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The Rise of the Secondary Market and the Fall of Art

Economic activity
Economic activity is defined by any process through which products, goods and services that meet human needs are obtained. According to the definition of economic activity, that art supplies a basic human need it automatically turns art into an economic activity. However, an economic activity has to generate money for who performs it, because otherwise it would be a business that no one would engage in and it would disappear along with the social context in which it occurs.

Does art produce money for artists? Can art really generate money for a country or does it serves only to create the illusion that there is money? And how is the illusion created that there is money generated, is it through moving money around? In summary, does the art generate money or only shuffle it around?

To achieve a response, it is necessary to begin by re-asking the questions in a more rigorous form. Money is only an accounting unit: not caused by an activity, but is created from nothing by the central bank and the financial system as needed. A more accurate term in economics is "wealth." For a country, its ability to meet the future needs of its citizens, it's wealth is made up of several factors. The first factor is still exploitable natural resources. The second, exploited but not consumed natural resources, because they have been stored or have yet to be processed have real value because at a given time, they can be processed directly or indirectly into consumer goods or exchanged with other nations for necessary consumer goods. Many of these assets in turn become "artificial means" with the potential to increase a country's ability to meet the needs of its citizens. An example might be investment in productive capacity, facilities and industrial machinery, provided their products meet a real need and demand of citizens. The third factor is the active population, its relative amount, ability, preparation and creativity. The fourth factor is, the skill, dexterity and judgement that the work of the population is applied to the exploitation of resources. In a modern economy, this can mean several things such as economic policy pursued by the authorities, the quality and strength of institutions, the ability of society to create and innovate, the type of economic system adopted, etc.

Translated into art, these factors are firstly, exploitable natural resources which would be the raw material used by the artist; exploited natural resources but not consumed, the work of art will be the second; the third, the number of artists and the fourth, cultural policies, cultural management and the market structure.

"Can this economical activity called Art actually increase the wealth of a country, or the money that moves around the art market is only a transitional means to facilitate the exchange of existent assets? "

The market
The market is the real or virtual site where traders converge to offer their products and exchange them with others who need them. It is therefore the place where needs are met, where they are materialized with something specific that one can get in exchange of the product itself.

One could say that a market where all participants leave equally satisfied, while each take care only of their own need, is a well functioning market. Economists call this a "perfect market" because it allows efficient distribution of resources, maximizing the wealth of consumers and producers alike. This market does not seem to exist in reality but is a useful theoretical concept to measure the efficiency of real markets.

To what extent does the art market approaches the perfect market model? In essence, the art market is no different than any other market (a place where buyers meet sellers and exchange art pieces at an agreed price), therefore, the analysis starts with the general principles, later dealing with it's unique complexity.

When art has a simple structure, it seems to be close to the perfect market model. Formerly, the artist was also a craftsman and lived in a market zone of the city with other artists and artisans. Customers visited the various workshops to find the artist who understood their needs and whom they liked aesthetically for the price they were willing to pay. This market can be defined as "direct primary market." Such a market was conducive to direct contact between the producer and consumer of art, it encouraged competition among clients to hire the best artists and between artists to get the best jobs. This scheme is not far from the concentration of galleries in zones, in new York: SOHO, Chelsea or the LES where people walk and shop around; the only difference is the presence of an intermediary, the gallery now we are facing the "indirect primary market".

For works that have some mobility, there soon began to establish a market of "second hand" or, to use an economic term, "secondary," where the possessor of a work was able to sell to a third party not even know personally to the artist. The onset of this secondary market confirmed that a work of art can be a capital asset that is used to store wealth, and introduced a third type of trader: "the middleman”.

Since then, the art market structure has gotten more complicated but always maintaining this dichotomy of base; an study of the current situation needs to analyze this division of primary and secondary market. In this process, the actors in the market also have been multiplying, there have appeared several types of intermediaries. Today it is highly unlikely that an artist sells his work directly to a customer. The direct primary market has been giving way to an indirect primary market with art galleries and fairs as intermediaries, while in the secondary market, auction houses and private dealers have emerged.

The current market has a structure in which artists sell their work through galleries. The galleries represent (in some cases, invite, choose, and / or "discover") the artists. They take on deposit their works and try to sell them to collectors. Through exhibitions at the gallery, writings of critics, the art pieces try became of value.. After a career of exhibitions, it is possible that the artist is selected for art fairs (the markets require that the artist has gallery shows in order to participate), which gives more value to the art. This may be the time when the artist is capable of choosing a gallery as their work is likely to be collected with ease. The artist has exhibitions in non-commercial art centers such as museums and art centers and may continue to have good reviews and those who bought the artist's work, resell, entering it into the secondary market (auction houses and private dealers.)

In this structure, the most prominent agent has been the gallery, followed by the curator whose specific function is to select the most outstanding artists. In fact the role of the curator that seems to be purely cultural, produces a market jump for the artist, that is, those elected in the primary market are launched to the secondary. In this launching into the second market, the curator and the art center play a prominent role. A lot of stuff moves around the art center. We can speak of a third market that is not art but linked to them. A market of collateral activities-"promotional" such as exhibitions and catalogs, grants, educational activities, and tourist activities.

The secondary market is basically: an auction house. Increasingly art dealers and brokers are all trying to work in both markets. It is in the interest of auction houses, who charge percentage commissions, to increase the volume of work passing through their auctions, and therefore they participate or sponsor art fairs to promote and make known new artists, to promote demand for their works in the secondary market. Importance is given to the fairs in this game because buyers are willing to pay a higher price if they think they have the ability to resell a work at a profit. On the other hand, the galleries resent that auction houses receive the largest portion of the profits from their "investments" in new artists and collectors try to lure customers with discounts and rights of first refusal, asking in return be the first to be consulted in case of resale.
What role has the artist, the key player, in this whole market structure? Less and less, except for those artists who manage to reach the secondary market, they become stars, some of which, shooting stars, because they are interdependent on the continued support of the primary market.

Imperfections
In the primary market, the splitting of the direct link between artist and client has several practical implications from the point of view of relation to the model of the "perfect market." Now the artist has no way of knowing the real needs of their client, whether existential, aesthetic or philosophical of nature, and hence, for it's ability to be a concrete product that maximizes the satisfaction of the buyer. On the other hand, the client cannot communicate with sensitivity and creativity of the artist, has a similar difficulty in fulfilling its requirements for specific objects. The worst thing is that both know the price at which one is willing to produce the work and the other to buy it. Some of this information is unknown by the intermediary. The broker knows the needs of artists and clients and tries to match one to the other but maximizing their own needs. In economics, when a buyer and seller have different information on the same transaction, it says there is "asymmetric information" Asymmetric information can lead to a market inefficient macroeconomic performance and in some cases to its complete abolition.

So, to a gallery, it becomes extremely important to convince the buyer of the quality of a work of an artist to justify its price. But, by doing this, the gallery owner may require a significant investment that must be reflected in higher prices. The higher prices, in turn, reduce the market and establish a strict selection of the artists who are promoted. In addition there is the problem of how to define quality. A direct primary market does not have this problem: the quality is totally subjective. Put simply, the buyer chooses the artist who gives them what they want at the price they are willing to pay, and where poor execution does not earn or earns less. But in the indirect primary market, because of the asymmetry of information, the buyer needs to be convinced that the quality of what you propose is worth the price they ask and find some "objective" indicators of quality. How to value a work of art in an objective manner? Experts speak of historical, conceptual innovation, originality, technical mastery, but the most important factor is when there is a true consensus of experts and critics of these qualities in a work. So to promote artists, galleries and fairs try to raise the profile of and artist, looking to create a consensus among critics and experts on their qualities. The strategy is to minimize the risk, looking for a few potential winners and to invest in them, leaving all others behind. And the investment begins to bear fruit when the works make the leap to the secondary market. Therefore it seems that the structure of this market is likely to focus all resources on the validation of the artist to increase their marketing but not in creation.

Art Demand
There are two main types of demand: First one, out of necessity, and second one out of speculation.  In the demand based on need, one buys something because one needs it. The speculative demand consists on the purchase of works for inversion, buying something that is not needed, one buy it to re-sale.

Observations on the demand curve: the art centers, and museums that in theory should fuel demand for the art of necessity, in reality has become an instrument to the speculative demand. Their main task the validation of the artists, they offer a service to the secondary market. 

The language that has developed around the arts center, like the emerging artist, or artist with projection specifically serves a function: validate an artist for the investor to buy, to help the artist reach the secondary market, that is to enrich speculative and not the existential necessity of art.

Second hand market
Re-adding the numbers of study can make the following distribution of expenditure:
2.40-5%- depending on countries occurs in direct primary market (new pieces  sold between artists and consumers). "20.00 to 30 % occurs in indirect primary market (new pieces sold through the galleries). 7-17.00% occur sin the secondary art market (market for the sale of works of art by artists considered as valuables, especially at auction houses). 60.60-80% occurs in a market to market collateral secondary (site management by government and private.)

These numbers generate many questions. Why the direct primary market is so small world wide? How to increase the primary market directly linked to the generation of works of art? What are the consequences of all of this with regard to artists and the production of works of art? How could the primary market in general and in particular the direct market be stimulated? The % dedicated to the collateral secondary market it is generating wealth or consumption only?

The secondary art market treat existing works which are recognized as assets. In this sense, this market does not create any wealth for a country, because all that happens is that existing wealth changes the environment in which it is stored: they sell bonds to buy these paintings, for example. Residually, it creates a bit of wealth in the sense that people working in this sector represents a human resource that consists of skills and knowledge that can be exchanged for other resources.

It is the primary market that creates real wealth for a country. In the primary market’s work is generated which has previously been defined "natural resources exploited .. but not used .." which in turn may be provided by other "artificial means" such as museums and cultural centers to create more wealth. In other words, where works of art are generated?.

Why the direct primary market is so small? How to increase the primary market directly linked to the generation of works of art? What are the consequences of all of this with regard to artists and the production of works of art? How could the primary market in general and in particular the direct market be stimulated? How to make the market direct and not through intermediaries or those elected to serve for selecting art for sale? In short how to make the art market alive to function without hindrance?

Second hand market bring the idea of something used and not much value, that applies for clothes or homes, with the exception that special architecture or vintage, some with pedigree; now, think in the art market the option houses, this is second hand stuff.
market, that is to enrich speculative and not the existential necessity of art.

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