Empirical Research: not a bubble at all!

Views of many economists differ/cross as of how to precisely define the phenomenon of a sudden price rise and fall of tulips in the 17^th century Netherlands. It is necessary to demonstrate varying definitions of the tulipmania.

Famous economist, P. M. Garber (1990), an expert in the field, describes tulipmania as an “outbursts of irrationality”, while G. A. Calvo, in The New Palgrave (1987), refers to the tulipmania “as a situation in which asset prices do not behave in ways explained by economic fundamentals”. An American economist P. A. Samuelson (1967) argued that the occurrence of such events do not necessarily impact real markets, and defines the tulipmania as “the purely financial dream world of indefinite group self-fulfillment”, whereas Shell and Stiglitz (1967) saw the tulipmania as a speculative boom.

In his research Garber (1984) considered the possibility of tulipmania due to the fact that, in 1634, the market of bulbs was increasingly filling up by unprofessional traders. Garber (1984) came to the conclusion that there were not enough data to make a solid argument, whether bubbles exist, or inflated prices are just a consequence of the crowd madness. He stated that limited, but a growing supply of some luxury good would reflect the same price change pattern as tulip bulbs.

P. M. Garber continued the research, and in his article, “First Famous Bubbles” (1990), argued that the collapse of the tulip market may have led to the economic instability in the Netherlands. He disagreed to qualify the tulipmania as a bubble; his arguments were:

-       By analysing a famous research conducted by Mackay (1852), Garber (1990) discovered misleading information: the data adopted by Mackay was incorrect (he used prices of bulbs 60-200 years after the collision of the market, which did not reflect the true picture). Moreover, he failed to conclude that price fluctuations of rare bulbs were typical to any market of rare varieties.

-        In his research, Garber (1990) succeeded to account few price depreciation rates: during the mania, after the crash and the 18^th century bulb market. By comparing it, he concluded that price fluctuations were not as sharp as it was stressed out.

-        It is frequently cited that the collapse of the tulip market significantly distressed the Dutch economy. Garber (1990) argued that there are no reliable historical sources to fully support the argument. Moreover, the period is often treated “as a golden age in Dutch development”.

A full article on Garber’s research can be accessed here.