The Iaido Journal  Oct 2003
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Building a Sword Collection – The Economic Rules of the Road

Copyright © Phil Fellman 2003. All rights reserved.

 Recently, Roger Robertshaw, a well known collector and scholar of Hizen-to, ( ) asked a question on our discussion list concerning the informal rules within our collectors’ group with respect to bidding at open auctions, particularly internet auctions.  I thought it an opportune time to address the issue of markets in general and how market behavior shapes our collecting possibilities, whether as connoisseurs, historians, martial artists or simply art collectors.  I approach the problem from a very American point of view, but one which is, I believe, quite consonant with Canadian and British thought, given our common Anglo-American legal and cultural heritage.

 One of the implicit questions which I was addressing is why nihonto list moderator Chris Bowen (who has a Japanese sword dealer’s license and who lives in Japan) insists that open discussion of ongoing auctions not take place on his list (it’s a liability issue).  At a deeper level, however, I wanted to explore what shapes the rules and norms of both discussion and markets as well as some fundamental differences between Japanese culture and markets and Western culture and markets and how this may affect what is available (at all) and what is available at what price and perhaps, most importantly how differences in preferences and expectations have combined to stagnate the market and erect barriers so that even those wishing to trade in the marketplace find themselves unwilling or unable to do so in the present, illiquid, market climate.

 I took the following comments by Roger Robertshaw (Nihonto list, September 25, 2003) as my point of departure:

“I think you will find there is much discussion behind the scenes amongst the people who collect a particular item – e.g. I often get asked about Tadayoshi on e-Bay.

 I do not comment until after an auction if I want to buy the item (rarely happens), but if it is gimei, then I will freely give my opinion to those that ask whilst the auction is on. I will do the same with others on this list that specialize in certain items - the people are there to ask in private.   Isn't that what this list is about? Stick to the rules and freely chat with the good guys.

 The policy seems odd, since there is usually in Society in general the opposite policy of favoring the interests of the customer/consumer over those of the seller/businessman.  In any event, one can always seek admission to Pat Simone's private list where there is no such policy.”

 My answer was directed specifically to Roger and was written in slightly different language, but the analysis below contains all of the salient points.  A version of this material was posted to the Nihonto list on September 26, 2003.

 To begin, I believe that anyone who investigates what we informally call “the rules" will find that they are a rather odd (i.e. historically contingent) product of culture, history and economics and that such rules vary widely across markets, legal systems, economic systems and geography.  One of the things which makes e-commerce rather complicated is the fact that it often cuts through these many dimensions indiscriminately.  If you start developing a relationship through Ebay, Sotheby’s or any other clearing house with a person or persons who have a very different take on the “rules” you can get into serious trouble quite deeply and quite fast.

 For example, the specific situation in which Roger is referring to an implicit or unspoken but nonetheless general set of   “rules” (which means rules of behavior or conduct) is an historically unique construct which emerges over a couple of centuries from the philosophy of the British Empiricists, John Locke, Bishop George Berkeley and David Hume (18th century).  In the 19th century this view of rule-governed agent behavior in markets is tweaked by John Stuart Mill and only becomes a comprehensive “economics” or a system of economic rules when it is picked up by Jeremy Bentham and William Stanley Jevons (I’m not suggesting that Smith and Riccardo weren’t economists or economics didn’t exist before welfare economics, but Welfare Economics is the first economic system to have a relatively complete calculus of economic rules) .  There’s a nice piece entitled “Jevons's Debt to Bentham: Mathematical Economy, Morals and Psychology at which explains this quite clearly for those who are interested.  Alfred Marshall’s subsequent development of the discipline of neoclassical microeconomics fully develops these themes.

 Yet even before Marshall, one can discover many elements of modern economic analysis cropping up during the 19th century.  Two examples are Vilifredo Pareto and his theory of Optimal Exchange  and Edgeworth whose analysis of markets is a forerunner of game theory (the Edgeworth Equilibrium is generally regarded as the first game theoretic construction).

 In the United States, the first modern consumer based set of economic rules to find actual implementation in law and commercial practice was propounded by the populist movement in the U.S. in the 1880’s and early 1890’s.  While this group ultimately lost out politically (in the elections of 1896), individual reformers like Theodore Roosevelt pushed strong legislation favoring consumers through Congress, largely stuff like the Hepburn act of 1905, which gave enforcement powers to earlier anti-trust legislation directed at the Railroad monopolies and which paved the way for the breakup of the Standard Oil Trust in 1912.  The economic and philosophical justification for this kind of activity actually came largely out of the University of Chicago, and most anti-trust, consumer protection thinking derives from the Chicago school.  In at least one sense much of the economic efforts of the West for the last century have gone towards the organizing of consumption while in the East, greater effort has been expended on the organizing of production.

 With the sword discussion groups, where this comes into play is that on the Japanese side, you have a number of hierarchical centralized organizations with a lot of tightly held information.  The group determines how to use that information not the individual.  In just a very rough sense, I would say that who sells or who sells at what price and who buys and who buys at what price may well be a product of a group decision and that violating group norms can have rather dire consequences (including loss of access to the most profitable parts of the system).  Remember that this is also taking place within a cultural dynamic which is oriented towards long-term results.  I think that is one reason we see very little in the way of “fire sale” activities with respect to Nihonto coming out of Japan.  If you look at where the Nikkei Index was in the 1980’s and where it has been for the last 12 years, if swords had followed corporate valuation, then we would be back at around 1970’s prices today.   Instead of market flooding, which we could easily see, for example if the Japanese Diet released the 7,000 odd high quality blades which have been sitting in storage since the end of the Second World War (they were not destroyed because they were deemed to have historical and cultural value) we see something which  for the most part, looks an awful lot like market failure.  Sellers, taking the long view, expect their assets to ultimately return to something like their former value and so very little new material enters the market and almost none at the bargain-basement prices an economist would expect. What is in the market generally does not sell.   Buyers, on the other hand, are frustrated because they feel that almost everything they are interested in is vastly over-priced for today’s market.  The result is that buyers don’t buy, sellers do not sell and the market does not clear.   This is market failure.  There is low liquidity, a low transaction rate and some very odd market distortions.  Go to any of the major sword shows here in the U.S. (among those that are still being held) and the lack of sales is self-evident.

 How does this relate to Ebay, or to discussing an item on a list while the auction is running?  In practice it is unlikely to mean too much.  However, if Ebay begins to perceive that a moderated list is consistently having a negative impact on their market, they could sue the list moderator for loss of revenue.  I don’t think they would win, given the innumerable examples of egregious fraud in which they have participated in order to raise their sales levels.  In fact, with the Chairmen of Sotheby’s and Christies both having been convicted of felony conspiracy (price fixing in restraint of trade), I wouldn’t be surprised to see the Federal government targeting Ebay sometime within the next five years for a similar investigation.  However, in the meantime, they can sue you, even if they won’t win and it’s a real headache, which is why Chris Bowen, as the list owner, doesn’t want people discussing items currently being auctioned because it simply increases his liability with no reasonable return.

 In a broader sense, I think many of us have “issues” to resolve about what the enterprise of collecting is that we are involved in – where do we focus, or do we lack any focus at all and just take sword and sword fittings collecting as some kind of treasure hunt?  Are we simply hoping that we can somehow replicate the situation of collectors in the 1950’s, who might have found a Masamune for $500 because nobody knew what it was?  Our focus, or lack thereof has an awful lot to do with what drives our search and buying behavior and to whom we turn for advice.  I spend a lot of time answering questions about various Ebay items just to tell people whether I think they are authentic and more importantly, whether they have any artistic merit.  As Roger indicated, he gets the same questions on Hizen-to, particularly Tadayoshi.  Like everyone else, I have frustrations when I go to sell.  I’ll put out a piece for which I might have paid $600, then I’ll set a $300 reserve and I will finish the auction with only two bids and an ending  price of $70 (again, the market does not clear).  It has been suggested that this is due at least in part to the quality of my digital photographs (something which I’m working on improving).   But I’m also observing this in other peoples’ auctions where the photos are quite good.

 As a personal solution I have ended up placing a number of tsuba on consignment with Cole Cantrell, because I’ve priced them low, and people know Cole gives high value for the money one spends with him.  The downside is that, reflective of the overall lack of liquidity in the market, it might take a year or two, instead of a week or two for those pieces to sell.  This is a slightly better alternative than simply sitting on pieces which are no longer important to my collection, but not a terribly attractive option.  What’s interesting here is that these are not poor quality pieces.  None of them have been burned, defaced, improperly restored, covered in rust, etc.  They are just not as unique or valuable as the dozen or so tsuba I want to keep in my collection.  In years past, I would simply sell this kind of piece to one of the Japanese dealers (whom we rarely see at the U.S. shows any more and when we do, perhaps one or two at most will buy aggressively).  In the absence of an active Japanese market, our own markets have become extraordinarily sluggish.

 This is not accidental or idiosyncratic.  The most difficult feature to deal with in the current sword market is that because there is almost no liquidity (freely moving capital – which used to come from Japan, particularly after the 1985 Plaza Accords which doubled the value of the yen) advice like “It’s better to have one good piece than ten average pieces” is very hard to follow.  Mostly we would all like to sell the lower quality pieces in our collections.  Regrettably, economics has put us in a bad position in this regard.  No liquidity means that (a) everybody is looking for something great at a bargain price and (b) people want to sell their low end pieces at the inflated prices which they paid 5 or 6 years ago, or even at a slight premium.  Basically this doesn’t work.  I’ve sold a ton of stuff for about half of what I paid for it.  In general I expect to get only half of what I paid, regardless of what the item is.  My thinking has been that, for example, if I sell 6 pieces which cost me $8,000 for something like $4,000 then I can buy one piece for $4,000 which is much better than what that $8,000 would have bought me five or six years ago.  But what starts the process moving is my being willing to take a loss in this market in order to exploit some upside potential that might take some rooting out but which Chris Bowen, Bob Benson or Cary Condell will tell you is definitely available if you are patient and have good advice.  If we are going to have a resurgence in the nihonto market, we are very likely going to bring it about through our own efforts rather than simply expect market recovery to occur on its own as the result of changes in the macro-economic environment.  To borrow Cary Condell’s phrase, “Sometimes in a bear market all that you can do is grasp the bear by the horns”.  In layman’s terms this means that if you don’t buy when the market is down, you may not have the chance to buy when the market is up.  Moreover as I argue above, if we don’t do something on our end of the market to bring it up, we may not see an “up” market in the foreseeable future.

TIN Oct 2003