General Ignorance

[Jay]

I was reading "The Book of General Ignorance" which has the catch of telling you "everything you think you know is wrong" and came upon the "Where do tulips come from?" section and thought, hey I know about this one!

Except that it said, according to the head of Global Strategy at Deutche Bank, Professor Peter Garber, the tulip scare was overblown and that most of the economic ruin stories came from one book, "Extraordinary Popular Delusions & the Madness of Crowds," by Charles Mackay, published in 1852. It goes on to say that the most lurid tales came from a moralistic campaign by the Dutch govt. to scare people out of tulip speculation and that there are many instances of higher values being obtained from plants elsewhere in the world at other times. Is this correct?

The reason I am wondering is: one, because I spend so much damn time on this site, I thought a bit of clarification might be in order so I can properly tell my friends interested in finance and economics where the title of this site that I am addicted to like a crack rock comes from, two, because a clear history of the mania obviously says something about the site itself and the ideas expressed here, and lastly putting the true story into context seems like it would be a interesting excercise in history.

In fact, for those of us inexperienced whippersnappers, a general economic history thread might be useful.

[Rajiv]

Here is the wiki on tulip mania (http://en.wikipedia.org/wiki/Tulip_mania)

The term tulip mania (alternatively tulipomania) is used metaphorically (http://en.wikipedia.org/wiki/Metaphor) to refer to any large economic bubble (http://en.wikipedia.org/wiki/Economic_bubble). The term originally came from the period in the history of the Netherlands (http://en.wikipedia.org/wiki/History_of_the_Netherlands) during which demand for tulip (http://en.wikipedia.org/wiki/Tulip) bulbs (http://en.wikipedia.org/wiki/Bulb) reached such a peak that enormous prices were charged for a single bulb. It took place in the first part of the 17th century, especially in 1636–37.

The event is remembered in part because of its extended discussion in the book Extraordinary Popular Delusions and the Madness of Crowds (http://en.wikipedia.org/wiki/Extraordinary_Popular_Delusions_and_the_Madness_of _Crowds), written by popular British journalist Charles Mackay (http://en.wikipedia.org/wiki/Charles_Mackay) in 1843, more than two centuries after the event. Mackay omitted mentioning that during 1636-37, the Netherlands suffered from an epidemic of bubonic plague (http://en.wikipedia.org/wiki/Bubonic_plague), and severe setbacks in the Thirty Years War (http://en.wikipedia.org/wiki/Thirty_Years_War). [1] (http://penelope.uchicago.edu/%7Egrout/encyclopaedia_romana/aconite/tulipomania.html). Modern scholars (e.g. Peter Garber) consider the event much less extraordinary than did Mackay.

[FRED]

I was reading "The Book of General Ignorance" which has the catch of telling you "everything you think you know is wrong" and came upon the "Where do tulips come from?" section and thought, hey I know about this one!

Except that it said, according to the head of Global Strategy at Deutche Bank, Professor Peter Garber, the tulip scare was overblown and that most of the economic ruin stories came from one book, "Extraordinary Popular Delusions & the Madness of Crowds," by Charles Mackay, published in 1852. It goes on to say that the most lurid tales came from a moralistic campaign by the Dutch govt. to scare people out of tulip speculation and that there are many instances of higher values being obtained from plants elsewhere in the world at other times. Is this correct?

The reason I am wondering is: one, because I spend so much damn time on this site, I thought a bit of clarification might be in order so I can properly tell my friends interested in finance and economics where the title of this site that I am addicted to like a crack rock comes from, two, because a clear history of the mania obviously says something about the site itself and the ideas expressed here, and lastly putting the true story into context seems like it would be a interesting excercise in history.

In fact, for those of us inexperienced whippersnappers, a general economic history thread might be useful.

No, that is not correct. The tulip mania, the south sea bubble, etc., were very real and have the same three key ingredients as all asset price inflations:

- New invention or discovery that is never been priced by the markets (e.g., railroad capacity and telecommunications capacity).
- Liquidity provided by government (e.g., bond issue) or created by the credit markets and permitted by government (e.g., CDOs).
- Risk guaranteed by government (either implicit or explicit).

[jk]

<table border="0" cellpadding="4" cellspacing="0"><tbody><tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/1_1.gif</td></tr> <tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/2_1.gif</td></tr> <tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/3_1.gif

<table border="0" cellpadding="4" cellspacing="0"><tbody><tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/4_1.gif</td></tr> <tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/5_1.gif</td></tr> <tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/6_1.gif</td></tr></tbody></table>
<table border="0" cellpadding="4" cellspacing="0"><tbody><tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/7_1.gif</td></tr> <tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/8_1.gif</td></tr> <tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/9_1.gif</td></tr></tbody></table>
<table border="0" cellpadding="4" cellspacing="0"><tbody><tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/10_1.gif</td></tr> <tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/11_1.gif</td></tr> <tr><td align="center">http://www.derivativesstrategy.com/i/cmx/1996_02/12_1.gif</td></tr></tbody></table>
from derivatives strategy comix!

http://www.derivativesstrategy.com/magazine/comix/
</td></tr></tbody></table>

[Rajiv]

The fallacy is in row 7 of the comic strip - where he describes exponential growth -- and then extrapolates it for 100 years.

Let us then count the tulip bulbs at the end of 100 years -- from 1 in year 0 -- it comes to 1.26 x 10^30 tulips. Let us assume that each tulip weighs 50 grams or 0.05 Kg -- comes to 6.3 ^ 10^28 kg. So what does this weight look like?

from Earth (http://en.wikipedia.org/wiki/Earth), the mass of the Earth is 5.9736 × 10^24 kg

The weight of the tulips is therefore equivalent to 10^4 or 10,000 Earths

This kind of extrapolation is quite common among the "financial engineers" that gave us derivatives modelling -- in fact I have had running arguments with some of these people (financial gurus) on this very issue -- and this is possibly one reason for our current financial mess -- and why things may collapse quite rapidly.

[jk]

The fallacy is in row 7 of the comic strip - where he describes exponential growth -- and then extrapolates it for 100 years.Let us then count the tulip bulbs at the end of 100 years -- from 1 in year 0 -- it comes to 1.26 x 10^30 tulips. Let us assume that each tulip weighs 50 grams or 0.05 Kg -- comes to 6.3 ^ 10^28 kg. So what does this weight look like?

from Earth (http://en.wikipedia.org/wiki/Earth), the mass of the Earth is 5.9736 × 10^24 kg

The weight of the tulips is therefore equivalent to 10^4 or 10,000 Earths.
no wonder they would be worth a lot!
check out derivatives strategy comix. my favorite is "memorial day."

[jimmygu3]

The fallacy is in row 7 of the comic strip - where he describes exponential growth -- and then extrapolates it for 100 years.

Let us then count the tulip bulbs at the end of 100 years -- from 1 in year 0 -- it comes to 1.26 x 10^30 tulips. Let us assume that each tulip weighs 50 grams or 0.05 Kg -- comes to 6.3 ^ 10^28 kg. So what does this weight look like?

from Earth (http://en.wikipedia.org/wiki/Earth), the mass of the Earth is 5.9736 × 10^24 kg

The weight of the tulips is therefore equivalent to 10^4 or 10,000 Earths

This kind of extrapolation is quite common among the "financial engineers" that gave us derivatives modelling -- in fact I have had running arguments with some of these people (financial gurus) on this very issue -- and this is possibly one reason for our current financial mess -- and why things may collapse quite rapidly.

Rajiv,

Actually, the comic assumes the number of bulbs doubles every 2 to 3 years, and your calculations assume it doubles every year for 101 years.

Given their estimate of doubling the bulbs every 2.5 years, that divides the 100 years into 40 'periods' (p) numbered from 0 to 39. The number of bulbs at any given time would be 2^p. At the end of 100 years the number would be 2^39, or 5.5 billion bulbs.

:)

[Rajiv]

You are right, but the implication from the previous pane was the yearly doubling -- which is what I cued off.

But my message does not really change. ;)

[jk]

whether the bulbs would make a good investment for 100years is not quite the point, however. the issue is whether there was more rationality to the tulip "mania" than we usually credit to it.

[jimmygu3]

whether the bulbs would make a good investment for 100years is not quite the point, however. the issue is whether there was more rationality to the tulip "mania" than we usually credit to it.

I agree that it is easy to dismiss the tulip mania as an anecdote, and I appreciate the points the comic makes. People were no different then than we are now. We want to buy things that are going up in price, especially when the resale market appears liquid and growing. When the market dries up you're often left holding something you have no use for yourself. Hopefully that will not be the case with my collection of shiny yellow coins that I hold sheerly because other people seem to like them. :)

[Rajiv]

whether the bulbs would make a good investment for 100years is not quite the point, however. the issue is whether there was more rationality to the tulip "mania" than we usually credit to it.

It is a rationality of the "short term" -- works quite well as long as we are not close to the peak -- at which point there is a sudden and disasterous collapse -- something that could have been foreseen -- but nobody expected to be caught in! Not too different from the dot.com bubble bust.

It is the psychology of "Why leave money on the table!" I still hear of people who congratulate themselves on getting the peak just right and those who beat themselves up for exiting too early. The fact remains that it is very difficult to forecast exactly when the collapse of a bubble will take place.

[FRED]

In any event, the tulip mania analogy did a fair job of forecasting the result of the tech stock bubble. (http://www.itulip.com/background.htm)