What Actually Happens in the Art Market’s Informal Economy

In “Art and the Global Economy,” University of San Francisco professor John Zarobell examines “how the art world has blossomed into a global economy in the past generation, and what that means to artists, dealers, curators, cultural administrators, educators, and the public.” Zarobell, an artist and former curator, calls for a deeper questioning into the tendency to measure and justify culture as an economic force, looks at how museums, biennials and fairs are evolving, and asks what the current vogue for “cognitive capitalism” means for the arts and artists themselves. Zarobell also explores less-public aspects of the global art market, what he calls “the art market in the margins.” In the following excerpt, he explains how the informal economy, a part of nearly all industries, intersects with the more visible aspects of the art market to make what some call a “gray market.”

What is an informal economy? Informal is one of the numerous monikers given to economic transactions that are unrecorded, literally off the books. As early as the 1980s, sociologists and economists began to study the gap between official economic production and the traces of a shadow economy that supplemented its capacity by a significant margin.

The term “informal economy” was first used by Keith Hart in 1973 to describe how individuals in developing nations invented new economic devices in order to survive in a world with very few “regular” employment opportunities. Since then it has been a term employed to describe bottom-up efforts to generate a livelihood among those without secure financial footing in the global economy. Edgar Feige has broken the underground economy down into segments: the illegal economy, the unreported economy, the unrecorded economy, and the informal economy.

I use the term “informal economy” here to refer to any transaction that is unrecorded, untaxed, and unregulated but not explicitly illegal. This is also described as the “gray market” to distinguish these economic activities from the explicitly illegal “black market.” The number of synonyms alone testifies to the prevalence and diversity of this economic sphere, but the question that everyone wants to answer is:

How big is it? An OECD report asserted that half of the world’s employees (some 1.8 billion in 2009) were employed in the informal sector, and that number was expected to rise to two-thirds by 2020. But estimates can mask the interpenetration of the formal and informal domains of the economy: it is impossible to entirely pull these two domains apart.

But one can consider a number of characteristics of the informal economy when assessing the size and the nature of the global art market, which blends the black and gray markets with legitimate, if less regulated, art market. Given present offshore financial mechanisms employed by high-net-worth individuals who invest in art, it would be difficult for a seller of a work of art to determine whether the money transferred to cover the artwork was “clean,” because money launderers are known to employ the tactic of “layering” to hide the origins of assets and blend “dirty” money with legitimate investments. Artists, too, are the perfect example of an unregulated labor pool, performing work at home and thereby evading workplace regulations, consigning and sometimes selling it without a formal contract, and working on the margins of the formal economy.


Informal corners of the art world

When art world insiders think of the art market, they generally consider international auction houses and dealers in New York or London, though they may be active in Mexico City, Moscow, or Dubai. But this is not the whole of the art market. There is a considerable gap between the estimated art market scale as measured, for example, by Clare McAndrew in her annual survey for TEFAF, and the actual markets for art and art-related products. This gap would include everything from the “starving artist” liquidation sale to regional art fairs where artists market and sell their own work, to the factories in China that manufacture painted reproductions of Old Master and Impressionist paintings. It is tempting to see such activities as marginal to the main event of the art market, and, like the informal economic activity described above, they are marginal. But the question remains: How big is this part of the art economy? Is it 7 or 44 percent?

The blending of black and white economies is an issue of increasing importance to the art market, which few commentators have addressed. Were sales taxes paid in the reported $250 million private sale of one of Cézanne’s Card Players paintings to the royal family of Qatar, and if so, in which country? Were customs duties assessed? Was the painting sent directly from the seller to the buyer, or did it pass through duty-free port? What was the commission that the dealer was paid? Were there middlemen who also profited from connecting the parties, and if so, did they pay income taxes on this income, or was it transferred to an offshore company or trust?

No one would answer these questions in public and so the public will never know, but the point is that the global art market is so little regulated that it would be impossible to assess the size of the informal portion of these transactions, even in the case of a “legitimate” sale. Given the presence of offshore financial mechanisms, there are enough means to avoid national regulations that it would seem likely that there is an informal tail to many formal transactions.

How Freeports Operate on the Margins of the Global Art Market

This is slippery territory, because journalists (and academics) are interested in shedding light on hidden practices, and the implication is often that the invisibility of these economic activities is evidence of wrongdoing, if not lawbreaking. But the informal economy is not the same as the illegal art economy, in which looted antiquities change hands and cross borders, for example. No business wants to be implicated in the black market, and no one would admit to doing so in the gray market either. There are norms that sellers of art follow and a bespoke code of conduct. However, the art market’s transactions are imbricated in a network of deregulation and arbitrage, so the informal market for money and financial services works hand in hand with the art services market.


The art world’s “gift economy”

Few concrete examples of the informal economy in the art world are more visible than the gift economy, which in some cases is clearly a graft economy.

Through this system, prices and auction markets, regional or international, can be manipulated and other purposes can be served through a gift of works of art. Gift exchanges in a market context solidify social relationships, and these “social relationships have instrumental economic value and enhance rather than [impeding] efficiency [as neoclassical economists would claim],” according to sociologist Olav Velthuis. In discussing the relationship between artists, dealers, and collectors, Velthuis points out the various ways in which the market for contemporary art in New York and Amsterdam can serve itself more efficiently by not being a free market open to the highest bidder.

This author has proposed that the art market is not free, but a modified market that unevenly distributes information and transactions resulting in advantages for insiders. In other words, simply by believing in an emerging artist or favoring a client, dealers make gifts that facilitate their business in the particular domain of the market that they inhabit. As a sociologist, Velthuis sees social relationships at the core of the market for contemporary art, and the gift economy, in which the commercial nature of exchanges is marginalized in favor of “trust relationships” cemented through generosity, is central to this development.

The gift economy works differently in distinct cultures, and a couple of recent episodes will illuminate how it produces informal art economies in Russia, China, and Brazil. All of these countries have an established tradition of gift giving.

An investigation by the London Sunday Times of two gifts of art by Russia in connection with its bid to host the 2018 World Cup shed much light on what nations will do in order to gain such high-profile sports events for themselves, including two reported bribes involving paintings given as gifts to voting members of the FIFA committee. According to CNN, a painting believed to be a Picasso was offered to the European Football Association’s Michel Platini, a claim Platini has denied.

In a related case, another FIFA voting member, Michel d’Hooghe has admitted to accepting a landscape painting as a gift from Viacheslav Kolokosov, a former Russian executive committee member looking to secure Russia’s hosting of the 2018 tournament.  D’Hooghe has described this painting as “ugly,” said that he believed it had no value, and protested that he had not voted for the Russian bid. Nevertheless, his case is one of the rare instances when malfeasance of this sort comes to light, and it indicates how works of art can be employed as gifts in order to secure favors (or not, in this case) that have nothing to do with the market for art.

One allegation suggests that the Picasso work offered to Platini came from the collection of the State Hermitage Museum in St. Petersburg. If this turned out to be true, the raiding of a national art collection to secure a World Cup bid would be a scandal of unimaginable proportion in the art world. While this claim cannot be substantiated at this time (and perhaps never will be), it exemplifies how the gift economy can transmute into a graft economy.

Art exchanges also played a role in the unfolding of the Petrobras scandal in Brazil, which involved deals that began as far back as 2004 as a huge kickback scheme, but erupted into public consciousness in 2015. This has had enormous economic and political consequences and led to the resignation of numerous cabinet ministers and even the impeachment and removal from office of President Dilma Rousseff, who headed the board of Petrobras before becoming president in 2011. More than $2 billion in bribes was paid. The New York Times reported:

“Prosecutors and the federal police have been seizing cash and assets, including fine art. Because storing expensive paintings and photographs is not a law enforcement specialty, the entire haul has been handed over to the Oscar Niemeyer Museum in Curitiba. Since April, the works, mostly by Latin American masters such as Heitor dos Prazeres and Vik Muniz, have starred in an exhibit called ‘Art in the Custody of the Museum.’”

The fact that so much art has been seized as evidence in this scandal demonstrates that either art was being given as bribes or the recipients were using cash from bribes to purchase art. Either way, the Petrobras scandal demonstrates how illicit capital flows are entangled with the art market. The fact that these seizures have led to an art exhibition demonstrates that art institutions are capable of making the best of this situation and have also been involved in making such practices public.

An exposé of the Chinese art market also published in The New York Times introduces more complexity and more systemic risk into the art market as a whole. According to the authors, “the [Chinese art] market...has become a breeding ground for corruption, as business executives curry favor with officials by bribing them with art” (Barboza et al. 2013, n.p.). Such bribery schemes have involved public officials, such as Wen Chiang, an official in the city of Chongqing whose country house contained more than a hundred works of art when it was raided by the authorities in 2009. The authors describe how these bribery schemes can operate: “In some cases, an official will receive a work of art with instructions to put it up for auction; a businessman will use it as the currency for a bribe, purchasing the art at an inflated price and giving the official a tidy profit”. This is termed yahui, which translates as “elegant bribery.” The Chinese example demonstrates not only how art works can be used as luxury currency but further how this currency can be laundered through the art auction market.


“Stir-frying” prices

The gift/graft economy is not the full extent of the gray zone of the Chinese art market, however. Price manipulation is supposedly rampant. In China, it is far more common than in the United States and Europe for living artists to sell their works directly through auction houses, skipping the dealer system entirely and driving up the prices of contemporary Chinese art in general. If others are colluding with artists (or operating independently) to drive up prices through the market, the stability of the primary/secondary market system is at risk, and this risk is not limited to China.

To a certain extent, dealers in contemporary art work use the auction houses to stabilize the prices of “their artists.” If someone has put a work up for sale by an artist represented by a certain gallery and it appears that the work will not sell, or will sell below the dealer’s established price, the dealer will often bid on and buy the work around the set price.

This practice has been in place for more than a century and is accepted in the art world, but the Chinese auction market features “collectors and investors, perhaps an art investment fund with large holdings in a particular artist, bid[ding] up a work to boost the value of their entire inventory. Sometimes, experts say, auction houses themselves throw in fake bids. The Chinese have a name for the price-boosting process. They call it ‘stir-frying,’” The Times reported.

As the Chinese art market expands, more works by these artists are finding their way into Western collections, and over the past ten years, many Chinese artists have muscled into the top ten highest-grossing artists at auction, so that one finds Qi Baishi and Zhang Daqian alongside names such as Picasso and Warhol as the top sellers globally. Thus the art economy is clearly seeing the signs of stir-frying techniques. Given the meteoric rise in prices for contemporary art over the past decade, informal price manipulations like these appear to be part of this story.


Artists and the informal economy

Artists have been in the informal economy for a long time, making sales of their own works in unregulated contexts, such as selling work out of the studio or at an art fair.

In such contexts, it is not common for them to charge sales tax, for example, and it does not seem unreasonable to suggest that they might not report this income on their tax returns. If a dealer or curator gives an artist an emerging artist an exhibition, it is common for an artist to gift a work of art to her and this kind of gift might not turn up as a transaction on anyone’s books. These are the kind of gifts that Velthuis describes as cementing the social relations of the art world. They are based on mutual generosity that cannot be measured, and so there is an argument to be made that it should not be.

The informal economy in the art world is not only a series of shady business deals, though it does include these, but also a way in which the distant and objective art market is personalized and made immediate. It is a symptom of the shrouded financial transactions of the offshore economy and salve to soothe the wounds that capitalism inflicts on those whose labor eschews its financial logic. Artists, curators, and nonprofit directors, among others, work for free because they want recognition and want to participate in a public conversation, but also because they do not want their labor to be monetized. Their actions provide a surplus that cannot be quantified, and the rewards they receive are not the kind of thing you can claim on a tax form. No one wants to be poor, however, so artists, and all other participants in the art world, turn to the market to provide the means for their existence.


—John Zarobell