Economics, like physics, has a few fundamental principles upon which it builds. One is simple, supply and demand determine prices. The more people demand, everything else held constant, the price goes up. The more people supply, keeping other factors constant, the price goes down, and vice versa.
It is not simple and sometimes impossible to apply this principle to non-tangible and abstract things. Take, for example, love or friendship. In this light, the value of art in terms of demand and supply is also not straightforward. Art is highly subjective, and what is or isn’t beautiful is mainly in the beholder’s eye. With that said, if we put these personal values aside and assume consistent valuations of what is great art, what else determines the price?
I would argue that one glaring property of a piece of art largely determines its value – its authenticity. Which I suggest has two main properties: (1) we can be confident the person who claims to have created the art is the true visionary behind the piece, it’s not plagiarized or counterfeit, and (2) the artist either owns the art, or sold it, i.e., it hasn’t been stolen.
Historically speaking, what can we say about the supply and demand of authenticity?? The demand for authenticity has always been high and remains that way. What about the supply? The article’s main point is that the supply of authenticity has increased over time, and NFTs or CryptoArt represent a technology that has essentially wholly solved the problem. The authenticity of NFT art is 100%, or at least as close as is possible to imagine.
The history of lost, stolen, plagiarized, and forged art reads like a tale from Indiana Jones. There are plenty of stories of large-scale robberies, organized crime, and Nazis. The list of the 25 largest art heists in history accounts how trillions of dollars of art has been stolen.
My personal favorite is # 3, which recounts the story of a man known as ‘Spider-Man,’ A thief who stole five masterpieces from Paris’s Musee d’Art Moderne de la Ville in 2010. If you are guessing the theft was plotted in a manner that mimics the superhero, you would be correct.
While the list above is a record of single incidents of stolen art, it is well accepted that the most costly and noteworthy occurrence of ongoing art theft accrued in Nazi Germany. See the linked Vanity Fair article for a description of this costly and atrocious theft. Sadly, many of the half a million art pieces stolen are still missing. Almost certainly, many are lost forever.
It would be comforting to think that art theft is a thing of the past. Yet, an estimate suggests that at present 4 to 6 billion dollars worth of art is still stolen each year. Art theft is a constant burden on the art world as “top prices are only paid when buyers are confident the offered works are genuine and unencumbered” Shortland (2021).
The most disturbing aspect of art theft is it undoubtedly deters creation. If it prevents buyers from buying, it discourages sellers from selling, which deters creators from creating. A recent project has gone a long way to solving this problem. The Art Loss Register is a project that aims to deter theft by making it very hard to resell lost, stolen, and forged art.
The project uses three methods to identify and track authentic art: (1) provenance, (2) autographs, and (3) materials. Of the three autographs, and materials are pretty straightforward. Artists are matched by their signature, usually a thumbprint, and the materials they could have used to create the art. If either is suspect, it points to an inauthentic piece.
The most powerful and exciting method is provenance. Provenance is a list of all owners. With perfect provenance, you have a chain that links ownership to the original artist. Ideally, this link shows the artist selling the piece, and so forth – no theft or forgeries along the way. Provenance is simply the best single method to guarantee authenticity.
The above brings us naturally to NFTs. Provenance is, in essence, the brilliance of the blockchain and cryptocurrencies. More than anything else, the blockchain is a perfect record of provenance. By using the power of the blockchain and NFTs an artist has complete ownership. Authenticity is a guarantee.
Historically the supply of authenticity has often been meager, and thus art prices were often insufficient and sparse. With time we have gotten better at guaranteeing authenticity, but even modern methods still result in billions of dollars of stolen art every year. NFTs are a leap forward, essentially putting the authenticity at 100%. It can’t get any higher; this drives up the price along with the art’s value to the buyer, and most importantly, it drives up the incentive to create.
A famous economics paper titled “The Market for Lemons” describes how when buyers are unsure of the quality of a good to be purchased, the best goods will be driven out of the market; see Akerlof 1970. In the paper, the author uses the example of used car markets, but there is a direct parallel to art.
The logic behind the article is simple enough. If there are good used cars and bad ones, which the author calls lemons, buyers need to be wary. Logically a buyer will suspect any vehicle and will assume there is some chance that any car bought could be a lemon; this causes the buyer to offer a price that isn’t sufficient for someone to sell a good car. The result is potential sellers of good cars don’t bother bringing the vehicle to market in the first place. Why would they if they will not receive an acceptable price?
There is a direct parallel to art markets. Inauthentic art often populates art markets. Given this, buyers won’t pay the full and fair value as a given piece could be stolen or a fake. The same logic holds that sellers of authentic art won’t bother bringing it to market, which means creators don’t have the proper incentive to create. We end up with an art market full of lemons.
The presence of inauthentic art can destroy a market or, at the very least, hurt it significantly. The demand for authenticity is very human. We want to reward the creator, and we want to have procession of the original piece that captures the beauty the artist envisioned. Thus the technology backing the supply of authentic pieces is critical. As blockchain and crypto change the world, it should be appreciated that thanks to this technology, the supply of authenticity can now match the demand.