Economists pay much attention to auctions when looking at the market for art and this is something that in my opinion skews their views and hinders a correct evaluation of both art and its economic function.
At an auction, art behaves as if it merely was a social construct, with its prices based on perception and beliefs about the good. It is therefore seemingly cut off completely from its mode, and costs, of production. As economists tend to think of auctions as a generally truthful and direct representation of market values, it stands to reason that they take art as a whole to work as a social construct, with this truthful pricing mechanism being a clear example of how the art market functions in general.
However, that the influence of public perception on the prices of art at auction isn't necessarily representative for any 'true' value of artworks can easily seen when one looks at auctions of other more mundane objects.
A simple red Olivetti typewriter for example, sold at auction for its design qualities with an estimate of 300 - 500 GBP, was sold for 45.000 GBP at Sotheby's in 2016, simply because it was owned by David Bowie at the time of his passing. Bowie himself didn't acquire the typewriter until 2014, so it can't even be said that any historical significance played a role in setting this price. The mere superficial association with the singer made this typewriter 150 times more valuable than its estimate.
Quite naturally, it would seem absurd to then proclaim that any red Olivetti typewriter is now worth a few thousand pounds, or conversely claim that there is no logic to the market for typewriters of this kind, yet this is precisely the reasoning much writing about the value of art seems to uphold.
I disagree strongly with this view and that is largely based on a conception of art which is closely related to its mode of production. Even works from artists with moderate reputation at otherwise well known galleries are sold in the primary market for prices that correlate strongly to their material costs.
This is however often glossed over by art historians. As nowadays art can be made from a large number of materials, any assessment of this kind of cost-based pricing requires a large degree of knowledge about the costs of those materials. It's debatable how many art historians could tell you the current price of bronze from the top of their head, let alone some rebar.
To demonstrate this correlation between cost price and sale price, let us consider a work by Carl Andre, '5 x 20 Altstadt Rectangle', now in the collection of the Guggenheim Museum in New York. As the title suggests, the work consists of nothing more 100 hot-rolled steel plates measuring 50 x 50 x 0,5 cm, placed in a rectangle on the floor. Similar works of the artist have now been sold for over a million dollars at auctions, which is obviously disproportionate to its cost price. The view in 1967, when the work was first shown, is however very different.
The price of hot rolled steel on the day of writing is 0,675 USD per kilogram. With no definitive and easy-to-access data about the price of steel in 1967, we have no better recourse than simply converting this price to 1967 dollars, which amounts to about 9 cents per kilogram. The weight of 100 plates of steel that measure 50 x 50 x 0,5 cm is 981 kilograms. The work thus presumably cost about 88 dollars to produce in 1967. This work was on sale at Konrad Fischer's inaugural exhibition for 4000 DM. At the 1967 exchange rate, 4000 DM is almost exactly 1000 USD. The sale price of this work was thus (about) 11 times the production costs, without even considering additional costs for fabrication or transportation, which for a metric ton of steel could easily be equal to the cost of the raw material.
For other luxury goods, a cost price to sale price ratio of about 1:10 is almost standard. At worst this work by Carl Andre has a ratio of 1:11. Contrary to the current auction prices for similar sculptures by Andre, there was nothing unreasonable or noteworthy about the price of this luxury item when it was first offered to the public. I believe that many, if not most, artworks adhere closely to that 1:10 ratio when they first are offered up for sale. To quote artist Ryan Gander speaking about his 'lamps made by the artist for his wife' series: 'I attempt to produce the lamps within a budget of £15, however if sold, they are priced at a 1000% mark-up.'