More Rembrandts than art dealers please


The National Trust, which helps preserve England’s heritage, is pleased with itself. It announced last week that a painting of a raffish Dutch gentleman wearing a white feathered hat, on display at Buckland Abbey in Devon, is in fact a self-portrait by Rembrandt. The discovery followed restoration and expert assessment of the picture by scientists and art historians.

When news of the work’s provenance broke, I happened to be visiting Eurostat, the organisation in Luxembourg that tries to keep Europe’s books in order. So my thoughts naturally turned to the question of the impact of this event on Britain’s national accounts.

The National Trust estimates that the value of the painting is £30m. There is of course no intention of selling it; the trust is legally prohibited from selling many of its properties, although that restriction does not apply in this case.

The £30m figure appears to be a “level two” estimate of “fair value” under International Financial Reporting Standards. Although there is no direct evidence on what a buyer might pay for this particular Rembrandt, its value can be inferred from market transactions in similar assets. Curiously, however, a specific statutory exemption for the National Trust allows it to ignore that fair value in compiling its accounts.

But that exception does not apply to Britain’s national accounts. Nor does IFRS help resolve the question national accounts statisticians must determine, or the similar issue that should concern those who draw up and interpret company accounts: who created that £30m value, and when?

The restoration and evaluation by the National Trust transformed an item of modest worth – a work by an ordinary Dutch master might command a modest six-figure sum – into one of the most valuable pictures in the country. But it seems absurd to credit the operations of the National Trust, or the gross domestic product of the UK in 2014, with adding almost £30m of value: it was plainly Rembrandt, not the National Trust, who created the work.

So maybe Eurostat should demand a restatement of the national accounts of 17th century Holland. (In fact there were none; the first such calculations were made by William Petty for England in the 1660s). But Rembrandt’s self-portrait was not worth the equivalent of £30m in 1635. Self-portraits were not a marketable proposition and, although he sold some of his work at high prices, Rembrandt was a better painter than businessman. His commercial portrait business left him bankrupt. Perhaps the credit for value creation should go to subsequent generations of dealers who made his pieces prized objects.

Van Gogh notoriously failed to attract patrons for his work during his lifetime but its value would today run to many billions. Was this value established by him or by Johanna Bonger, his sister-in-law who became his highly successful promoter? Or was it created by the museums, galleries and collectors displaying his work?

These questions may not seem to matter much because fine art is a small proportion of economic activity. But exactly the same questions apply to the treatment of financial services, which certainly are a large proportion of economic activity.

The economic purpose of the financial services industry is to establish a market for securities representing underlying productive activities. What part of the value that is created relates to original productive activity (what Rembrandt or Steve Jobs did); to the promotion of that activity (what Johanna Bonger did or Morgan Stanley does); or to the discovery of inherent but unappreciated value (the achievement of the National Trust or Warren Buffett)?

The general principle is to distinguish profits from services that add to the value of an object or activity (Rembrandt’s craftsmanship) from those that result from changes in expectations of value (the Dutch tulip bubble, which was in progress as he wielded his brush). That principle is useful both in understanding the sources of corporate success and measuring the productive capacity of an economy. It is a principle hard to apply in the fine art market or finance industry. But my instinct – and I suspect the instinct of most other people – is that, while we need the services of dealers, varnishers and critics, what we need most of all is Rembrandts.

This article was first published in the Financial Times on June 18th, 2014.


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