Tim Worstall looks at some historical manias and explains how even the maddest of them can yield long-term economic benefits (to society as a whole, if not to individual maniacs):
The UK’s railway mania, the tulip bubble, the dot com boom and other collective economic madness – such as bitcoin – might lose people a lot of money, but they often lay down important foundations
Bitcoin is, of course, a mania – a delusion of the sort that human societies are prone to. This is fighting talk from someone who declared in 2011 that bitcoin was all over. Being wrong is not interesting – it is rare things which are interesting, not common ones – but the psychology and economics here are important.
The classic text on this topic is Charles McKay’s Extraordinary popular delusions and the madness of crowds. Human societies are prone to manias which seem to defy any sense or reasonableness. Certainly markets can be so overcome, although the witch burnings show that it’s not purely an economic phenomenon.
The South Sea Bubble, Tulip mania, railway shares, the dotcom boom and now bitcoin are all part of that same psychological failing of not recognising that prices can and will fall as well as rise. That is the classical interpretation of the McKay book and observation, but modern studies take a more nuanced view.
South Sea and the Mississippi Company bubble were simply speculative frenzies, but the tulip story – while appearing very similar – can be read another way.
It is still true, for example, that a few sheds near Schipol, just outside Amsterdam, are the centre of the world’s trade in cut flowers – the result of that historical episode where a single tulip bulb became worth more than a year’s wages.
We can, and some do, take tourist trips to see the fields of those very tulips today. Modern researchers point out that the tulip was near unknown in Europe, the first examples only just having arrived from Turkey.
The art of cross-pollinating tulips to gain desirable characteristics was only just becoming generally known, and Europe was reaching a stage of wealth where the purely ornamental was becoming valuable.
Yes, the speculation in prices was ludicrous – although the weird stuff was in futures and options markets, not the physical trade, and the absurd prices never actually happened – but the end result of the frenzy was still that the tulip and flower market became and is centred in The Netherlands.
