The Tulip Economy
Posted on August 7, 2012
The study of economics, and finance is centralized on the theory of rational behaviour. For the most part economist believe that people are rational beings who respond rationally to economic principles such as scarcity, surplus, and elasticity. For the most part, we may very well be rational; however every odd moon or so we seem to let an economic pandemonium strike. For some reason, be it fear of missing out or what not, we seem to let our irrational impulses drive the economy.
The cyclical natural of economic boom and bust has been a driving factor in the economy for the past X many centuries. The first recorded incident of an Economic Bubble took place in the 163o’s, in the Netherlands. Tulip Mania, was a time in the Dutch Golden Age during which the prices for tulip bulbs reached extraordinary and sustainably high prices, followed by a sudden collapse.
Tulips were introduced to Europe in the mid 1500’s, the flower with its intense petal color was different from ever other common european flower. Tulips were a status symbol, that quickly became a coveted and desired item of luxury. Tulip Mania reached its peak in the winter of 1936-1937, during this period it is reported that tulip bulbs reportedly changed hands up to 10 time a day with the price of tulip bulb exceeding that of 10 times the average annual income of craft mans. At the height of the tulip bubble, one bulb could sell for that of an Amsterdam Town House.
In February of 1937, the tulip trade came to an abrupt halt. Buyers refused to pay the enormous sums requested for the prized bulk. Demand seized. Sellers were left holding unwanted and costly tulip bulbs. With in days, much like the 2008 mortgage crisis, the bulbs were worthless and the economy of Netherlands was depressed. Rumor has it that it took nearly 200 years for the Dutch Economy to recover from Tulip Mania. Demand was created and hyper inflated to an unrealistic and unsustainable level.
Of course in times of economic boom, there is money to made: money to be lost. Demand is elastic, and constantly changing. Capital costs need to covered. The lesson I learned from Tulip Mania, is regardless of want or societal demand frenzy one must ask themselves the true cost of an item for purchase. Do I need the tulip, or do I simply want be cause every one else seems to be investing in tulips?
I’ve learned that often what produces the greatest good, often goes against the grain of societal frenzies.