through hedging, this does not happen in the arts markets. This fact is illustrated by the current economic crisis and how it has affected the arts market. Rather than bring it to its knees as it has happened in the financial markets, the meltdown has led serious investors into considering non financial investments and the arts market is the biggest beneficiary.
However, investors in the arts market exhibit procyclical behavior in their choice of what to invest in. a kind of herd mentality drives the markets. If the group views a given market as valuable so do all the others not necessarily because of any intrinsic or perceivable aesthetic value but basically as a social mark. Buying expensive items is the hall mark of status and class and so everyone goes for what the moneyed say are the classy and great collections despite there being in the same market, real classy and sassy pieces of work