Tulip and bubble craze

Did the Dutch Tuliplmania Really Exist?

In the year 1841, the author Charles Mackay published his classic analysis, Extraordinary Popular Delusions and the Madness of Crowds. Among other phenomena, Mackay (who never lived in or visited Holland) documents asset price bubbles—the Mississippi Scheme, the South Sea Bubble, and the tulipmania of the 1600s. It is through Mackay’s short chapter on the subject that it became popularized as the paradigm for an asset bubble.

Mackay makes the point that sought-after bulbs of particular rarity and beauty did sell for six figures in today’s dollars, but there is actually little evidence that the mania was as widespread as has been reported. The political economist Peter Garber in the 1980s published an academic article on the Tulipmania. First, he notes that tulips are not alone in their meteoric rise: “a small quantity of … lily bulbs recently was sold for 1 million guilders ($480,000 at 1987 exchange rates),” demonstrating that even in the modern world, flowers can command extremely high prices.

Additionally, because of the timing in tulip cultivation, there was always a few years of lag between demand pressures and supply. Under normal conditions, this wasn’t an issue since future consumption was contracted for a year or more in advance. Because the 1630’s rise in prices occurred so rapidly and after bulbs were already planted for the year, growers would not have had an opportunity to increase production in response to price.

Earl Thompson, an economist, has actually determined that because of this sort of production lag and the fact that growers entered into legal contracts to sell their tulips at a later date (similar to futures contracts), which were rigorously enforced by the Dutch government, prices rose for the simple fact that suppliers couldn’t satisfy all of the demand. Indeed, actual sales of new tulip bulbs remained at ordinary levels throughout the period. Thus, Thompson concluded that the “mania” was a rational response to demands embedded in contractual obligations.

Using data about the specific payoffs present in the contracts, Thompson argued that “tulip bulb contract prices hewed closely to what a rational economic model would dictate…Tulip contract prices before, during, and after the ‘tulipmania’ appear to provide a remarkable illustration of ‘market efficiency.” Indeed, by 1638, tulip production had risen to match the earlier demand, which had by then already waned, creating an over-supply in the market, further depressing prices.

The historian Anne Goldgar has also written on the Tulip mania, and agrees with Thompson, casting doubt on its “bubbleness.”5 Goldgar argues that although tulip mania may not have constituted an economic or speculative bubble, it was nonetheless traumatic to the Dutch for other reasons. “Even though the financial crisis affected very few, the shock of tulipmania was considerable.”

In fact, Goldgar goes on to argue that the “Tulip Bubble” was not at all a mania (although a few people did pay very high prices for a few very rare bulbs, and a few people did lose a lot of money as well). Instead, the story has been incorporated into the public discourse as a moral lesson, that greed is bad and chasing prices can be dangerous. It has become a fable about morality and markets, invoked as a reminder that what goes up must go down. Moreover, the Church latched on to this tale as a warning against the sins of greed and avarice; it became not only a cultural parable, but also a religious apologue.

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