Roubini's Bubble in Contemporary Art

Nouriel Roubini is a very smart man. He has more interesting things to say about banks, sovereign debt and the world’s economic prospects than most other commentators. But here, in discussing the art market, he’s being a bit silly.

Not because there isn’t a bubble in Contemporary Art. But because by the definition of financial bubbles, the entire art market always was and always will be a bubble.

The economist’s definition of a bubble is when assets trade at values determined by their exchange, not their use. When the price of a stock, bond, house, commodity contract or any other financial asset becomes too divorced from price of its fundamentals—profits, interest or use value—the asset is said to be in a bubble. That means the short-term price that someone will exchange the asset for is much, much greater than the long-term value of the asset.

In a bubble, smart players sell their assets—often using the money to buy them back after the bubble has burst—because they can make a rational calculation and then balance that against their “feel” for the future.

With art, there is no financial or use value. There is no rational value. Every work of art has the potential to become valueless. (There’s a great example in the Lawrence Alma-Tadema’s Finding of Moses which recently sold for a surprising $36m but was once abandoned on the street in front of the art dealer who had sold it to someone who really just wanted the frame.) The only measure for art, especially Contemporary Art, is the collector or dealer’s feel for which artists will have either lasting art historical importance or whose work will have near-term demand.

The value of art, as the old saying goes, is only what the next person is willing to pay for it. A maxim that is eerily similar to the definition of a financial bubble.