Tulip mania wasn’t

Tulip mania wasn’t irrational. Tulips were a newish luxury product in a country rapidly expanding its wealth and trade networks. Many more people could afford luxuries – and tulips were seen as beautiful, exotic, and redolent of the good taste and learning displayed by well-educated members of the merchant class. Many of those who bought tulips also bought paintings or collected rarities like shells.

Prices rose, because tulips were hard to cultivate in a way that brought out the popular striped or speckled petals, and they were still rare. But it wasn’t irrational to pay a high price for something that was generally considered valuable, and for which the next person might pay even more.

Tulip mania wasn’t a frenzy, either. In fact, for much of the period trading was relatively calm, located in taverns and neighbourhoods rather than on the stock exchange. It also became increasingly organised, with companies set up in various towns to grow, buy, and sell, and committees of experts emerged to oversee the trade. Far from bulbs being traded hundreds of times, I never found a chain of buyers longer than five, and most were far shorter.

And what of the much-vaunted effect of the plague on tulip mania, supposedly making people with nothing to lose gamble their all? Again, this seems not to have existed.

That is from Anne Goldgar, there is much more at the link, including an explanation of how the myths about Tulip Mania spread, fake news basically.  Here is her earlier book on the topic, here is an earlier Peter Garber piece.


For all the contrarianism here, they were still bidding the price up basesd on a fad which should foreseeably was gonna end. Kinda like the current fads for spicy cocktails (yuck!) and feminism (likewise).

Granted, the contortions of third and fourth wave feminism would strain the most limber of hook—- ah, er, sex workers, but what makes you think that feminism is a fad that will end?

I hope “it” becomes more reasonable, but precisely for the same reason that Jordan Peterson says women value competent, confident, capable men, so too do I value old style feminist women.

Once reform movements attain their main objectives they tend to become smaller but also more radical since some people can't give up the struggle.

It seems like you should also be referencing Earl Thompson, no?

'But tulip mania was a historical event in a historical context, and whatever it is, Bitcoin is not tulip mania 2.0.'

Nope - bitcoin is about nothing but a string of digital data being valued at - 100? 18,000? 6,000? 600? dollars. Tulip bulbs exist - bitcoin is nothing but a shared belief. Along with being useful as a way to evade various restrictions.

Tulip bulbs exist but so do snowflakes, random images made by water stains or toasters, clouds etc. Just because something is in a limited supply doesn't mean it is valuable. Also there's nothing inherently valuable about anything economically other than what humans are willing to sacrifice for it. The effort to segregate value between stuff that is 'inherently valuable' (say water, food, lifesaving medicines) and supposedly not (art work, collectible toys, the latest iphone) ultimately fails.

Perhaps the words 'completely and totally non-existent apart from a shared belief' would have been better?

'The effort to segregate value'

And yet every single one of your examples was a real thing, and not a digital string. Meaning that the effort to segregate value between things that actually exist (regardless of how abstracted), and those that don't, might actually be worthwhile.

Know what also is often "nothing but a string of digital data" and has value based on "nothing but a shared belief"? US Dollars, Euros, etc.

I'm actually fairly skeptical about bitcoin, but I don't think you have a great argument here.

So, it seems that 'regardless of how abstracted' was easily overlooked.

And 'US Dollars, Euros, etc.' have a value beyond a shared belief, at least in the countries where those currencies are issued.

The point is that cryptocurrencies are fascinating in their very non-existence apart from belief, especially when forked - what is the value of bitcoin before and after a (hard) fork? This is a pretty good review - https://news.bitcoin.com/a-guide-to-what-a-bitcoin-fork-is-and-why-they-happen/

And its ending is fantastic - 'Essentially, the free market and you will decide on which bitcoin blockchain gives the world economic freedom and shakes up the current status quo.' Just make sure that your digital data string is safely ensconced among the proper group of believers, and every thing will be fine.

(For a couple of real world free software examples, check the Libre/Open office split, or the death of XFree86 and its replacement by X.org - https://en.wikipedia.org/wiki/XFree86 )

All Currency Is Fiat Currency. As Boonton notes, value is purely in the eye of the beholder. The highest of those "intrinsic" values can vary wildly depending upon circumstances, of course. A brick of gold can be very meaningfully valuable in a situation where it is viewed by the general consensus as a store of value. OTOH, in desert settlement in the middle of a drought it will be worth less, and in a lifeboat adrift in unknown waters it might be seen as utterly worthless. The "realness" of something, apart from being a slippery concept (electrons aren't real? data isn't real) appears to be utterly immaterial.

That said, I'm in agreement that Bitcoin is at best questionable. This has nothing to do with the "realness" of Bitcoins, though, and a lot to do with the shakiness of beliefs that are not backed up by immediate utility, or courts and guns, or that have much relation to existing anchors or Schelling Points. Wile E. Coyote is not *obliged* to fall by virtue of Warner Bros physics, but he usually does anyway.

Follow-up: And it occurs to me that "courts and guns" is possibly just a subset of "immediate utility", as in "the courts, backed up by people with guns, say X is a legal store of value, so it is of immediate utility to act as if this is so."

In “ The embarrassment of riches” by Simon Schama about Dutch culture in the Golden Age, he seems to agreee that the trading was fairly well controlled and did not lead to the bankruptcy of speculators and therefore was not the mania it was later made out to be. However he adds that at the time it was viewed very negatively by the elites and the church

“ the elites viewed this degeneration of business into gambling with deep misgivings — and the church, of course, with unconcealed horror. It was in their view money run amok, a kind of anarchy in which all the conventions and rules for virtuous and sober commercial conduct has been thrown to the wind “

Perhaps it is this perception that led to the issuance of satirical poems, dialogues and prints in great numbers after the crash. These in turn as she mentions influenced negatively later (perhaps unscrupulous) popularizing writers.

"But it wasn’t irrational to pay a high price for something that was generally considered valuable, and for which the next person might pay even more."

Given that this sentence could apply to almost any bubble, I'm unconvinced.

Goldgar's not necessarily wrong with her explanation; the sentence is just so trite that it doesn't contribute anything. The reason paying a high price for anything is rational might be because it's valuable and because the next person might pay more. But if that's the causal mechanism at play, it's worthless for distinguishing bubbles and non-bubbles--in which case, it's worthless for distinguishing whether tulip mania is rational or irrational (unless she's actually arguing that all bubbles are rational).

Alternatively, rational but dumb might be another way of putting it.

Given the tulips being bid up in trading were as flawed as the dot.bomb IPOs, ie, the bulbs traded were suffering a fatal disease with early symptoms of the virus being colorful stripes and patterns, their value was doomed to collapse to zero once the bulbs started rotting in the ground, buying them was as rational as buying pets.com at $100.

Pets.com lasted longer than the line of traded tulip bulbs, almost two years.

Such is the power of hindsight. Do you suppose that this was obvious a the time?

Tulips are still sold with mosaic virus causing color breaking in the blooms, though usually with a warning to keep them away from other plants that are suceptible to the virus.

Somehow I always thought "which the next person might pay even more" was known as the "greater fool theory," and everyone understood that eventually one will either run out of greater fools, or the greater fools will run out of money?

Bubbles stop expanding when when they run out of people willing and able to keep putting money into them. And the same logic that encourages investment when prices are going up (aka "greater fool theory") equally encourages a rush to dump when the price starts going down.

Yes, truly, systems with high positive feedback loops tend toward instability: imagine that!

"But it wasn’t irrational to pay a high price for something that was generally considered valuable, and for which the next person might pay even more."

Not individually irrational, perhaps, but isn't this pretty much the essence of what a bubble is?

If by "essence" you mean "textbook definition," then yes it is.

I think the bubble part only comes in if you are paying a premium only because you believe someone else will pay more.

"the most expensive tulips of all cost around 5,000 guilders (the price of a well-appointed house)"


Yes, that’s what the well off were paying. But the less well off in the bubble were also paying a crazy percentage of their income for a biological conspicuous consumption signaling unit.


Time to revoke Shiller's nobel. Fama can have 2 .

The newly wealthy Dutch didn't have flat screen televisions to look at, so they went for tulips. Golden Age portraits all seem to include small dogs. Was there a similar bubble in dogs at the time?

I think--and I am aware of Garber's book--that this opinion that tulip mania was not a fad is revisionist history. From what I can tell, there was a 'bubble' in the futures markets for tulip prices, and it popped. Maybe the part about a hungry sailor eating what he thought was a raw onion that turned out to be the master's rare tulip, equal to the price of a house, is fake, but not the overall thrust of the Kindleberger Tulip Mania stories.

Bonus trivia: there are those who argue John Law's South Seas and the equivalent UK "Mississippi" ventures (or vice versa, they happened contemporaneously) was not a fraud or bubble but simply monetizing the French/English public debt, in a novel way, and in a strange revisionist way anticipated 20th century deficit financing. Perhaps, and this too can be seen as cutting edge / revisionist in a good / bad way.

The exemplary Ray Lopez writes, "Bonus trivia: there are those who argue John Law’s South Seas and the equivalent UK “Mississippi” ventures (or vice versa, they happened contemporaneously) was not a fraud or bubble but simply monetizing the French/English public debt, in a novel way, and in a strange revisionist way anticipated 20th century deficit financing. Perhaps, and this too can be seen as cutting edge / revisionist in a good / bad way."

Everytime these topics come up I'm reminded to re-read Charles Mackay's "Extraordinary Popular Delusions and the Madness of Crowds" that was written way back in 1841. It's still one of the best investment books every written and leads inexorably to the modern day work of Tversky and Kahneman (who I don't think ever referenced him but I might be wrong on that count). Others can debate whether a "financial popular delusion" is a bubble but as the old saying goes, 'if it walks like a duck and quacks like a duck, by golly, it is a duck.' they are all bubbles to me.

Thanks AG. I think the critics to the revisionists point out that while arguably perhaps the price of tulips was rational, the futures market for these tulip prices were definitely a bubble. Then again, you have guys like the notable economist Scott Sumner who argue--if I recall correctly, which I think I do--that it's not a bubble if the price comes back to the original 'bubble' level. I think this is wrong. The NASDAQ 100 was in a bubble in 1999 even though the index (suitably revised) has revisited its all time high since then. If a bubble pops then reflates it doesn't mean it was not a bubble the first time.

The question then should be, what is the basis of the original scholarship? Revisionist history is only really a problem if it challenges well researched history, if it turns out that what is being revised is being revised because it had no basis in fact in the first place, whats the issue?

How does the present-day Matsutake economy differ from that of Tulip Mania? Both Matsutake and Tulip are non-essential aesthetic objects, bought for status, primarily as gifts and grown in agriculturally marginal regions with a high degree of unpredictability (Matsutake is found only in re-wilded landscapes and harvests wildly vary from year to year; tulip hybrids were largely unpredictable in quality and volume.) See Anna Lowenhaupt Tsing's The Mushroom at the End of the World: On the Possibility of Life in Capitalist Ruins (Princeton University Press.)

or the Japanese "Gift Melon" (a perfect but ordinary honeydew melon)? Bubble say I.

The premise is that there is no such a thing as "speculation", that all investment is productive whether the subject is productive capital (plant and machinery) or tulips. Rising asset prices are what make fortunes, and produce high levels of inequality - the wealthy already own most of the assets, hence rising asset prices inures primarily to the wealthy. To question rising asset prices is to question the foundations of capitalism. What Cowen omits in his blog post is the flip side of rising asset prices, namely, the necessity of letting asset prices fall once the exuberance, rational or irrational, has passed. That's the Austrians' view, a view I would assume Cowen shares with his Austrian colleagues at Mercatus. A problem with the Austrian view is that only a few benefit from rising asset prices while everyone suffers from falling asset prices; "speculation" benefits only the speculators but puts everyone at risk. To avoid widespread suffering from falling asset prices, the central bank must rescue the speculators, and us, from the speculators' folly, even if doing so reinforces the imbalance in the economy and promotes another round of exuberance, rational or irrational, rising asset prices, and systemic risk. The focus on tulips is a distraction from the underlying economic problems that are reflected in rising asset prices.

Larry Summers' Okun Lecture notwithstanding, the conventional wisdom is not to deflate asset bubbles with deflationary monetary policy. But what's happening today is conflation of inflation and bubbles. For example, see today's column in the WP by Robert Samuelson: https://www.washingtonpost.com/opinions/today-inflation-tomorrow-crisis/2018/02/18/8deeb394-133e-11e8-9065-e55346f6de81_story.html Of course, deflating asset bubbles with deflationary monetary policy causes everyone to suffer for the speculators' folly.

A problem with the Austrian view is that only a few benefit from rising asset prices while everyone suffers from falling asset prices; “speculation” benefits only the speculators but puts everyone at risk. To avoid widespread suffering from falling asset prices, the central bank must rescue the speculators, and us,

You're omitting the other part of the Austrians' argument: dismantle the mechanism which enables bubbles, and the transfer of non-systemic risk to systemic risk, to begin with. Remember how the collapse in Beanie Baby prices led to numerous bankruptcies and bailouts? Remember how the collapse in dot-com shares and daytrading casinos led to a near-failure of the banking system and Fed bailouts? Neither do I.

It's important to allow the poor to become rich. It's also important to allow the rich to become poor.

If the goal is to make the poor rich, for a fee I will engineer a deal to increase the price of your car 1000 times. I will pay you $10 million for your car if you agree to buy it back a second later for $10,000,020 million.

You will be able to claim to be a millionaire simply on the value of your car. Wall Street will charge you a million or two to do the same wealth creating deal. That will make them rich and you very very poor.

"The premise is that there is no such a thing as “speculation”"

That is plainly not the premise to anyone with reading ability above the 4th grade level.

I think the better question is why owners of capital invest in such things as Bitcoin or tulips or gold as opposed to, for example, equipment (or a company that owns equipment) to make widgets? Does investment in Bitcoin, tulips, or gold make the economy richer? I suppose demand for Bitcoin, tulips, or gold causes their price to rise so the investor is richer. But is she? I suppose she is richer if she sells the asset at a higher price, but is the economy richer if she does? I suppose so if she uses the proceeds to invest in equipment (or a company that owns equipment) to make widgets. But what if she sells Bitcoin and reinvests in tulips, is the economy richer as a result? Why not invest in the equipment in the first place rather than speculate on rising prices for Bitcoin, tulips, or gold? I suppose it's because the investor believes her rate of return will be higher if she invests in Bitcoin, tulips, or gold, even though Bitcoin, tulips, and gold have no intrinsic value (well, tulips are nice to look at) in the sense that they can produce something more such as widgets. People my age can remember when "speculator" was used as invective, similar to the Ayn Rand invective "takers" that is frequently used today by, now get this, speculators in Bitcoin, tulips, and gold. Of course, people my age can remember when "pornography" was, well, pornography, and pornographers had about as much esteem as speculators.

Bitcoin and other speculative goods seem to promise quick riches (via absurdly high rates of return) for minimal effort.

Economics has too narrow an understanding of rationality

Everyone in all fields should understand that rational/irrational are shorthand for complex mental processes.

But certainly the belief that "rational" actors behave as implacable calculators, forever maximizing a "utility" that is partly psychological was a house of cards. Or at least contradiction.

Thanks for this link, The tulipmania narrative underpins a lot of behavioral finance, which in turn underpins a lot of the justification for paying people to pick stocks so it is in the financial interests of many people and financial institutions to promote the idea of market irrationality that one can profit from,

Right, but the better lesson to give average folks is that market irrationality is not the same as market predictability.

Indeed, why did we ever think it should be?

Relatedly, people are paying $600 per pound for coffee grown in California.


Basically, because it is stupid to grow coffee in California.


By the same tortured logic, this is "rational" because you can flip those $600 beans at $55 per cup. For now.

Ray Lopez basically has it right, but there is a bit more that one can find in Garber's book, but that Ann Goldgar either misrepresents or simply misses entirely, although they both share the view that much of it was not a bubble, that exaggerated stories were told about it, and that id did not have major consequences for the Dutch economy.

She recognizes that there was a sharp runup in prices in Jan. 1637, but is unwilling to call it a bubble because it was all paper futures contracts with the losses "notional." What has that to do with it being a bubble or not. Garber notes, which she does not, that this runup was in ordinary bulbs, not the exotic stuff she spends so much time talking about (and he did too). He says this period was "probably" a bubble, if indeed notional in paper futures contracts.

The point she is plain wrong about is that she says there was no cessation of trading. According to Garber there was, with the government shutting down the market on Feb. 5 for about two months. Prices had gone completely haywire (and Spanish troops were lurking about). Her claim about all this being "rational" and "calm" do not hold at all for this period, which she seriously misrepresents. When the market reopened in April, it had returned to "normal." So she wildly overstates her case, and this is no case for Shiller returning his prize.

This is one of those too-clever-by-half arguments that economists love. It's either wrong, or it does such violent to the word "irrational" as to render it completely meaningless.

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