Web of Wealth

I see in the paper today that a painting by an obscure 19th century German is now believed to be by Leonardo da Vinci. This means its value has increased from $19,000 to $150,000,000. Where has the money come from ?
1. Maybe new value has been created by the discovery and the world is $150M
better off ?
2. Maybe the branding enables this painting to capture a larger fraction of the art market, so all other works of art are now collectively worth $150M less ?
3. Or perhaps this applies to the entire world economy ?
4. Or maybe it is just inflationary creation of money. Nothing is worth less, but a given sum of money buys slightly less of everything. What do you think ?

In this case, the increase from $19,000 to $150,000,000 is only a projection of the painting’s saleable value if it is determined that the work is indeed painted by the hand of the master, Leonardo. As Trevor points out, before the painting will actually be worth $150M, someone will have to pay that amount. The monetary value of Art can only be as high as the market is willing to pay. If someone does pay that kind of money for the painting, it will raise the bar on all artwork.

I like Jonathan’s notion that the world could be $150M better off. If only the creation of wealth could be that elegant. This is definitely a huge case of branding and plays a role in this estimate of increased value, if only for its ability to possibly attract the buyer that will pay $150M.

Trevor, - buying Leonardo on credit?! Will that be Master card or Visa? :-)

I think the change in value of the painting is a red herring. The classic case of found value that we know about is the Spanish repatriation of gold and silver from the New World. As I understand it, this repatriation essentially bankrupted the Spanish economy by displacing the real economy.
So if enough valuable paintings were found and the excess of supply did not reduce the value of the finds (highly unlikely) then enough money would move out of other things into art to destabilise production. Just like the current little local difficulties. This would essentially be option 3.
One of the interesting and genuinely new issues in economics is the completion of the world economy. Whereas before one could find new markets and even plunder their assets, now there can be no externalising of any aspect of the economy. It may be that the underlying sense of the financial instrument explosion is to find areas of trade where the world economy is not yet complete.

Dear Aidan,

I don't think the value of the painting is a red herring. It is the subject of this topic, and I will come back to that in a moment.

The Spanish repatriation of gold & silver from the New World is a very different matter, worthy of its own topic. It is true that all that gold and silver ruined Spain, but it stimulated real wealth creation in other parts of the world. According to Felipe Fernandez-Armesto in his "Millennium; A History of the Last Thousand Years", half the silver bullion mined in South America ended up in the coffers of the Emperor of China, so it stimulated economic activity right across Eurasia. It also kick-started the development of England and its colonies through the activities of the Elizabethan licensed pirates, such as Drake and Raleigh, who stole from Spanish galleons and invested in more productive enterprises.

So, there might be an interesting parallel between the role of Spain in injecting liquidity into the global economy, and the USA today, which has injected vast amounts of liquidity in the form of dollars, which have kick-started the econonic revival of China and India, which were the two greatest centres of world economic power right up until about 1830. If this is so, it does not bode well for the future of the USA!

Meanwhile, back on topic, the da Vinci painting has value very different from that of the gold and silver plundered from South America. Gold and silver have intrinsic worth to just about anybody offered them in the form of coinage, but an oil painting's value lies in the fact of its uniqueness. The painting only shoots up in value because paintings by da Vinci are so rare.

The monetary value reflects the value system of a handful of wealthy individuals, looking for a home for their excess funds, and a small coterie of art experts, with some overlap between the two groups. We are supposed to believe that there is some sort of spiritual value in a great work of art, but exactly how this connects with its value in the art market is hard to understand.

Try the following thought experiment:

You may have heard recently that a new generation of laser printers has been developed which actually "print" three dimensional objects. So you can draw an object using Computer Aided Design software, then the printer will make the object. There is no technical reason why it should not become possible to scan a da Vinci painting and construct a perfect copy of it by assembling it from atoms and molecules. The cost of doing so for the first time would be massive, but then the cost of the technology would drop exponentially until we could all own such a device. So we could order a copy of the "Profile of the Bella Principessa" from Amazon and our printer would assemble it for us instantly.

So how much would the original painting be worth in such a world?