After an auction season with few guarantees, frustrated dealers and flocks of journalists are pushing the old canard that guarantees “distort and inflate” the art market. It seems to have its origins in dealer frustration at not being able to acquire works at low prices. But a guarantee—offered directly or by a third party— is a real price. Someone has to pay it. And if they guarantee too many works they cannot resell, they’ll stop eventually. That’s how markets work. That which cannot go on forever doesn’t.
The knee-jerk, unthinking repetition of this line is being done by many other reporters. But let’s use this example from Scott Reyburn’s column because of its visibility:
“Guarantees distorted and inflated the top end of the market,” said the London dealer Alan Hobart, who has been a prominent buyer of trophy-quality 20th-century works at auction. “But there are still going to be sales in May, and there will still be deals to be done.”
When dealers say guarantees are distorting the market, they’re really just saying they can’t compete with the auction house’s balance sheet to acquire the work for sale. That’s not a distorted market. That’s a market, plain and simple.
There’s actually a much better example of “market distortion” that came up in London that has little to do with guarantees. A Picasso and a Basquiat purchased a little more than two years prior came up in the sales and achieved prices that were 30% lower than before. The buyer, not a guarantor, “distorted” the market for both works on each transaction. He clearly overpaid in the first and the conditions of a distressed sale so soon after their purchase may have artificially lowered their prices on the second.
If you want to point fingers in this market, that’s a better direction. But, of course, no dealer wants to blame a potential client. So we get the endless carping about the auction houses instead.
The guarantee canard is a self-interested complaint dressed up as a disinterested economics. Really its rehash of Thomas Aquinas and the just price but this isn’t the place for a discussion of the history of capitalism.
There is a good analogy for all of this, however; and it is something we can all relate to. When you work for a salary, as opposed to taking equity or working for yourself, you’ve accepted a wage guarantee. Your employer, and its equity holders, assume the risk of the enterprise’s failure. If the company succeeds beyond everyone’s dreams, the equity holders are rewarded and the salaried workers muse about what might have been. If the enterprise is a middling the success, the equity suffers and the salaried workers smirk at their good fortune.
When an auction house over-guarantees a work, it is really no different from when that jerk you used to work for at the small partnership gets a huge job with a big salary. It doesn’t seem fair. And, in a few years, when they fail at the job, it seems even worse. But no one runs around saying the company that hired her is “distorting the market.”
Tough Start to the Auction Year (The New York Times)