The travails of India’s first art fund were revealed in detail in this newspaper on 10 December. Art, like any other asset, has suffered grievously from the financial crisis. William N. Goetzmann, Luc Renneboog and Christophe Spaenjers from the National Bureau of Economic Research, in their recent paper Art and Money explore the relationship between art and the equity markets.
Why are art prices so volatile? Because, unlike most other assets, its supply is very limited. With supply being inelastic, the price of art depends completely on the demand side of the equation. The authors point out: “When individuals’ buying power rises, this can be expected to lead to higher art consumption, and thus to a higher price level in the art market.”
How do you test that proposition? The researchers look at stock market returns as a proxy for measuring the buying power of wealthy individuals, who are the people who buy art.
Illustration: Jayachandran / Mint
They constructed a price index for art covering the period 1765-2007, taking prices for the British market, because Britain has been the centre of the art market for most of the period. They then related that to the rise in British equity prices over the period.
The results: a strong correlation between returns from the equity markets and the movement of the art market. That is hardly surprising—if wealthy bankers find their bonuses cut, their ability to invest in art too plummets.
The researchers also find some evidence that art prices go up when inequality in a country goes up, though this doesn’t hold true for the post-World War II period in the UK.
But they do find that the positive correlation between inequality and art prices holds in the US after World War II. That is entirely understandable, as it’s in the US where the real wealth shifted after the war. There’s also a close correlation between top incomes and art prices.
To sum up, the study finds that “it is indeed the wealth of the wealthy that drives art prices. This implies that we can expect art booms whenever income inequality rises quickly. This seems exactly what we have been witnessing during the last period of strong art price appreciation, 2002-07. Indeed, in many countries with large numbers of art buyers, income inequality rose significantly in those years, mainly due to strong increases in managerial compensation.”
Illustration: Jayachandran / Mint
The authors also quote pop icon and painter Andy Warhol, who once wrote: “I like money on the wall. Say you were going to buy a $200,000 painting. I think you should take that money, tie it up, and hang it on the wall. Then when someone visited you, the first thing they would see is the money on the wall.” In these depressed times, many art collectors will be wishing they had taken Warhol’s advice.
William Kerr’s study looks at the increasing contribution of Indian and Chinese immigrants to innovation in the US. Also, because immigrants are more tightly knit together in cities, the rising proportion of ethnic contributors to inventions has led to an increasing concentration of US innovation in clusters.
Says Kerr: “The contributions of these immigrant groups to US technology formation are staggering: while foreign-born account for just more than 10% of the US working population, they represent 25% of the US science and engineering workforce and nearly 50% of those with doctorates.” He adds that the rapid increase during the 1990s in the share of high-tech patents granted to Chinese and Indian inventors is particularly striking. The share of Indian inventors in total US patented inventions has gone up from 1.9% during 1975-79 to 5.4% during 2000-04. Similarly, for the Chinese, their share of US inventions went up from 2.2% during 1975-79 to 8.5% during 2000-04. As expected, the Indian share of patents is highest in computers, where it is 6.9%. The Chinese share even in computers is higher, at 8.2%.
Kerr also finds that ethnic patenting is more concentrated than general innovation. In San Francisco, for the period 2001-06, the share of Indian and Chinese inventors in patents was as high as 24%. In Los Angeles, it was 7% and for New York it was 9%.
Kerr’s study is not just a survey of how the contributions of ethnic minorities is increasing, but also shows that, as a result, clusters of innovation, in the sense of networks between these ethnic scientists, are formed. He quotes the economist Alfred Marshall who argued that clusters help stimulate innovation and skills.
The bottomline: Indian and Chinese scientists are increasingly spurring innovative activity in the US.