What is it that makes a piece of artwork valuable? What is it that determines the value of a piece of artwork? The "duh" answer is that someone, preferably a lot of someones, has to want to hang it on a wall where they can see it or, in the case of sculpture, put it in some space where they can see it. And the more "someones" wishing to display that piece of artwork, the more valuable it becomes. That's the simple answer. If only it were that simple. The complicating factor in the art market is the word "prestige." Who would want to own a dark, dirty, un-restored Rembrandt if they had to keep it a secret--like if it was stolen or something? The thing probably wouldn't be very attractive, and in any case, keeping it hidden would take all the fun out of owning a genuine Rembrandt. So, with antique art at any rate, there are three factors determining price, name of the artist, name of the artist, and name of the artist, (just like in real estate--location, location, and location).
Of course, in art, just as in real estate, that too is an oversimplification. Factors such as the condition of the property, size of the property, and the quality of the workmanship (artistry) are also important. A little Picasso usually sells for less than a big Picasso; a good Picasso sells for more than a bad Picasso; and in either case, clean and undamaged wins out over marred and dirty every time. Up to this point, the art market seems very logical. Dead artists no longer paint, the supply is limited, and only matters of authentication make for sticky wickets. It's when we move into the realm of living artists that things get screwy. Here the correlation is not with the fairly logical real estate market but more accurately with the highly volatile stock market. Everyone is looking for a hot stock (artist) likely to increase in value. Emotions and politics and hunches and hype and (here's that word again) prestige rule the playing field.
Which is not to say that there are not quantifiable factors. Investing in living artists is like building a stock portfolio. Questions arise. How productive is the company (artist)? Is he or she innovative? Does the artist possess a good reputation? Is the artist's product politically correct? Is it well made? Does the artist mass-market or speciality market his or her work? Does the artist measure up to his or her hype? Does the artist produce an attractive product? How many other artists produce a similar product? Is (or was) the artist the first to produce it (something like owning a patent). Does the price reflect a great deal of speculation? Is the artist a fad or a fact of life? And finally there comes our favourite word, prestige. Here the living artist market departs from the stock market completely. No one claims prestige in owning a stock (except perhaps in owning all of a given stock). But art is to be admired, and through it, the owner gains admiration. His or her tastes are on display along with the name of the prestigious artist. And when that living artist dies, then there's the different set of rules (as in real estate) which kicks in. Name begins to mean more and more, all else, less and less. There are exceptions of course (van Gogh for instance), but in general, a relatively unknown artist will remain so after death--often becoming even more unknown in fact. The artist with a prestigious, established name, his or her work seldom decreases in value and almost always increases as that name goes down in more and more art history books. And this is what makes artwork valuable.