The Artist as Entrepreneur PDF

The Review of Austrian Economics https://doi.org/10.1007/s11138-021-00547-8 The artist as entrepreneur Ennio E. Piano1 · Rania Al‑Bawwab1 Accepted: 6 April 2021 © The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2021 Abstract We develop a th...

The Review of Austrian Economics https://doi.org/10.1007/s11138-021-00547-8 The artist as entrepreneur Ennio E. Piano1 · Rania Al‑Bawwab1 Accepted: 6 April 2021 © The Author(s), under exclusive licence to Springer Science+Business Media, LLC, part of Springer Nature 2021 Abstract We develop a theory of the supply side of art markets building on Kirzner’s under- standing of entrepreneurship as alertness to profit opportunities. Whereas Kirzner’s entrepreneur is alert to the existence of resource misallocation, the artistic genius is alert to the opportunity of producing aesthetic value out of mundane objects and resources with no such value of their own. Our theory produces an important empir- ical implication: when market conditions are such that most art is “high art,” the artist will perform both functions, alertness to artistic value and alertness to profit opportunities. Instead, when most art is “low art,” the two functions will belong to distinct individuals. To substantiate our theoretical arguments, we discuss their rele- vance to the markets for paintings in Renaissance Italy and contemporary visual art. Keywords Entrepreneurial alertness · Artistic genius · Economics of the arts JEL E14 · L26 · Z11 1 Introduction We develop a theory of the supply side of art markets. We begin by characteriz- ing art production as a process requiring the combination of the services of labor and various capital goods by an individual possessing artistic genius. Artistic genius consists in the faculty to perceive the potential aesthetic value of an artwork. By aes- thetic value we mean a piece of art’s ability to produce a set of intended reactions on the part of those who experience it. Thus, in our theory, artistic genius is to the reali- zation of aesthetic value what entrepreneurial alertness is to the realization of pure profits in the market for mundane commodities. Whereas Kirzner’s entrepreneur is alert to the opportunity of “buying low” and “selling high,” the artistic genius is * Ennio E. Piano [email protected] 1 Middle Tennessee State University, Murfreesboro, TN, USA 13 Vol.:(0123456789)  E. E. Piano, R. Al-Bawwab alert to the opportunity that she may produce aesthetic value out of mundane objects and resources with no such value of their own. This model has empirical relevance concerning the circumstances under which the two functions–artistic genius and entrepreneurial alertness–will be performed by the same individual and those under which a different individual performs each function. We argue that when market conditions are such that most art is “high art,” the artist will assume both functions. Instead, when most art is “low art,” the two functions will belong to distinct individuals.1 To substantiate our theoretical arguments, we discuss two historical case studies. Our first case study is the market for paintings in Renaissance Italy. Artistic genius assumed an unprecedented role in this industry towards the end of the Middle Ages. Painters assumed a distinctive entrepreneurial role, including that of business-owners. In contemporary visual art markets, the market-entrepreneurial role has been largely separated from that of the artistic genius and is the purview of art-gallery owners and other such figures. We attribute this development to two fundamental changes in the art market.2 On the supply side, developments in technology have reduced the cost of producing and reproducing art. On the demand side, the rise in income has led to a rightward shift in the demand for “low art.” The combination of the two has meant an increase in the size of the market for “low art” relative to that for “high art.” This, in turn, caused the separation of the two functions as predicted by our theoretical framework. We contribute to two bodies of research. First, we add to the literature extending Kirzner’s theory of entrepreneurship to the study of real-world markets. Leeson and Boettke (2009) stretch the notions of alertness and entrepreneurship to encompass institutional arbitrage.3 They argue that entrepreneurs may earn a profit from intro- ducing innovative institutional solutions as well as from “mere” market arbitrage within a given institutional environment. In a similar vein, Skarbek (2009) develops 1 We do not take a position in the complicated debate on what constitutes high as opposed to low art (Fisher, 2013). For our purposes, we use these terms as reflecting contemporaneous sensibilities. Specifi- cally, we follow Cowen and Tabarrok (2000) in defining high art as that art that receives contemporane- ous critical approval. Thus, a Renaissance patron and a contemporary art critic may not see eye-to-eye on whether an Andy Warhol painting belongs to a museum. Yet, both would understand the distinction between high forms and low forms of art. Generally speaking, Renaissance artists, theorists, and patrons emphasized the importance of technique and skills, materials, and originality, though the latter was con- strained by adherence to traditional religious imagery and symbolism (O’Malley, 2013; Welch, 2000). In the modern visual arts, originality and abstraction have a much more significant influence on how an artwork is perceived, while materials and technique are relatively less important (Galenson, 2009). 2 We do not claim that these are the only changes in the art market between the Renaissance and now. However, changes in production technology and income are likely exogenous to the art market. This makes them better candidates for starting points in developing a causal theory of the separation of entre- preneurial and creative functions than potential alternatives like the sensibilities of consumers and artists or the degree of specialization within the industry. 3 We use institutional arbitrage to refer to any form of arbitrage that does not take the standard form of “buying cheap and selling high.” Any rearrangement of the process through which commodities are produced and exchanged that does not take the form of price-arbitrage falls within this category. Thus, for instance, we would see the move towards the vertical integration of different tasks as a form of insti- tutional arbitrage. See the discussion in Piano and Rouanet (2020). 13 The artist as entrepreneur a framework to understand the role of ideology and local knowledge in shaping alertness and entrepreneurial action. He then applies this to the institutional change brought about by missionary Johnny Appleseed in the American Midwest during the first half of the nineteenth century. Martin and Thomas (2013) build on Kirzner (1973) as well as Leeson and Boettke (2009) to formulate a taxonomy of institu- tional entrepreneurship, with special reference to constitutional and political deci- sion making. They then apply this taxonomy to develop a theory of the introduction of the “committee system” in the US Congress. Other recent contributions include Lucas and Fuller’s (2018) work on “market- making entrepreneurship” in the context of government bounties, Candela and Geloso’s studies of the economics of the English lighthouse system (Candela & Geloso, 2018a, b, 2019), and Candela et al.’s work on containerization and its effects on the global economy. Finally, Lucas (2021) provides a critical survey of this literature. Therein, he criticizes the tendency to assume that Kirznerian alert- ness necessarily exists and drives economic and social change in contexts lacking the institutional characteristics proper of a market economy. We are sympathetic to this view and believe that our argument is robust to this criticism. As we discuss in the next section, creative genius is not a form of entrepreneurial alertness. In fact, in our argument, the market provides the feedback mechanism that encourage the adoption of alternative institutional arrangements. Moreover, although there may be analogies between the two, alertness and creative genius are distinct functions. The former allows one to perceive direct and indirect subjective benefits from alter- native courses of entrepreneurial actions in the market. The latter allows one to perceive the artistic potential of mundane objects and materials, whether or not any benefits (direct or indirect) accrue to the creative genius. Our second contribution is to the literature on the economics of the arts. Baumol was arguably the first economist to use economic tools to study the working of art markets. In particular, he recognized the role of competitive forces behind the (artistic and commercial) success of theater in Renaissance England (Oates & Baumol, 1972) and classical music in the Early Modern Austrian Empire (Baumol & Baumol, 1994). Galenson (2001, 2009) develops a framework to understand modern art’s evolution over the twentieth century. He argues that the first six decades of the century pre- sented an unprecedented degree of conceptual and technical innovations in the world of the visual arts. He attributes this development in part to the rise of international and competitive art markets freed from patrons’ influence and government interfer- ence. Ekelund et al. (2017) offer a complementary perspective, focusing on the mech- anism and institutions (such as auctions and art galleries) of the secondary market for American paintings. One contribution that is particularly relevant for our argument is Caves (2000).4 He uses the tools of contract theory and information economics to study the organization of contemporary art markets, including the movie, music, and publishing industries, and the visual arts. One theme from Caves’ work that is most relevant to our argument is what he refers to as “art for art’s sake.” That is, artists are rewarded for showing no interest in the pursuit of material benefits. However, Caves 4 See also Caves (2006). 13  E. E. Piano, R. Al-Bawwab does not explain why this feature of art markets only appeared rather recently. His explanation also relies on (some) consumers having preferences directly over produc- tion processes. Our argument differs by maintaining the (standard) assumption that the choice of how to produce a commodity affects consumers’ willingness to pay only indirectly via its effect on the quality of the final product. Cowen and Tabarrok (2000) come closest to the approach and subject of our paper. Theirs is a theory of artists’ choice of the quality of the art they produce. In their framework, the artist faces a trade-off between indulging in her own prefer- ences for producing high art and the monetary benefits of producing low art. They argue that as societies grow richer, artists experience an income effect that encour- ages them to indulge in the production of higher quality artworks. However, this effect is counteracted by the growth in the market for low or popular art. On the demand side, wealthier societies will demand more such art, increasing the revenues one can realize from serving this market. On the supply side, technological innova- tions have made mass production possible, which allowed artists to reach a much larger audience. However, since mass tastes and those of the artist do not coincide, this favors the production of low or popular art over high or avant garde art. There are several commonalities between their argument and ours. For instance, we both consider the effect of changes in market conditions on the artist’s solution to her tradeoff. Moreover, we both assume that artists have the ability and desire to pursue aesthetic value and that their choice not to pursue it even further is due to the effect of market forces. However, the two approaches differ in one important way. Their argument does not speak to the separation of the two functions we identify (crea- tive genius and market entrepreneur). Thus, for instance, they cannot account for the decline of commissions in the market for paintings nor can they explain why modern painters are not involved directly in negotiations over the price of their art. 2 Entrepreneurial alertness and artistic genius 2.1 The kirznerian entrepreneur Kirzner developed his theory of entrepreneurship over time. While a review of his contribution is beyond the scope of this paper, we summarize some of the theory’s fundamental elements as they relate to our argument. The first element is Kirzner’s view of the entrepreneurial function in a market economy: To bring about equilibrium in a world of change and uncertainty. For Kir- zner, “the entrepreneurial role, although of course the source of movement within the system, has an equilibrating influence” (Kirzner, 1973, 81). If it wasn’t for entre- preneurs, the very notion of “equilibrium prices” (and “equilibrium quantities”) and their relationship to value and scarcity would be nonsensical. It is only because entrepreneurs act upon existing disequilibrium prices (and quantities) that standard economic models approximate the behavior of real-world markets. According to him, “competition offers the incentive and the pressure which alert entrepreneurs to the opportunities created by such errors of over-optimism and over-pessimism” (Kirzner, 1997b, 59). 13 The artist as entrepreneur Alertness is what allows entrepreneurs to fulfill this function. Alertness refers to an entrepreneur’s ability to perceive the presence of opportunities for pure profit (Kirzner, 1973, 7). It is what Kirzner (1997a, 72) refers to as “an attitude of receptiveness to available, but hitherto overlooked, opportunities.” The simplest instance of entrepreneurial action driven by alertness is that of an entrepreneur who buys a commodity from a seller offering it a price p1 and then sells it to a willing buyer at price p2, where p2 > p1 and the act of buying and selling are of no cost to the entrepreneur. Thus, in this scenario, the entrepreneur captures p2- p1, pure entrepreneurial profits. Entrepreneurial alertness doesn’t apply just to the case of market arbitrage over a commodity at one point in time. The “incentive for market entrepreneurship along the inter-temporal dimension is provided not by arbitrage profits generated by imperfectly coordinated present markets but more generally, by the specula- tive profits generated by the as yet imperfectly coordinated market situations in the sequence of time” (Kirzner, 1982, 154). Consider the case of the same com- modity as in the previous paragraph. Our entrepreneur observes current prices and sees that the commodity sells at price p1, however, she becomes alert to the existence of a method for the production of the same commodity and sell it profit- ably below p1. The entrepreneur hires labor and capital and from the combination of their services produces the commodity at marginal cost where mc < p1. The entrepreneur may then set the price just below p1, realizing pure entrepreneurial profits. Finally, entrepreneurial alertness may extend to the market for commodities that do not yet exist. The entrepreneur observes current input and output prices and judges that consumers may be willing to pay price p1 for some new commodity when input prices for the same commodity are such that mc < p1. Once again, if the entrepreneur’s expectations materialize, she will realize pure entrepreneurial prof- its. Much real-world entrepreneurship takes this form. The introduction of televi- sion, and then color television, or smartphones and smartwatches, are all instances of innovative commodities, fulfilling consumers’ demands and yielding riches to the innovators. As Kirzner writes, to succeed, the entrepreneur “must introduce … his own creative actions, in fact construct the future as he wishes it to be” (Kirzner, 1982, 63). Because of his understanding of the entrepreneurial function, Kirzner sees the market process as having the beneficial effect of channeling entrepreneurial alertness towards the continuous realignment of the reality of (relative) scarcity with the val- ues of consumers. The realized entrepreneurial profits and the increase in consumer surplus give us a measure of the beneficial effects of markets. These crucially rely on a regime of property rights, contractual exchange, and the rule of law. Under this regime, markets generate both an incentive effect and a selection effect in the perfor- mance of the entrepreneurial function. First, because she gains from being alert to profit opportunities, the entrepreneur has an incentive to act upon them and resolve any existent misallocation of resources. Second, because successful entrepreneurs are rewarded with profits and unsuccessful ones are punished with losses, the market process filters out the latter and encourages the former. This evolutionary process is what ensures that, in the long run, markets show a tendency towards convergence 13  E. E. Piano, R. Al-Bawwab between real-world prices and the market variables predicted by equilibrium models (Alchian, 1950). 2.2 Alertness and the artistic genius An artistic genius is someone who can, in her imagination, picture a unique combi- nation of resources that generates aesthetic value. In the visual arts, a painter may see that, by combining paint of different colors, applying them on a surface using a specific technique and specialized tools, she can produce a painting that can stim- ulate a set of anticipated emotional responses from the viewer. A composer does something similar when she writes down a sonata. In her imagination, she expects that the sounds, produced through different instruments in the designed order, will generate a series of emotional states (sorrow, agitation, joy) in the listener. The crea- tive genius wishes, through her art, to produce the highest possible aesthetic value out of the resources available to her. Our definition of aesthetic value is comparable to the one employed by the current mainstream approach in art theory (known as externalism) which claims that “an object has aesthetic value in so far as it affords valuable experience when correctly perceived” (Shelley, 2017). It follows that the creative genius is the ability to identify the characteristics of such an artwork that will lead to the desired anticipated reactions as well as what combination of mun- dane resources and materials and production processes will lead to them. The artistic genius and the Kirznerian entrepreneur share several commonalities. Both take the form of rearranging existing resources. Both are informed by subjec- tive expectations. In the case of the entrepreneur, these expectations pertain to the consumers’ willingness to pay for a commodity. In the case of the creative genius, these are expectations about the ability of the artwork to generate certain emotional responses on those exposed to it. Another parallel between the two is that their abili- ties are in many respects innate and unequally distributed in society. In Kirzner’s theory, one cannot cultivate her ability to perceive price differentials. Alertness is not human capital and entrepreneurial profits are neither the return to an investment nor the rent paid out to a fixed asset (Kirzner, 1973). A similar case can be made for the creative genius. Technique and taste, while necessary to the production of aes- thetic value, are not sufficient. Consider how artists, art critics, and the public per- ceive the case of an exact copy of some famous painting. Most people, perhaps even the author herself, may not be able to easily tell the original from the replica. Yet, it’s common understanding that the former is much more valuable than the latter–as is suggested by the fact that they sell at drastically different prices (Ekelund et al., 2017). Thus, technique–which can be learned via practice–is not by itself the cause of art’s aesthetic value. Nor is taste. If it were, then sophisticated art-critics and art- lovers would make successful artistic geniuses. Like technique, taste can also be acquired. What cannot be acquired is the artist’s vision, her ability to imagine a final product that, if she has the technique necessary for realizing her vision, will stimu- late the expected reaction in the minds of those who get to experience it. 13 The artist as entrepreneur Kirznerian entrepreneurship and creative genius differ in important ways as well. A key difference lies in the fact that they aim for different goals. The former’s objec- tive is to maximize economic value net of resource costs. The latter is only inter- ested in creating aesthetic value. While both economic and aesthetic value are fun- damentally subjective variables, they are distinct theoretical concepts.5 A creative genius’ estimation of a potential piece of art’s aesthetic value may not coincide with her (or anyone’s) willingness to pay for the same. For instance, a creative genius may very well estimate that an artwork will have very high aesthetic value and still refuse to produce it since she expects its economic value to be insufficient to cover its resource costs. Indeed, the two “values” cannot even be expressed in the same units. Subjective economic value can, in a market economy, be expressed in objec- tive dollar terms. There is no equivalent for aesthetic value. Yet aesthetic value is real. People do recognize that the aesthetic value of Beethoven’s Ninth Symphony is fundamentally higher than that of the resources that went into its composition. In this sense, artistic geniuses and Kirznerian entrepreneurs are both “alert,” however they are alert to radically different objects. The latter is able see that she can buy low and sell high. The former can see that she is able to create a thing of beauty out of mundane objects. Because they maximize different variables, the Kirznerian entrepreneur and the creative genius serve separate functions. The former, by pursuing economic profits, brings supply and demand conditions into alignment, leading to a state of affairs that is the most beneficial for society. The competitive market system encourages this process by rewarding the agent of (positive) social change with profits. When a Kirznerian entrepreneur makes a profit, society gains as well. Indeed, the larger the profits to the entrepreneur, the large the benefits to society. The same is not true of the actions of the creative genius. The creative genius qua creative genius has only one goal: to create artwork of the highest possible aesthetic value. Caves (2000) refers to this property as “art for art’s sake.” Unlike the Kirznerian entrepreneur in an economy governed by private property rights, the function of the artistic genius has no built-in incentive to keep the welfare of society into considera- tion when planning her course of action. If given the chance, the artist would use larger and larger amounts of resources to bring about ever-larger aesthetic value in the world. Unbridled by economic consideration, she would make society a lot poorer, but sur- rounded by beauty. For this reason, no society would ever let artistic geniuses run the show. Kir- znerian entrepreneurship will ensure that the creation of aesthetic value–and thus the actions of creative geniuses–conforms to the reality of scarcity in society. This “entrepreneurial check” on creative genius may take one of two forms. First, the same individual may perform both functions (entrepreneurial and artis- tic) directly. In this case, the artist would be alert to both the possibility of profit 5 Economic value is subjective in that any commodity is only valuable in connection to its ability to contribute to an individual’s goal of reducing perceived uneasiness. Aesthetic value is subjective in that it pertains to the emotional response an artwork generates in an individual observer. Neither value is “intrinsic” to the object and only exists because of its relationship to one or more subjects. 13  E. E. Piano, R. Al-Bawwab opportunities and the creation of aesthetic value. Such an artist would undertake the production of only those artworks that she expects will generate revenues above resource costs. From our discussion of the properties of competitive markets, we know that these actions will be encouraged by the promise of pure profits and that artists who adopt them have an evolutionary advantage over those who don’t. Art- ists who keep producing art that does not sell above resource cost simply will not be able to stay in business for long. Alternatively, the two functions may be performed separately. In this case, artists still strive to maximize their resources’ aesthetic value while market entrepreneurs will attempt to maximize the profits from the sale of the artwork. For instance, an entrepreneur may become alert to the fact that the output of a certain artist’s genius could sell at a price such that, after having compensated the artist and paid for all the inputs, she is left with a significant surplus. Practically speaking, this coincides with the practice of art commissions, a popular practice in the industry between the Middle Ages and the Modern Era. The entrepreneur may also purchase a finished artwork that is currently priced below what she expects the market to be willing to pay. This second scenario resembles the practices–like the auction and the art gal- lery–that dominate modern art markets and the visual art industry in particular. In both scenarios, regardless of who performs the entrepreneurial function, eco- nomic considerations are not sacrificed to maximize aesthetic value. Also in both scenarios, artistic geniuses producing art of aesthetic and economic value sur- vive–and sometimes prosper–while those who do not are unable to pay for the inputs necessary to the production of art. Yet, the two scenarios differ in important ways. They differ in their allocative consequences for artists. When the artist performs both functions (the first sce- nario), she captures the entrepreneurial profits generated by the arbitraging of low- priced resources. When the two functions are severed, by definition, the artist sells resources at a price lower than what the alert entrepreneur perceives they can com- mand. All pure profits go to the entrepreneur while the artistic genius receives com- pensation for her resources’ opportunity cost. A second, more significant source of difference between the two lies in their implications for the quality of the art they produce. Consider first the case of an art- ist-entrepreneur–an artist performing both functions–who inhabits a world in which demand for art is such that profits from the sale of art of higher aesthetic value are at least as high as those from the sale of art of lower aesthetic value. If the profits from the making of high art were higher, her choice would be straightforward: her wish to maximize aesthetic value and the lure of higher profits she is alert to push her in the same direction. Because she expects to obtain pure profits in the same amount from the making of either high or low art, but the former generates higher aesthetic value, she would produce high art. However, a conflict emerges when “art-for-art’s sake” and “art-for-profit’s sake” do not coincide. In this case, the lure of profit may lead the artist to sacrifice aesthetic value for profits. The issue is not just with the artist’s will, but with the market system’s evolution- ary properties. As they accumulate more profits from the making of low art, artist- entrepreneurs can outbid those artists who choose to make aesthetic value a priority. 13 The artist as entrepreneur Over time, the art-market will be dominated by low art the average aesthetic value of artworks will be lower–though perhaps more art is produced overall. When artistic genius and market entrepreneurship are performed separately, a dif- ferent result emerges. Because the artistic genius is not aware of the profit opportu- nities available in the art market, she always produces artwork of the highest aes- thetic value she can, given the resources available to her. If profit opportunities favor high art, separating the two functions has little effect on the overall quality of art. However, if profit opportunities exist in the market for low art, separation prevents artistic geniuses from sacrificing aesthetic value to profits. Thus, while much low art will still exist–since that’s the most aesthetic value some artists can produce–more higher quality art will exist when the creative genius and the alert entrepreneur are not the same person. 3 Evidence on the performance of artistic and entrepreneurial functions To provide substance to our theoretical framework, we discuss the organization of real-world art-markets, with special attention to the market for the visual arts, in two historical settings. The first setting is Renaissance Italy. During this period, institutional patrons–such as churches, local governments, and professional associa- tions–and wealthy families–dominated the demand side of the market for paintings. In most circumstances, only the very top of the income distribution was interested in or could afford a painting. Thus, an entrepreneur would find most opportunities for profits in the sale of high art. The second setting is the contemporary market for the visual arts. From the Renaissance, changes in standards of living, technology, and market institutions have made a more wide-spread demand for art-products pos- sible. Low and high art coexist and the former dominates the latter in terms of quan- tity and total revenue. Our theoretical discussion suggests that separation of artistic genius and market entrepreneur functions be the norm in contemporary visual-art markets. At the same time, a Renaissance artist will be more likely to perform both at once. 3.1 The Renaissance art market In art history, the term Renaissance identifies the two hundred years–more or less–between the end of the medieval period at end of the thirteenth century and the beginning of the mannerist movement in the 1520′s. The period is associated with several consequential episodes in art history. First, it is during the Renaissance that we see the artist move to the foreground. Throughout the Middle Ages the art- ist did not make his identity known by developing a unique style, technique, and set of motifs or adding a signature to his work. Indeed, the practice of signing one’s work started only late in the thirteenth century and became widespread in the four- teenth (Welch, 2000, 124). The artist also moved physically, from the castles and 13  E. E. Piano, R. Al-Bawwab monasteries of the countryside to the growing cities of the Italian center-north. This development was in response to the economic forces set in motion by the commer- cial revolution of the Late Middle Ages. Cities like Bologna, Perugia, Siena, and more importantly Florence, Venice, and–later on–Rome had rapidly turned into regional and in some cases international hubs of commerce and culture. Their popu- lation growing in number and wealth, they required the services of artists to ornate the walls of new churches and public buildings. Much like Medieval art, Renaissance art was religious in its subject and sensi- tivity. Most art was for churches, including private chapels sponsored by wealthy families. Indeed, the most popular and lucrative artform during this period was the altarpiece. Usually made out of wood, an altarpiece consisted in one panel or more panels plastered with layers of limewater and ashes and painted over with tempera colors. A popular subject for an altarpiece was the Madonna with Child, usually depicted alongside a couple of Saints beloved by local parishioners. Altarpieces were mounted on expensive frames and then erected over an altar or in some cases hung on the church’s walls. Another popular Renaissance art form was the fresco, which involved the application of pigments directly on a wall’s surface before the plaster had dried. Most frescoes were also religious in subject, although they were also the go-to medium for the artwork covering the walls of government buildings, in which case they may have historical, patriotic, and ideological themes. The popularity of altarpieces and frescoes testify to the leading role paint- ing achieved during the Renaissance, a role reserved for tapestry and mosaics for most of the Middle Ages. Moreover, Renaissance artists made their most important contributions to the progression of the arts in the production of paintings. These included the development of linear perspective and innovative techniques to give paintings a more realistic look. Finally, Renaissance painters were innovators in the making of pigments and the use of colors. The innovativeness characteristic of Renaissance art markets, especially in the major Italian cities, was partially the result of the significant degree of competition on the supply side. Artists in general and painters in particular enjoyed much more free- dom from the traditional anti-competitive influences of guilds and local governments than other craftsmen and professionals (Goldthwaite, 2009: 344). The market for frescoes and altarpieces was at least regional and often national in scope. To receive a hefty commission for a painting, a master from Florence had to beat the competition of dozens of other Florentine workshops, that of the members of the neighboring rival Sienese school, a few painters from Perugia, and even some from far away towns like Bologna and Venice. Competition was even more severe when the commission origi- nated in a city or region with no significant painting tradition, as were Rome et al. (2012) and Etro (2018) have argued that the data on the prices of Renaissance paint- ings are consistent with a rivalrous and dynamic market in which price differentials between regional markers were driven down by the artists’ entrepreneurial arbitrag- ing. For instance, marginal revenues were equalized between major art markets-like Venice and Florence-and secondary ones-like Arezzo and Padova-as masters relo- cated to whichever market remunerated them most for their services. While rivalrous and entrepreneurial, this market was by no means perfectly competitive. Informa- tional asymmetries, market power, appropriable quasi-rents clearly existed. However, 13 The artist as entrepreneur they did not result in the unraveling of the market. Artist- and school-specific reputa- tion, informal adjudication systems, and other institutions emerged to mitigate oppor- tunism on both sides of the market. Monopolies were contestable and consistently challenged by enterprising rivals and newcomers (Baxandall, 1988; Thomas, 1995; Welch, 2000). Competition also existed on a demand side dominated by institutional patrons like professional associations, local governments, and religious orders commission- ing art works to decorate local churches’ walls and altars. Later on, art assumed a more private dimension as the wealthy began hiring masters to decorate their pal- aces. For instance, many of the most admired Florentine painters of the fifteenth cen- tury–including Botticelli, Ghirlandaio, and Raphael–frescoed the rooms of the Papal palaces in the Vatican. These high-paying commissions for unique, high-quality work were Renaissance painters’ most lucrative source of revenues. Renaissance artists spent most of their time and efforts conceiving, researching, designing and oversee- ing the production of original paintings for high-paying commissions. Originality was of the foremost importance and painters accused of putting little thought into improv- ing upon their previous work to produce something new were ridiculed by their peers and risked losing their reputation and with it demand for their services (O’Malley, 2013: 182; Shearman, 1983: 44). Other sources of revenues existed. For instance, O’Malley (2013) notes that it was not unusual for even an accomplished master to accept less remunerative com- missions and less-prestigious work, especially in their hometowns and from institu- tions (like religious orders) of lesser means, a strategy consistent with price discrim- ination by the painter. A final minor source of revenue was the market for private art. A master may have his assistants produce smaller, lower-quality copies of origi- nal altarpieces known as tondi for their round shape. Buyers would purchase them ready made directly at the workshop. While the master was generally not involved in producing these items, they offered his assistants opportunity for practice and the chance to earn some extra money (Thomas, 1995, 46; O’Malley, 2013, 195).6 Consistent with our framework’s prediction, we find that Renaissance artists com- bined the functions of creative genius and entrepreneur. And creative geniuses they were. One of the defining traits of Renaissance art, setting it apart from its Medieval predecessor, was the emphasis on creativity and innovation. The most celebrated painters of the period were individuals who patrons and connoisseurs alike recog- nized to have the innate ability to create beautiful visions of complete paintings in their mind. Renaissance artists and art theorists referred to this as ingenio, which they contrasted with mere arte, the technical skills required to execute the vision 6 Unfortunately, there is no empirical evidence we are aware of that would help us estimate the size of the market for low art in Renaissance Italy. This lack of evidence on this market may itself indicate that it did not constitute a major source of workshop revenues. Moreover, artistic commodities, including low art, are very likely normal or superior goods (Skinner et al., 2009). Given that Renaissance Italy, wealthy as it was by historical standards, was still operating in a Malthusian equilibrium, it seems reasonable to assume that most households did not allocate any significant share of their income to the consumption of any art, including low art. Given how most high art was public and easily accessible at least in urban areas, we suspect that revenues from low art were but a small fraction of those from high art. 13  E. E. Piano, R. Al-Bawwab inspired by an artist’s ingenio. Good ingenio was believed scarcer than arte, mostly because unlike the latter, the former could not be learned even after many years of practice and apprenticeship. The making of a masterpiece required both arte and ingenio. However, the artist was responsible for the ingenio who received the patron’s commission and assumed liability over the complete painting (Piano, 2020). Implicitly or explicitly, Renais- sance art contracts included the obligation that the master painter signing them would be entirely responsible for the design of the artwork and overseeing its execu- tion. There was no expectation that he would actually be performing the execution himself, or at least, not beyond those sections of the painting that most crucially embodied his ingenio, such as the faces of all main figures. Most of the painting beyond these sections were left to his assistants, whose work he directed and closely supervised. Renaissance art consumers had no conception of “autograph” work and did not care much about who did the actual painting, as long as this was executed well and inspired by the master’s beautiful vision. Renaissance painters were very enterprising in finding business for themselves and their workshops. As we mention above, all paintings were the result of a com- mission. The commissioning process could begin in one of two ways. A wealthy individual or association may decide to sponsor the making of an altarpiece or a fresco painting, possibly to enhance their prestige or pursue some political strategy. They would then rely on merchants, local artists, and their social network to iden- tify potential candidates (Nethersole, 2019). Thus, reputation and word of mouth played a crucial role in this market. Alternatively, a painter may reach out to poten- tial patrons to offer their services unsolicited (Thomas, 1995, 98). Patrons may then ask candidates for quick sketches of the complete painting and estimates of the final price, and the final choice of whom to assign the commission would depend on both aesthetic and economic considerations. The patron and the selected artist would then draft a contract binding parties to their respective obligations. However, these contracts were far from complete. They often specified the deadline for completion and the amount and method for the artist’s compensation. Seldom did these con- tracts include references to the painting’s subject, the painter’s style, or the number of figures. The commission may simply state that a fresco or an altarpiece had to be “beautiful” or “at least as beautiful” as some previous work by the painter (Thomas, 1995, 91). This contractual incompleteness was partly the result of the high contracting costs typical of the arts more generally (Caves, 2000, 2006) and partly a way to give painters the creative freedom they needed. Commissioned masters faced few restrictions on their artistic choices, including the painting’s subject. In these cases, tradition and expectations about quality were the only real constraints on his genius. For instance, one could not produce an altarpiece with a non-religious (or even blas- phemous) subject and expect to receive the expected compensation. Nor could he justify errors and imperfections as creative elements or artistic licenses. If the patron was not happy with the final look, he could demand that the artist fix the painting at his expense. The reputational consequences of delivering low-quality work could be even more damaging (Shearman, 1983, 44). 13 The artist as entrepreneur Another key entrepreneurial function of Renaissance painters was that of busi- ness owners. As we mention above, artists were not expected to and did not produce the whole painting. A master left most tasks-from the preparation of the materials (like pigments, glues, gessoes) to the transfer of the preparatory drawings to a wall or tavola and the painting of backgrounds and secondary figures-to the employees of his bottega or workshop (Thomas, 1995, 76). Their numbers varied from bottega to bottega and depended on the number and size of commissions received by a master at any given time. At the beginning of his career, a painter may employ one or two assistants. Their number would grow with his reputation, which in turn increased the demand for his services. The most popular masters of the fourteenth and fifteenth centuries employed up to six assistants. Assistants were not the only workers under a master’s supervision. He also employed unskilled workers (garzoni) and very young apprentices (discepoli) to perform menial tasks. A master’s managing abilities in “organiz[ing] materials and men” (Welch, 2000, 79) were just as important as his ingenio in determining the success of his enterprise. Hence, he spent much effort training them in the necessary techniques of his craft, directing their contribution to the production of the paintings, and monitoring their efforts to prevent shirking (O’Malley, 2013; Piano, 2020). If the diaries (Ricordanze)-the only surviving source of its kind from this period-of fifteenth century Florentine painter Neri di Bicci are any indication, masters took their business responsibilities very seriously. They han- dled their bottega’s accounting directly by keeping extremely detailed notes of all expenses and revenues (Thomas, 1995). 3.2 The contemporary market for the visual arts A comprehensive overview of the evolution of the market for the visual arts since the Renaissance is beyond the scope of this article. However, a summary of some of the most significant developments is needed to understand the evolution of the artis- tic and entrepreneurial functions in this market. A major difference between Renaissance and contemporary visual art lies in its subject. The former, recall, was mostly religiously themed. Over time, religious art declined while other subjects became more popular, such as portraits, landscapes, and still-lifes. Eventually, abstract themes came to dominate the visual arts. Possibly due to the diffusion of photography in the late nineteenth century, painters aban- doned rapidly the traditional tenets of their craft, including linear perspective and naturalism (Galenson, 2009). The decline of religiously themed art in absolute and relative terms reflected changes in the demand for paintings starting in the sixteenth century. The protestant reformation reduced the demand for religious paintings across Europe. Italy, which had provided fertile ground to the growth of this market, experienced an economic decline that limited the income society would spend on building new churches and making them beautiful. In the rest of Europe, the rise of a merchant class democra- tized the demand for paintings. Paintings from established artists stopped being the purview of churches and public palaces but adorned the walls of the new rich’s pri- vate residences. The democratization of art only accelerated over the past century: 13  E. E. Piano, R. Al-Bawwab “The truth is that there has never been, at any time in history, more art demanded and consumed per capita in the entire world” (Ekelund et al., 2017, 258).7 Today, the demand side of contemporary high art shows a combination of institutional and private buyers. Museums that specialize in contemporary visual art–such as the MOMA in New York City, the Tate Museum in London, and the Centre Pompidou in Paris–are the most important institutional buyers in the market competing against private collectors, like the Lebanese billionaire brothers David and Ezra Nahmad. While social change and the rise of real income transformed the demand for the visual arts, technology transformed its supply. Colors, canvasses, brushes and all the other necessary tools for the production of a painting are so cheap that many people from all social backgrounds take on this craft as a hobby. Indeed, developments in digital technology have made these tools obsolete and many visual artists work with digital tablets. The production process behind much contemporary high art would be unrecognizable by any nineteenth century painters: “Today some of the greatest artists do not touch their paintings, and some do not even supervise those who do touch these works” (Galenson, 2009, 185). One of the most successful painters of the past century, Andy Warhol, admitted to hating the act of painting, embraced mechanization and other industrial practices to mass produce his paintings, and moved his operation to an actual factory (Galenson, 2009, 192). In one extreme instance of separation of artistic genius and the production of her artwork, the American painter Solomon LeWitt left the actual drawing of some of his pieces to the buyers (Galenson, 2009, 194). If the cost of producing new art declined, that of reproducing the same art has fallen even more (Cowen & Tabarrok, 2000). Technological innovations and the rise in income levels over the past two hundred years have also contributed to the multiplication of avenues for fruitful employment of artistic geniuses. Visual artists can choose among a larger number of remunerative uses of their talents. They may work as independent painters or visual artists, but they may also cater to the large demand for “lower” forms of art as graphic designers, photographers, cinematog- raphers, cartoonists, and illustrators.8 These are very lucrative industries that offer artistic geniuses profitable alternatives to the contemporary art market’s uncertain prospects. For example, Caves (2000, 47) notes that a significant share of visual art- ists are lured out of the high-art world and into one of “galleries offering decorative art” by the lure of higher and more secure compensation. These changes contributed to the rapid and radical transformation of market for the visual arts over the twentieth century. On the demand side, the generalized 7 The demand for high art has assumed another dimension over the past century, as paintings and other works of art have become profitable avenues for investment (Ekelund et al., 2017, 255). This phenome- non has been driven by the prospect of fast and unexpected surges in the value of “underappreciated” art- ists whose work may go from commanding prices in the hundreds of dollars to several hundred thousand or even millions in the span of just a few years (Galenson, 2009, 22–3). 8 Some modern visual artists have gone so far as to challenge the very distinction between high art and low art, and even the notion that we can separate art from non-art. For example, one of the most con- sequential contribution to twentieth century art was Marcel Duchamp’s Fountain, a porcelain urinal to which he had only added the signature “R. Mutt.” The pop-art movement’s major figures took a similar stance as they adopted and endorsed the use of industrial practices for the mass-production of their art- work and “by making original works that pretended to be copies of the commercial originals” (Galenson, 2009, 54). 13 The artist as entrepreneur increase in income over the past two centuries has led to a rise in the demand for popular or “low” art. On the supply side, the increase in reproducibility of one’s artwork has increased one’s ability to cater to larger markets. Combined, these two effects have increased the artist’s opportunity cost of pursuing higher levels of aes- thetic value at the margin (Cowen & Tabarrok, 2000, 244).9 Consistent with our framework, the market for high art has adjusted by separating the entrepreneurial function from the creative function of the artist. Perhaps the most significant embod- iment of this change is the decline of the commission system. Unlike her Renais- sance counterpart, the contemporary visual artist seldom interacts directly with the final buyer on the primary art market (Caves, 2000, 38). Nor is she constrained in the style, theme, or even form of her art by the buyer’s demands. She makes these choices independently, before she even knows the identity of the buyer. This feature of contemporary art markets gives the visual artist an unprecedented degree of crea- tive freedom, preserving what Caves (2000) refers to as “art for art’s sake.” Thus, “in a number of respects, advanced artists in the twentieth century have enjoyed dra- matically greater creative freedom than their predecessors” (Galenson, 2009, 17). The separation of entrepreneurial and artistic functions has coincided with the most remarkable period of stylistic, technical, and philosophical innovation since the Renaissance. Change has come to characterize the contemporary scene in the visual arts more than any other period in art history. Galenson (2009) identifies forty-nine separate artistic genres introduced during the twentieth century, mostly over the six decades between 1911 and 1970, although many of these were only ever employed by the artist who “invented” them. It is unlikely that many of these would have been possible without the separation of the entrepreneurial and artistic functions, as exem- plified by the resistance of the artistic establishment–including experts, institutional patrons, and other artists–to the rise of Impressionism, Fauvism, Cubism, Expres- sionism, and so forth (Galenson, 2009). By partially insulating visual artists from the profit and loss mechanism of the market, the institutions of contemporary art have encouraged them to focus on esthetic value rather than revenues (Caves, 2000). This is not to say that market forces play no role in this industry. Real resources must provide enough income to some visual artists to discourage them from exiting the market. The magnitude of these resources must ultimately be responsive to the demand of consumers. Artists who consistently fail to meet the expectations of even a small niche market face unflattering chances of survival. While the visual artist focuses on maximizing aesthetic value, the entrepreneurial function of allocating her work to its highest-valued use is left to a series of interme- diate institutions. Most important among them are the independent art gallery and its manager, the art dealer. The function of the art dealer is to discover individual artists, advertise and find potential buyers for their work: 9 In Cowen and Tabarrok’s (2000) framework, a generalized increase in income may also lead to a higher indulgence in the realization of aesthetic value by artists. Their argument is that the income effect of economic growth may more than compensate for the substitution effect of higher compensations avail- able from the satisfaction of the demand for low art. Nevertheless, they find that this effect should be weaker for artists who already operate in the market for high art. 13  E. E. Piano, R. Al-Bawwab The dealer spends time with prospective clients articulating the artist’s intent providing context for her work, and formulating a best case for its signifi- cance. […] The dealer promotes the artist with such certifiers as art writers and museum curators, supplies illustrations to art publications, tries to place the artist’s work in museum exhibitions and encourages purchases by museums and major collectors, whose judgments provide counsel to less well-informed buyers. He arranges loans to museums and other exhibitors and seeks repre- sentation for the artist with friendly galleries in other cities.10 Talent-scouting and recruitment are key to the success of the dealer’s operation. By recruiting underrated artists, the dealer is exercising the (Kirznerian) entre- preneurial function of selecting those artists whose work she believes in currently underappreciated. The dealer believes that, thanks to her promotion and her skills in identifying future trends in the art market, she will be able to earn entrepreneurial profits above the costs of running her operation. Indeed, successful dealers show a combination of entrepreneurial talent and a taste (and knowledge) of the art world (Caves, 2000, 44). That between the artist and the dealer is a partnership governed almost entirely via informal means as “formal contracts are simply avoided” (Caves, 2000, 41). Instead, the two sides rely on reputation to ensure that a dealer supplies enough effort to promote the artist, while the latter promise not to shop their work around though independent channels. Revenues from art sales are split between the two according to the terms of the informal agreement, with the artist obtaining between half and two-thirds of the final proceeds, the rest going to the dealer (Caves, 2000, 41). Dealers exercise their function via the operation of private galleries, where an art- ist’s work is displayed.11 The private gallery first emerged in France, where the state had a de facto monopoly over the circulation of high art (Galenson, 2009, 17). The break-down of this monopoly led to the rise of the independent art gallery in France. In the United States in the early nineteenth century, art galleries started as a way for dealers to sell imported European art, especially paintings from the “Old Masters,” to the elites of the newly founded country (Ekelund et al., 2017, 18). Today, the average American art dealer operates a small independent gallery in a large urban area and represents a lineup of one to two dozen artists, who among other things can expect their work to be featured in the gallery for a solo show approximately every other year (Caves, 2000, 38). The other major player in contemporary art markets is the auction house.12 Unlike dealers, auction houses operate mostly in the secondary art market. The function of auction houses is twofold. First, through their reputation, and expertise, auction 10 Caves (2000, 38). 11 Running a gallery is a very expensive endeavor, Caves (2000, 45) reports the estimate that in the 1980s in New York City starting an art gallery required one to incur a fixed cost of $250,000. It is also a risky one, as only twenty five percent of new art galleries survive after five years. 12 See Ekelund et al. (2017) for a discussion of the economics of auctions for paintings and other art- works. 13 The artist as entrepreneur houses mitigate the “credence” property of the visual arts by guaranteeing that the artwork is in fact authentic (Ekelund et al., 2017, 51, 106). Second, they “perform the market-making function that prices and reallocate [the] evolving stock” of the supply of paintings (Caves, 2000, 334). In so doing, they match paintings from liv- ing or deceased artists that may now be experiencing a broader appeal–and thus can potentially command a much higher price than they did in the primary market–to those buyers who are willing to pay the highest prices. This function is socially ben- eficial since artists may spend much or even all of their career without their art get- ting much traction until sudden changes in the market environment make their work more valuable. The function of auction houses is to allow current and potential own- ers to find each other and ease the artwork’s allocation to the collector who values it the most. The secondary market for the visual arts is international in scope and is domi- nated by two auction houses, Sotheby’s and Christie’s, and two cities, New York and London (Caves, 2000; Ekelund et al., 2017).13 However, only the work of a very small share of all visual artists, dead or alive, is traded in this market. Hence, in the market for the visual arts “success is primarily defined by being included in second- ary art markets” (Ekelund et al., 2017, 36). Auction houses profit from their entre- preneurial function by levying fees from both buyers and sellers. Generally, these fees consist of some percentage of the “hammer price” (Caves, 2000, 336). Though a handful of auction houses dominate the secondary art market, rivalry is fierce as they must compete for the ability to auction off the artwork, which leads them to offer very favorable terms to the current owners of the art (Ekelund et al., 2017, 49). 4 Conclusion In this paper, we expand on Kirzner’s (1973) theory of entrepreneurial alertness to develop a framework to study creative genius. We argue that alert entrepreneurs and creative geniuses are similar in their characteristics and functions. Where the former have the ability to perceive resource misallocations that, when resolved, will gen- erate pure entrepreneurial profits, the latter have the ability to perceive the poten- tial aesthetic value of combining mundane objects like paint, blocks or marble, and pieces of cloth. We identify the conditions under which market forces will favor the performance of both functions (the entrepreneurial and the artistic) by the same per- son and those under which a different person performs each task. Specifically, we claim that when most demand for artistic commodities is demand for “high art,” the artistic genius will also take on the role of the entrepreneur. However, when profit opportunities emerge from producing “low art,” the market for “high art” will see a separation of the two functions and the emergence of pure creative geniuses and pure market entrepreneurs. We substantiate our claims with evidence from the his- torical records on the markets for paintings in the Italian Renaissance and those on 13 According to Ekelund et al. (2017, 46) there are currently over two hundred auction houses in the United States alone, mostly concentrated in the American Northeast. 13  E. E. Piano, R. Al-Bawwab the contemporary market for the visual arts. These records are consistent with our framework’s prediction: Renaissance Italian painters dealt directly with their indus- try’s business side, while this role is generally performed by professionals (like gal- lery directors and agents) in contemporary art markets. Lacking a clean natural experiment, we cannot claim with absolute certainty that the mechanism this paper identifies is solely responsible for the separation of the entrepreneurial and creative function in the market for visual arts. Indeed, comple- mentary explanations that focus on other variables (changes in the sensibility of con- sumers and artists, greater division of labor in the economy, and so forth) may have also played a role. However, our focus on changes in technology (on the supply side) and income (on the demand side) have the advantage of a high likelihood of being exogenous to the art market. 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