The intrinsic value of tulips to Dutch investors An economist challenges the view that manias such as that in the 17th-century Netherlands are always irrational
Few events in economic history have captured the imagination of financial journalists like tulipmania in the Netherlands. In 1634, Dutch investors began snatching up rare tulip bulbs and trading them until their prices reached astral levels. At the fever's peak, a single Semper Augustus bulb went for the equivalent of
$33,000. Other individual bulbs sold for the price of a
well-appointed house, a much repeated comparison.
But by February 1637, bulbs were plummeting. The tulip crash, as the story is
often told, dragged the rest of the economy down with it. Tulipmania is said to
represent the classic bubble, as codified in Palgrave's Dictionary of Political
Economy (1926 edition): "Any unsound undertaking accompanied by a high
degree of speculation". As such, it is taken to be the original model of the perils
of the technology stock phenomenon.
Wrong, says Peter Garber, a global strategist with Deutsche Bank. Mr Garber is
grabbing attention on Wall Street and Silicon Alley these days with the argument
that the tulip story should be revisited. He claims that the 17th-century tulip
market, while by turns exuberant and plummeting, was far from irrational and not
"unsound" in the Palgrave sense.
It was also less destructive to the economy than generally alleged. His
argument, while tulip-focused, is an attack on the very notion of the frothy market
bubble. It is thus a striking counterpoint to the negativity of other hot scholars
such as Robert Shiller, the author of Irrational Exuberance.
Nor does the bold Mr Garber stop there; he also impugns the motives of
gloom-meisters in the press, most prominently the Financial Times. He charges
that we have used the tulip analogy and other well-known price spikes to damp
technology enthusiasm. "The wonderful tales from tulipmania are catnip," he
says, "irresistible to those with a taste for crying bubble."
Fighting words, indeed. So what is the substance of Mr Garber's argument?
Fortunately, he has laid out his attack in a book called Famous First Bubbles:
The Fundamentals of Early Manias, which is published next month by MIT Press
- just in time, many sceptics will hope, for the author to be humiliated by a stock
market crash.
He starts by challenging the assumption that tulip prices were unreasonably
high or, to put it in modern lingo, out of line with the fundamentals. He offers
several reasons why tulips in fact had high intrinsic value in the Golden Age. The
first is that the bubonic plague was sweeping the Netherlands during tulipmania.
Faced with the prospect of a rapid end, the merchant class put a premium price
on pleasure. Their chosen pleasure was to possess the rare flower.
Mr Garber's second value argument stems from botany. The unusual beauty of
the multicoloured and feathered tulip so prized by the Dutch was due to the
Mosaic virus, which attacks the bulb and causes its flower to break into patterns.
But Mosaic also reduces plant reproduction - in economic terms, it shifts the
supply curve. Meanwhile, the ever-powerful force of fashion maintained strong
demand. "In France," he notes, "it became fashionable for women to array
quantities of fresh tulips at the top of their gowns" and prices rose
commensurately. In short, tulips were the pashmina scarves of their day.
The author next assails the old certainty that tulips crashed precipitously.
Tulipmania historians have long alleged that prices dropped by 90 per cent. But
Mr Garber points out that the original document that gave rise to this claim, a
1637 paper issued by a group of Dutch florists, refers to a settlement price for
forward contracts on bulbs, a very different thing from the price of the bulb itself.
Moreover, his research shows that the fall in the tulip price may have been more
of an orderly contraction than a rout. Tulips, hyacinths and other rarities
continued to sell well after 1637 (Mr Garber's hyacinth detour is not to be
missed). He notes that the principal chronicler of tulipmania, Charles Mackay,
relied on prices dating 50 years after the spike to document the crash, too long a
period to demonstrate the sudden death we associate with tulipmania.
As for tulip bulbs fetching the price of a house, it was not unique to the 17th
century. Figures from the Haarlem Bloembollencentrum show that "a small
quantity of prototype lily bulbs" fetched $480,000 - or the price of a house - in
1987.
Most interestingly of all, Mr Garber takes on the theory that the drop in tulip prices
generated great economic distress. After poring over documents with the aid of
Dutch-speakers, he concludes that there was scant sign of general collapse.
The Netherlands of the mid-17th century actually enjoyed a powerful spurt of
growth, something that Charles Kindleberger, one of Mr Garber's more
prestigious targets, concedes in his book on the topic.
If the parallel holds, then a crash in technology shares need not bring down
other markets with it; "e-Street" is not Wall Street, let alone Main Street. It is a
useful insight at a time when investors from Frankfurt to Tokyo hang nervously on
the Nasdaq's every blip.
But this column cannot close without addressing Mr Garber's hurtful assaults on
the media. The question of whether journalists are natural bears is a good one.
It is true that we are wary of seeming to "puff" markets, since blame for those
markets' collapse will doubtless be laid at our door.
Mr Garber's accusation of pessimism may be exaggerated. My own database
hunt finds a mere 14 references to tulipmania in the FT archive. By contrast, new
economy - a bullish phrase if there ever was one - pops up 99 times in story
headlines alone. But this does not detract from Mr Garber's arguments, which
ought to resonate in coming months, whatever the Nasdaq does.
Mr. Garber's "Famous First Bubbles" is but one of several books on tulip mania
published lately.
For the more historically inclined there is: "Tulipomania: The Story of the World's
Most Coveted Flower and the Extraordinary Passions it Aroused" by Mike Dash
(Crown). Those who prefer fiction may enjoy "Tulip Fever," by Deborah Moggach.
www.amazon.com
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