Yale School of Management professor William N. Goetzmann joins Allison Schrager to discuss the history of financial innovation, the role of markets in Athens, Sumeria, and Rome, and the democratization of risk-taking. His latest book is Money Changes Everything: How Finance Made Civilization Possible.

Audio Transcript

Allison Schrager: Welcome to Risk Talking, a podcast about economics. I'm your host, Allison Schrager. And today, I'm delighted to be joined by William Goetzmann. Now, in addition to being pretty much the most interesting person you could ever sit next to at a dinner party, he is a professor of finance and management and the faculty director of the International Center for Finance at the Yale School of Management, where he teaches portfolio management, alternative investments, real estate, and financial history. His past work includes studies of stock market predictability, hedge funds, and survival biases in performance measurement. His current research focuses on alternative investing, factor investing, behavioral finance, and the art market. Professor Goetzmann has written and co-authored a number of books including Modern Portfolio Theory and Investment Analysis, The Origins of Value: The Financial Innovations that Created Modern Capital Markets, and most recently Money Changes Everything: How Finance Made Civilization Possible, which we're going to talk a lot about today because it is a tremendous work. So, welcome and thank you so much for joining us.

William Goetzmann: Well, thanks for the invitation.

Allison Schrager: So, normally I jump right in with the economic questions, but I am just curious, it seems from your book, you have a tremendous background in history and art history in addition to finance. Where did all that expertise come from?

William Goetzmann: Well, I was an art history major and an archeology major in college. So, I never dreamed that I would find myself as a professional economist, but I have long been fascinated by these very longue durée developments and also the connection between the right and left sides of our brains. How does the art relate to the finance, and can we think about finance in a more human context?

Allison Schrager: So, how did you get into finance after doing sort of the other-side-of-the-brain work?

William Goetzmann: Well, you could say it was a continuation of my interest in archeology, which was a fascination with looking for things, finding things, digging deep into things. And when I went to the Yale School of Management—I went to get a business degree after working in various areas of archeology and filmmaking and all sorts of stuff when I was young. But what I found is that people that were doing research in this field were digging into data sets—stock prices, and corporate information—and there was just a vast scope for exploring where did these things come from? Why are they important? And so forth? So, I switched from being interested in material objects and artifacts, at least partially, and into looking at numeric data and information about companies and investments and so forth, and found myself just immersed in this new playground of data that actually related very closely to what people in this world need to know about risk and returns and savings and so forth.

Allison Schrager: Yeah. So, I think I was just first blown away reading your book when you start in ancient Sumer, and you find these early archeological pieces that show the creation of compound interest. What about that civilization really jump-started financial innovation?

William Goetzmann: Well, you're right. The earliest evidence that we've got for something as cerebral and complex as compound interest comes from the Sumerian civilization, which goes back about 5,000 years ago and also goes back to the origins of writing. So, it could be that ideas about interest and savings and so forth may have started earlier, but we didn't have any record until people began to write things down and save records. But in any case, the thing that was fascinating about this Sumerian civilization is that they began to live in large cities. So, the first large-scale concentrations of populations emerged in this area of the Fertile Crescent right at the head of the Gulf and in the Tigris and Euphrates valleys. So, when you concentrate a bunch of people in one space, you've got a lot of planning to do because you've got to figure out ways to feed them.

And that kind of density caused these early urban societies to not only plan in terms of space and creating roads and things like that, but also in terms of time, they needed ways of planning to get food in and planning in advance for deliveries of grain and so forth. And that's where early finance started. Tax started very early, the tax on the farmers to deliver grain to the people in the cities. That's one of the early kinds of records that we have, but it was a lot more than that. They invented all sorts of financial tools and planning tools that really surprised us with their sophistication even today.

Allison Schrager: Do you see financial innovation as following a linear path, sort of each civilization built on each other? Or were there a lot of backslides where people sort of shut out what we knew and what we could do?

William Goetzmann: Well, it's interesting. Nothing ever really proceeds linearly. There are all these interruptions in the path of development. But in some sense, the problems that the early societies struggled with and created financial solutions to are similar to the problems that we have today. So, you could always say there's nothing new under the sun, but the way that we've solved them has become progressively sophisticated or embedded in our new technologies.

So for example, we have a blockchain that we're excited about now as a way of creating a sequence of permanently recorded transactions. And we actually know that if you go back into, let's say medieval times, there were blockchains in large parts of Europe, but they were simply called notaries. So, if you wanted to record a transaction, a sale of land or something in Southern France in the 13th century, you would go to a notary and the notary wasn't interested in your transaction, you just had them record that event in a book that they just kept a record of, and transaction after transaction, no particular economic or logical connection, just a way of recording a sequence in a book where you didn't have the ability to rip pages out and so forth. The notary was in charge of maintaining the integrity of that record. So, blockchain seems to be so new, but actually it's been around as a concept just in written form as opposed to electronic form for a long time.

Allison Schrager: So, jumping ahead to the next jump in innovation would be Athens. So, they had a lot of innovation around debt. What about the Athenians sparked all of this new financial innovation?

William Goetzmann: Well, you're right. Athens is a really interesting case because when we cast our minds back, we think of Socrates and philosophy and we think of some wars and then we think of this fantastic architecture and the Parthenon. But a lot of that had a connection to two different sets of things. One of those things is the ability that Athenians had to create businesses and to get investors in those businesses. And most of those, I wouldn't say all of them, but many of them were businesses that were involved in the trade of grain through the Mediterranean and particularly bringing grain into Athens because as Athens grew, it grew so big that it really couldn't sustain itself with the farmland around it that was not particularly adapted to grain. It was a better place to grow olives and to raise honey. So, the city really depended upon long distance trade. That was its sort of invisible arm that stretched out into, well, one part of it stretched into where Ukraine is today. Ukraine, the area that is Ukraine now was Athens’s bread basket during the high point of Athenian civilization.

There was another thing also that made Athens particularly special and that was its coinage. It had a tradition of tokenization, which again, that's a term we hear a lot today. The creation of tokens that can be used in a setting where you would exchange value and represent investment in a business enterprise and so forth. Well, the Athenians had silver very close to the city, and silver mines allowed them to make millions and millions of these beautiful coins that were symbols of the city, the head of Athena on the front, and an owl for wisdom on the back. Anyway, this tokenization was a way that united the tribes of people that were in Athens into a commitment to the city and a symbolization of their unity with the coinage. But it also was a way for them to measure out people's contribution to the city.

Let's say that you were called to a jury, you would get a coin for the day that you served on the jury. And that was a way to distribute the wealth and also to measure out who does what and who owes people how much? So, it became a very strongly monetary economy built around an extraordinarily successful tradition of coinage. But the bigger issue, the bigger framework for this was the kind of adaptation of much of their economic life to this tokenization that could represent payoffs to the businesses and to the investors in a way that everybody accepted was fair.

Allison Schrager: Could they trade these coins with people outside of Athens?

William Goetzmann: It's really interesting. We sort of think, "Well, the coins must have been a great way of extending their influence," and actually it was. It turned out that, just like the U.S. dollar today has value around the world because people trust the dollar and they use it for transactions even if it's in a foreign country, the same thing was going on with these Athenian coins. They created a monetary system that was in some sense partially adopted by many different other places. And in fact, some of those other places started to make their own coins that looked like the Athenian coins and imitate those owls and so forth. So, that we call it a seigniorage, the extra benefit you have by having the dominant currency, it was something that Athens enjoyed in the same way that the United States enjoys today.

Allison Schrager: Was that largely just because they had access to a lot of silver when other civilization didn't?

William Goetzmann: I think it is. I'm not sure that this Athenian monetization would've happened in the same way if they didn't have the silver mines close by. The Romans, by contrast, struggled along fairly early in their history because they didn't have access to silver, and early on they traded iron bar. They used iron bars and so forth for money, and it took them a while to extend their empire to incorporate the capability of mining silver and minting lots of coins.

Allison Schrager: Yeah. In your book, you also talk about how when there'd be a financial dispute, it would be decided by a jury of like 500 people, and people would have to vote on fairly complex financial transactions.

William Goetzmann: I thought that was really interesting as I began to read about and learn about these Athenian juries. You think, "Well, with 500 people, how could you have a reasonable discussion?" It's not like 12 angry men in a room, it's a big crowd. But we also know from statistics that as the number of, let's call them random observations grows, the uncertainty about what the average belief is increases. So, if you want to measure what the growth rate is for ears of corn, you don't just take one corn plant or 12 corn plants to measure that rate. Five hundred corn plants is going to give you a much better estimate. So, I think although they didn't express it this way, I think they also understood that the way they were constructing a jury was not to have a process of persuasion within that group, but more a process of taking the average opinion of the jurors.

So, yeah, it was also a way to pass out money to people, to share the wealth. But the jury system we have today, few of us spend a lot of time on a jury and we kind of every once in a while have an experience where we learn about, let's say financial fraud or something because we happen to have been on a jury when that came up. But if you're circulating 500 Athenian citizens through, and each one spends a day listening to a trial and then casting their vote, those people are going to hear a lot about all the financial frauds and lawsuits and business dealings that led to a court case. And I think that they must have had a level of business know-how just by participating in that process that increased the average level of economic know-how and financial literacy to something that was probably greater than what we on average have today.

Allison Schrager: Yeah. I think it's always weird to me that people are so resistant to serving on juries. I don't know about you. I always get picked for juries. Partially, I think because I'm an economist and people, they always ask like, "Can you put a value on pain and suffering?" And I'm like, "Yeah, I can put a value on anything," and then I'm on. But you learn so much and you connect with this group of people that is a very diverse part of your community. It's actually a really wonderful experience that I think everyone should do.

William Goetzmann: I've been frequently called but never chosen. They always seem to find a way to put me off of the jury because of my experience. So, I guess you're fortunate to be an economist that actually they're willing to accept.

Allison Schrager: They love the fact that I feel I can monetize anything. But also New York is also more desperate for jurors. So, I think that's another reason why you get picked a lot. But another comment you made about this jury thing that I thought was interesting is, I'm working on a project right now thinking about the evolution of our feelings towards risk. And ancient Athens is known for being a very sort of risk-open society where people willingly took risks in terms of exploration. And you mentioned that this jury process forced every citizen to really think about the future and think about risk in a more cohesive way.

William Goetzmann: Yes, we're really fortunate to have some records of these trials because the first lawyer in history, as far as we could tell, is Demosthenes and he was such a famous orator that a number of his trials were saved. And so, when you read through them, you understand that people were trying to put value on things, value on businesses, value on foregone revenues, but also they had to be aware of the different kinds of risks that their trade entailed. For example, one of the dialogues has a dispute between two people that lent some money to some shady young guys who were brothers that were planning to go off and buy some grain in the area of Ukraine. And actually they kind of absconded and did a few other tricks. And their older brother was held responsible for their bad behavior. He was sued.

But one of the interesting things about the trial was that the contract for this loan clearly specified that if the brothers were able to sail through the Bosphorus, the straits that lead into the Black Sea, during the summer successfully, then the interest rate was lower. But if they couldn't, then and they had to go in stormy times, then the interest rate was higher. In other words, implicit in the contract was a compensation for higher risk. And those shores along the Turkish coast today, we know that in the wintertime, even small journeys to the Greek islands from Turkey become much more dangerous. And when people were fleeing Syria, it was easier and safer for them to travel during the summer than during the stormy winter period.

Allison Schrager: Huh, interesting. So, you also mentioned Ancient Rome and how they were behind the concept of equity.

William Goetzmann: Yeah, yeah. I'm really interested in this very broad concept of equity. We think about equity today in two different ways. The meaning of course, for most people is fairness and how we treat each other fairly, whether somebody got a fair deal, whether the taxes they're paying are fair. So, that's the primary framework that we have for the word equity. But for economists and for people in the financial industry, equity also means shares of stock. And you can buy some equity in a corporation by buying shares. I was convinced to buy some shares of Tesla, and all of a sudden I became a tiny, fractional part-owner in this enterprise that's making all of these electric cars. That's a really interesting situation because, what does that have to do with equity? Well, the way that stocks work is that all the shares of stock in a company have the same rights.

So, I can vote my shares just in the same way that Elon Musk can vote his shares and the person that gets the most votes can appoint the board of directors and so forth. So, the corporation is actually a structure with certain concepts of equity embedded in it. And as you go back in time and look at when did the corporation first emerge and what were the early corporations? And in fact when we go all the way back in time to Ancient Rome, they had corporations that were created to do all sorts of things that the state actually didn't want to do itself, build and maintain temples, supply army with food, collect taxes in far-flung provinces, those kinds of things. And so Roman citizens could... Well, not just Roman citizens, but a lot of people with money could buy shares in these companies that were doing this stuff.

And these shares actually apparently fluctuated in value. So, there were market prices for them. But the thing to me that's most interesting about these Roman corporations—they're called publican societies by the way. The publican societies were, I believe, ways of sharing the wealth of the Roman Empire, well at least the Roman Republic, when it was growing. So, when Rome began to conquer other societies in the Italian Peninsula, and then more broadly, the publican societies were a way that the benefits of that imperialism were shared broadly amongst the citizens, rather than retained just by a small circle of people around an emperor.

So, that's one way that I interpret today's equities, today's shares of stock. When people are able to invest in something like Tesla, they feel like they have a chance to participate in the next big thing, even though they themselves don't have a lot of money. So, like in a mutual fund that invests in the top 500 companies in the United States, an S&P 500 mutual fund, when you own a share in that, even if it's just $100, you are actually sharing in the growth of the big corporations in this country. So, instead of thinking that the corporations are shutting you out of some sweet deal that they're getting, actually you are sharing in the deals, and the innovations, and the patents, and everything else that they're generating.

Allison Schrager: So, as you're talking about both Rome and Athens, it sounds like what you're saying is that these financial innovations really made their societies more successful in part because they really democratize risk-taking and wealth, which I think is interesting, because usually when we talk about financial innovation, people always think that's enriching the frontiers of society.

William Goetzmann: Yeah, for most people, there's no close connection with the world of finance except in times when it makes you a little bit uncomfortable like the worry about taking out a mortgage or getting your bills in the mail. And so, it's hard to separate out that common feeling of anxiety around finance and an appreciation or understanding of the problems that it's solving. So, there's a whole realm of finance but behavioral finance that takes that human dimension into account and recognizes that not everybody is easily operating as a purely rational decision-maker, but emotions can come into play in decision-making and in your capacity to be able to use these financial tools.

Allison Schrager: So, skipping ahead to something you said that also really excited me, I'm a retirement economist and you called annuities one of the most important financial innovations ever. I love annuities—that made me excited. But can you tell me a bit about the role annuities played in a medieval times?

William Goetzmann: Yeah, sure. If you can imagine a world with very little finance, and let's think about a medieval castle, and the Duke is living in the castle with his family, and then the farmers and the people in the surrounding countryside are tending the fields and so forth. You ask yourself exactly how can that duke pass along the benefits to his family? How do you actually construct a way to reduce the risk for your loved ones going forward? Not everybody's good at managing agricultural enterprise. Not everybody is really good at being a knight that could serve the king. And so, that futile structure existed and it begged for some solution that separated the particular set of talents and skills of a given person from the stream of income that those skills would generate.

Allison Schrager: So, city-states were effectively selling annuities, which were just effectively bonds that paid you until you died. When did they start doing that?

William Goetzmann: Well, we know that people could buy annuities even before cities started selling them. And we know that the Knights Templar, which is a religious organization that was involved in the crusades in the 12th and 13th century, we know that they sold annuities, which means that you take some money, give it to the Templars, they would promise to give an annual payment in perpetuity to, let's say your daughter or your son or your offspring in general. So, the religious institutions early on were doing this kind of sale of future benefits in return for present investment.

Why religious? Well, people figured by that time, the Catholic Church had been around for 1,000 years, they were probably going to be around for another 1,000, so you weren't uncertain that you were going to actually get paid, plus you thought if you had to trust somebody, rather than trusting a king, maybe you'd be better off trusting a priest or a church because they've already made moral promises and commitments and so forth.

So anyway, even before cities were selling annuities, the church organizations were. But then, as cities in Europe began to grow, they began to finance their growth and other things, their infrastructure by selling annuities. And so, in Germany, we have actually, we have in our collection at the Yale School of Management, two annuities that date to the 15th century. So, there are documents that are on parchment, they're a little bit bigger than an 8.5 x 11 piece of paper. And then written on this parchment in tiny handwriting are these promises to pay people an interest rate in perpetuity by a given city. German cities were doing this. French cities were doing it. This municipal finance was one of the early forms of bond in financing that emerged in Europe. So, those documents lasted up until the present day. And from it, you can see the deals that were struck, what are the interest rates, they might be something like 4% to 6%, and each one of them has the name of somebody on there that sometimes you can actually trace the personal history of the person that bought the annuity.

Allison Schrager: Well, also it seems that annuities, which I think people don't realize how important they wer,e also really paved the way for incorporating probability theory into how we measure risk.

William Goetzmann: They sure did, because let's say that you bought an annuity that would keep paying you every year until you died. That was a common annuity, a life annuity. It's like social security is today for people that it's comforting that you can count on a stream of payments while you're alive. And so, you can see however that that creates some uncertainty for the city that has made those promises because it's hard to know exactly how long people are going to live. And it depends on whether you go to war and it depends on whether they're a man or a woman. And you can think of all the reasons why there's considerable variation in individual lives.

So, the way that cities began to think about this, and now we're talking about the 1600s when people like... Well, there were mayors and even what effectively was the prime minister of the Netherlands got involved in this was they began to understand that maybe as the number of people grew that bought annuities from you, that you could make some statistical assumptions that could put bounds on the risk that you have. In other words, suppose that you wrote a bunch of annuities and you wrote them to very young people as opposed to very old people, the young people are going to live longer and so you're going to owe much more money than if you wrote it to people who were in their forties or fifties. So, they had to figure out how to deal with that.

Allison Schrager: So, Peter Bernstein would argue that this shift towards being able to measure risk really changed people's outlook that now risk wasn't something that just happened to you, it was something you could control. Do you agree that that was pivotal that way?

William Goetzmann: Peter was a fantastic author, just a fantastic thinker, just you bringing this up reminds me of what a wonderful person he was, and he was a great narrator, if you will, about risk and return in the world of finance and a historian. But yes, of course I agree with the idea that statistical thinking was revolutionary and the statistical tools that this European society broadly developed in the 1600s and the 1700s had really never emerged before in the world. The capability of assessing risk and putting a price on risk, assessing the uncertainties about sending ships overseas to the new world and what are the chances that they're going to disappear due to a hurricane. And then pricing out insurance contracts. All of that came from the mathematics of probability that was developed by a really extraordinary set of scholars who began with this idea that I could figure out the probability of a poker hand, or a game of cards, or a game of dice. And they took those insights from gambling and then used them to correctly price out insurance contracts, and annuity contracts, and things that allowed us to share risk in fair ways.

And so, that was a revolution that allowed us as a society broadly to take more risk, to share the uncertainties about overseas exploration, and trade, and so forth amongst investors that were willing to accept it and also could diversify those risks across many different kinds of voyages. It may have occurred the same way in ancient Athens, where investors would invest in different grain voyages and they diversified their portfolio. But in Europe, in this period of probability discovery, you could actually quantify that risk in a way that had never been feasible before.

Allison Schrager: Do you think that's why Europe was able to industrialize first?

William Goetzmann: Well, that's a good question. The question of industrialization and the relationship to probability is an interesting puzzle. We think about industrialization as a very specific moment in world history, mostly associated with Great Britain where people were able to mechanize operations in a way they'd never been able to do so before and gain huge advantages and efficiency and so forth. But it's funny that the financial sector in Britain at that time in the late 1700s and early 1800s actually was not such a terrific or equitable setting. The British had put constraints on the ability to have corporations that could pursue any kind of path to profit and growth. And it took them some time actually to share those benefits broadly from the early industrialization. There was a financial system, but it's strangely enough quite different than what we might have imagined to be a setting for the emergence of this new economics.

Allison Schrager: Because you also argue that Europe had this financial structure that really supported risk-taking and the exploration because of the weakness and the fragmentation of the European states compared to say . . You write also a lot about Asia. Why didn't they have the same financial innovation?

William Goetzmann: Yes, the contrast between China and Europe is an interesting one because in some sense the Chinese Empire was for many of the dynasties, something that didn't require a lot of interstate fighting and difficulties and uncertainties and so forth. In some ways it was so successful at being able to structure itself to move money at great distances to fund their armies and so on, that they never really needed a municipal bond market. They didn't need ways for specific cities to borrow from the future to pay for things today. Generally, taxation worked pretty well in China, but it didn't work that well in Europe. Venice is a remarkable city-state. It was a maritime empire just in similar ways to Ancient Athens. But in the 12th century and early 13th century, they were involved in battles with Constantinople that required them to build a navy and they didn't have the cash to build a navy, to build a bunch of ships.

What did they do? They taxed people. They promised they were going to pay them back, but they never could. So, instead they gave them what amounted to bonds, they issued them bonds that would promise to pay perpetually into the future. So, imagine that the tax office comes to you and say, "We're going to take a third of your wealth and in return, we're going to give you this piece of paper that promises we will pay you a 6 percent return on that wealth until we eventually get around to making you whole." That was the deal that the Venetian citizens faced in these wars. But what was interesting is they allowed those promises to be traded. So, I could take the bonds that they've given me, I could go down to this little area in Venice called the Rialto, and I could say, "How much will you give me for these promises?" And somebody would buy them from you.

And so, that was a way that you could amass quite a fortune by buying these bonds and you could give them to your descendants, for example. And so, these financial instruments were very important early on in the 13th and 14th century for, let's call it financial planning. But the whole idea of raising money in the present by borrowing against the future, which is what a bond is, that idea was something you could then use to finance all innovation. You could borrow money to start a mining operation even if you don't have any cash up front. And this is what some people did, borrow money to construct a diving apparatus to salvage ships. So, the English started to think of all different ways of financing through this, what we call it, arbitrage through time or getting money in the present in exchange for promises in the future.

And so, this municipal finance is actually the foundation of our modern financial system as successive people figured out that you could make different kinds of promises, not just fixed payments through the future, but shares of profits you could share in the future as long as you had contracts that you could defend in court. So, somebody couldn't just say, "Well, I never promised you that." So, you have to have a legal system that allowed for the defense of these deals that you could strike. But if you can concentrate value in the present and create something that's going to generate growth in the future, then you've got something quite powerful for society. Today, people talk about GDP and the rate of growth, and a recession is when we have negative growth, and so on. But that growth is a reflection or the growth that we experienced today is inevitably the result of investments that were made in the past in order to expand the economy. And so, the financial system is what allowed that.

Allison Schrager: So, was there no private sector borrowing in Asia or it is just not municipal?

William Goetzmann: Well, there were promises from very early on that we can find. For example, there were wealthy Chinese who were known as money lenders, and they would lend money to farmers and so forth. In the form of those loans was actually a piece of bamboo that you would write the terms of the loans on this fragment of bamboo, and you'd split it. So, lender got one, borrower got the other, they could put them back together when anybody had a question about what the terms were.

So yeah, those things existed 2,000 years ago. But a widespread organized system of people being able to invest and lend money and so forth, we really don't have a securitization that happened like it did in Europe. There were pawn shops where you could borrow, you'd bring in your stacks of silk clothing and you'd get loans against them. So, there were certainly household borrowings, but China historically has had a love-hate relationship with private enterprise. We see that today, there have been benefits, but there's always a sort of sense that the state really ultimately is in control.

Allison Schrager: We're running out of time. That kills me because I could go all day. But just a couple of more questions. So, if you're looking at the long arc of financial innovation, I think we associate financial innovation as making the world riskier. Do you think it's made the world more or less risky?

William Goetzmann: Any kind of financial innovation raises great possibilities for growth and making the world a better place, but it also raises the possibility that the innovation could lead us into some problem. When you invent a new way to do things like a new tool or something, you don't know what kind of risks that it entails until you discover by using it. So, I think financial innovation's a two-edged sword. It's suited us well, but understanding the risks that those innovations create is something that's essential.

Allison Schrager: All right. So, one last question that seems like a big jump here, but I just have to ask. It's about the art market. So, when you talk to people, there's a lot of manipulation in the contemporary art market around prices. And if you talk to our dealers, they'll say, "Well, we need to do this because art inherently doesn't have this intrinsic value. So, we have to manage prices because if prices fall, people take that as a signal this artist's work isn't actually good after all, and it has to collapse, so prices have to be manipulated to protect artists from prices collapsing." But you could also argue that because prices are manipulated, that's why people have no sense in the value. So, what do you think it is? It's like a chicken-and-egg problem. Do prices need to be manipulated, or do people have no sort of faith and value because they're manipulated?

William Goetzmann: Well, the art market is a fascinating market because there's no future revenues that you get from rents of the art. And so, our standard valuation tools don't work very well for art. It really is only worth what somebody in the future's going to buy it for. And so, it is a classic beauty contest, if you will, where everybody's trying to figure out what everybody else thinks is beautiful, and that will ultimately determine what the price will be. So, into that situation steps a gallery that says, "Look, I'm going to tell you what everybody thinks is really great." They try to resolve some uncertainty about this process through the promotion of their artists. Now, galleries will typically take 50 percent of the value of the sales price. So, they share equally in the profits from creation and promotion. So, promotion is a huge part of an artist's world.

And so, manipulation is a funny word. I'm not sure I would exactly use that. But some of the things that might happen in a world of art are things that the Securities Exchange Commission might not allow in the world of stocks and bonds, for example, people stepping in to purchase works just to show that they've gone for a high price, and so on. But on the one hand, it's wonderful to see high prices for works of art that demonstrate that society values them monetarily. I appreciate the fact that some works of contemporary art have gone for vast numbers of millions of dollars. On the other hand, if art becomes something that has many more speculators than it has people that appreciate the art or derive value from the art itself, then that's a very frothy situation that could lead to great uncertainty, and bubbles and crashes.

I'll give you an example. I study the NFT market—non-fungible token market, and that is something that starting in about 2020, 2021, it started to take off and prices started to rise up dramatically sometimes through, people sometimes say through manipulative activities. But it really was something that caught the imagination that if you could buy some NFTs, they might go up not just one, two, three times, but 100 times, 1,000 times their value. And so, we've seen this very few times in the history of finance, the 17th-century tulip mania is a nice model for what happened in the NFT market when you had lots more speculators than you had tulip growers. And so, a lot of people now own NFTs and I wonder if most of the people that own them ever look at them and enjoy them, or they’re just waiting to sell them to try and make a buck. And if that's the case, then it's going to be a long wait.

Allison Schrager: Oh, yeah. I guess to some degree the NFT market proves the dealer's point that without their input that you end up with a more frothy market.

William Goetzmann: Yeah. And with the NFT market, there's so many of them, you really needed people to point you in the right direction about first of all, which ones are interesting, but secondarily, which ones make good investments. So, the dealers and the auction houses, they're coordination devices for aesthetics, and of course they're also profit-seeking institutions. So, the world of art would love to exist absent money because it's something that people have done since the beginning of time. On the other hand, it's very closely tied to the world of money and wealth and markets.

Allison Schrager: Well, that's all we have time for. So, we'll include a link to your work on the City Journal website and you can find City Journal on Twitter @CityJournal or on Instagram @cityjournal_mi. And as always, if you like what you heard on the podcast, please give us a five-star rating at iTunes. Thank you again so much for joining us. I loved your book, and I'm so excited we got to talk about it.

Photo: TonyBaggett/iStock

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