The Past Speaks

Tulipmania didn’t exist, at least not in the fashion you think it does.

That’s the argument of Anne Goldgar, Professor of Early Modern History at King’s College London. Back in 2008, Professor Goldgar  published a study that debunks many elements of the pop-history account of Tulipmania that many observers applying in discussing financial bubbles in the present.

The conventional view is that Tulipmania was the first of the many episodes in financial history in which irrational exuberance on the part of investors resulted in a bubble. Tulipmania is often referenced by those of us who question the Efficient Market Hypothesis (EMH) and the belief that financial markets always set prices correctly. Whenever people see bubbles, references to Tulipmania are sure to follow. Although I can’t find the reference right now, I believe that Warren Buffett has used the historical example of Tulipmania when speaking to investors at his annual Berkshire Hathaway conference.

The recent BitCoin bubble has, of course, see frequent invocations of Tulipmania.  As Prof. Goldgar writes:

Right now, it’s Bitcoin. But in the past we’ve had dotcom stocks, the 1929 crash, 19th-century railways and the South Sea Bubble of 1720. All these were compared by contemporaries to “tulip mania”, the Dutch financial craze for tulip bulbs in the 1630s. Bitcoin, according some sceptics, is “tulip mania 2.0”.

Prof. Goldgar argues that contrary to the convention wisdom, Tulipmania in the Netherlands did not result in a frenzy of speculation that involved large numbers of people and which inflicted long-term damage on the Dutch economy. She shows that relatively few people were involved, the inflation of asset prices was modest, and that the bursting of the bubble resulted in neither a widespread recession in the Netherlands nor a wave of suicides.

I’m not disputing the accuracy of Prof. Goldgar’s historical research, which received fairly positive reviews by other scholarly experts on the 17th century Netherlands (see here). However, I’ve noticed that her research has being press-ganged into service by hardcore libertarians, a group that includes many people who subscribe to a very hard version of the EMH and who tend to regard the market as infallible, and therefore not requiring regulation by the state. When Goldgar’s book appeared in 2008, it received a highly favourable, indeed enthusiastic review from the libertarian economist Deirdre McCloskey, who praised the book for demolishing a historical narrative used by so-called “anti-capitalist” writers. Today, the libertarian website CapX has published an article that showcases her research.

I’m left wondering why libertarians appear to be so interested in Prof. Goldgar’s research. What rhetorical purpose does citing her research actually serve? I suspect that libertarian like her research because it shows that one of the many data points used to prove the existence, and harmful social consequences, of financial bubbles didn’t really exist.