Economic historyWas tulipmania irrational?

Tulipmania was not just crazy speculation

IN THE 1630s a sailor was thrown in a Dutch jail for eating what he thought was an onion. That onion was in fact a tulip bulb. The cost of the sailor’s gluttony was equivalent to the cost of feeding an entire crew for twelve months.

That story is probably not true—no sane person would leave something so valuable for an absent-minded seaman to chew on. But like much about tulipmania, the line between fact and fiction is blurred.

“Tulpenwoede” (tulip madness) resulted in big increases in tulip prices. At the beginning of 1637, some tulip contracts reached a level about 20 times the level of three months earlier. A particularly rare tulip, Semper Augustus, was priced at around 1,000 guilders in the 1620s. But just before the crash, it was valued at 5,500 guilders per bulb—roughly the cost of luxurious house in Amsterdam. Prices collapsed in February 1637—although data here are particularly poor—and a few investors were left bankrupt.

The price swings were not caused by massive changes to production costs. Nor did tulips suddenly become particularly useful. As a result, most people assume that tulipmania was the result of financial market irrationality. That idea was popularised by Charles Mackay, a mid-19thcentury Scottish writer. Most modern-day references to tulipmania draw on Mackay’s work. But economic historians provide better explanations for what happened.






It is easy to claim that bubbles are irrational. They seem to represent a deviation of prices from fundamental values—and they contradict basic economic theory. But there has been little attempt to understand how speculation actually works. The example of tulipmania shows the importance of doing that—rather than relying on lazy quips about “animal spirits” or irrationality.

Suggested reading list:

Day, C. (2004). ‘Is There a Tulip in Your Future?: Ruminations on Tulip Mania and the Innovative Dutch Futures Markets’. Journal des Economistes et des Etudes Humaines, 14(2), 151-170. [Good background to the tulipmania]

Garber, P. M. (1989). ‘Tulipmania’. Journal of Political Economy, 535-560. [Argues that tulipmania was not irrational in rare bulb trade—though confesses that the price changes to common bulbs does “defy explanation”]

Mackay, C. (2004) [1841] Extraordinary popular delusions and the madness of crowds. Barnes & Noble. [Mackay only devotes about 7 pages to the tulip mania—but his account informs most contemporary perceptions of the event]

Thompson, E. A. (2007). “The tulipmania: Fact or artifact?Public Choice, 130(1-2), 99-114. [A densely-written but precise account of what happened in tulip markets]

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