Was it a bubble or not after all?

Previously hardly ever mentioned tulipmania was brought back into the picture in 1950s, after the capital theory development and detection of unsteady asset prices. Experiential irregularities in a finance field are believed to be the first ones that referenced tulipmania as a bubble.

A.Maurits van der Veen (2009) believes the tulipmania must indeed be classified as a bubble. His main arguments were: the sharp increase in price (from only a few to a few hundred guilders), and, social networks. Maurits (2009) claims that any attempt to research the phenomena is, to some extent, imprecise: there is no reliable source of information - some of it is taken from a painting book with no exact prices or dates, the use of different measures (some sold in units, some in bulk) did not reflect values.

The bubble argument can be supported by his theory of social networks. Maurits (2009) believe traders not entirely bought and sold bulbs depending on their private information, but because they were interconnected by trade or friendships, it allowed them to base their decisions taking into account actions of other traders. It implies that dealers rationally may disregard their own private information and pay too much attention to others, when judging the demand and supply of the market, hence stimulating  the emergence of the bubble.

Maurits (2009) argued the tulipmania can be “qualified as a bubble, in a sense that prices were not sustained by a private estimation of value”. He also suggested some lessons to learn from the tulip bubble: “the lessons to be drawn from the bubble are less about a spectacular rise in prices followed by a collapse, and more about the social structures within which the market is embedded”. For instance, the rating agency Moody’s disappointed its customers and destroyed a long built trust (which was delivered through reliable ruling) by providing false credit ratings. His arguments can also be backed up by Madoff investment scandal, and a subprime mortgage crisis.

Maurits (2009) stated that a central message arose from the tulip bubble which can be associated with current financial crises:

“The tulip bubble continues to be relevant, then, not because it shows that there have always been people willing to pay many times what something is fundamentally worth, but because it demonstrates that such people tend to be social fools rather than economic idiots”

Full article on Maurits (2009) research can be found here.

Some economists disagree to consider the tulipmania as a bubble, since it lasted a short period of time, but rather cite it as a consequence of irrational behaviour. I agree with Maurits (2009) point of view. Even though some argue that only increase in asset prices over the long-run followed by a sharp fall can be qualified as a bubble (the tulipmania does not qualify it), did it never appear to anyone that it might be due to the fact it was the first bubble ever?

The history repeats itself, and it has been proven by all the crises humanity lived through: the Mississippi bubble (1719-20), Railway Mania (1844-47), the Great Depression (1930s), the Dot-com bubble (1990s), the Credit Crunch (2007), and who knows how many more there will be. The main lesson to learn for all the countries is not to ignore the past, but try to build a safer future. To sum up, I found this great video which shows how the tulip bubble relates to nowadays, and why it should be a matter of interest. You can watch it here:

The tulipmania, for one can sound like a silly fairytale, for the other the most important piece in a tricky financial world puzzle, judge yourself, I agree to disagree.