Flower Power: The Lessons
An article in the financial section of the New York Observer this spring described a company named NetJ.com Corporation. NetJ.com has no business operations, no revenue and no assets to speak of. To quote its business plan, filed with the Securities and Exchange Commission, "the company is not currently engaged in any substantial business activity and has no plans to engage in any such activity in the foreseeable future." This would seem to render NetJ.com worthless. Yet in February, it was capitalized at $22.9 million.
Despite the Nasdaq's recent gyrations, a market like this one can't help but bring to mind tulipmania, the brief period of fantastic speculation in tulip bulbs in seventeenth-century Holland. Ever since Charles Mackay wrote his 1841 classic, Extraordinary Popular Delusions and the Madness of Crowds, tulipmania has been a potent symbol of the euphoric irrationality of financial speculation. According to Mackay, in the late 1630s a single tulip bulb in the Netherlands might be sold for a price equivalent to that for four oxen. The high point of Mackay's story is the anecdote of a sailor who breakfasted upon what he believed to be an ordinary onion: "Little did he dream that he had been eating a breakfast whose cost might have regaled a whole ship's crew for a twelvemonth."
But Mackay wrote back in those old-fashioned days, when people believed that markets might be speculative, something other than arbiters of perfect truth and rationality. Today, trendy academics like to say that the tulip craze wasn't a bubble at all. In a paper published in 1989, economist Peter Garber argued that the dramatic increase in bulb prices simply reflected the great demand for rare varieties of the bulb. As the flowers multiplied, their price fell. The best-known bubble in history turns out to have been a rational response to fundamentals, after all. (Even Garber, though, was stumped by the twentyfold price increase for common varieties of tulip in the month before the crash; he conceded that this might not have been completely rational--but when you're an economist, it's the model, not the data, that counts.)
Now there's a new history of tulipmania to go with today's sky-high market. Tulipomania, by Mike Dash, retells yet again the story of the flower craze, emphasizing the economic context of the bubble and its effects on Dutch society and culture. Perhaps the strangest thing about this book is what it doesn't talk about: Clearly it's supposed to provide insight into the stock-market boom of the past decade, yet Dash scrupulously avoids saying anything direct about the Dow Jones, preferring instead to expound upon the finer points of tulip cultivation. Still, it's a colorful description of one of the oddest periods of financial history. And while Dash doesn't comment directly on financial euphoria today--wouldn't want to alarm anyone!--if one reads between the lines, Tulipomania offers its own sly commentary on contemporary market fever.
* * *
For one thing, Dash attributes the tulip craze to inexperienced investors crowding into the market--not unlike today's day traders. Tulipmania exploded in 1636, during an economic boom in the Netherlands. But despite economic growth, artisans and laborers found themselves barely eking out a decent living, unable to cash in. For these humble sorts, the tulip market offered an irresistible temptation. "Growing bulbs was a lot easier than working an eighty-hour week hammering horseshoes or working a loom," writes Dash. Many of the people growing and selling bulbs were new to the flower business altogether and had little experience in the financial markets. At the same time, speculative financial instruments--like the futures market--were just coming into existence. One can almost hear Alan Greenspan's anxious sigh as Dash describes these novices to the market.
In a sense, Dash uses tulipmania to legitimize "normal" financial activity in the early seventeenth century, much as the recent flick Boiler Room told a parable of cheating bucket shops to demonstrate the virtues of real brokerages. Dash suggests that the tulip market was a "rough but intended parody" of the newly built beurs--the legitimate Amsterdam stock market. Tulips were more frequently traded in raucous pubs (substitute: chat rooms) than in the calm halls of the beurs. Instead of being staffed by experienced bankers or people who understood the complexity of financial markets, the tulip market was dominated by "country people and poor city dwellers who had, when they started dealing in bulbs, almost certainly never owned a single share in their entire lives."