The Economics of Tulips

When considering the overlap of tulips and economics, you might imagine it could be encapsulated in a simple Venn diagram:




or maybe at the most:


Despite these opening thoughts, tulips, and in particular, the Dutch Tulip Mania in the mid seventeenth century, can provide a useful lens through which economic bubbles can be understood.
Tulip Mania saw contract prices for bulbs of the increasingly fashionable flower inflate rapidly before the 'bubble' of interest burst and these prices crashed. This event is regarded as the first instance of a speculative bubble. Before diving into the world of tulips, I will attempt to decode some economics jargon; the term 'bubble' refers to the rapid increase in prices of a particular asset, due to the belief of speculators that these prices will continue to rise (and thus hold the potential for profit). This phenomenon highlights an element of fragility within our systems of transactions. Perhaps intuitively, a supplier can sell a product only up to the price point consumers are willing to pay. The implications of this illustrate that our interactions within markets (our decisions to buy and willingness to pay) impact the pricing decisions of suppliers; our valuation of the worth of a product or asset indirectly relates to the value determined through the monetary price. This relationship between consumers or investors and the products they are seeking to buy means that mere speculation as to an asset becoming more valuable can increase its price, this effect is amplified when increasing numbers of people, or media outlets echo these predictions. The value attached to the asset in question is no longer just its present worth to whoever owns it, but also the future potential gain for the owner.
(See below for an infographic I created explaining the rise and fall of these bubbles)

Lets see this happen with tulips:
When tulips were first brought into Europe, they were uniquely bright, and soon became associated with symbols of status in a Holland experiencing a Golden Age of growth and prosperity. The exoticism of tulips made them a luxury item and soon a market grew for selling 'futures contracts' of tulip bulbs during the dormant period of growth. The rise in popularity illustrated a shift in how much consumers were willing to pay, causing prices to rise. The nature of selling contracted rights to bulbs meant that no goods were exchanging hands, leading to the label windhandel, or wind trade. By the winter of 1636-7, bulbs were changing hands up to ten times a day, without any actual fulfilment of the contract. At a peak of Tulip Mania, buying the contracts to 40 tulip bulbs cost 100000 florins, with yearly income of labourers falling around the 200 florin mark. The devolution of tulip bulb sales from a motivation of seeking to obtain a luxury good, to purchasing the contracts in order to sell them on at a later date was ultimately unsustainable, reaching the inevitable point where those in possession of a contract struggled to find anyone willing to pay the offered price. This caused the speculative bubble to burst, requiring government intervention to mediate the fall out.
How is this story still relevant today? The process played out within an almost comical 'tulip mania' has been repeated in far more devastating contexts recently. The 2008 financial crisis had much of the same steps within the housing market. Financial repackaging of mortgage debt belonging to individuals with a high risk of being unable to make payments continued to get low risk ratings, increasing the market and popularity of this debt in packages called Collateralised Debt Obligations(read grouped debt). A combination of selling mortgages to risky individuals, selling debt using deceptive ratings, and the maintenance of persistently low interest rates led to a housing crash when numerous households defaulted (couldn't pay) on their mortgage payments, causing panic at a more grassroots level, as well as within a banking system which had been trading risky debt.
More recently, the rise in bitcoin has been described as a speculative bubble, with rapid increase in prices accompanying media get rich quick anecdotes of 'bitcoin millionaires' fuelling speculative buying.
The difficulty within speculative bubbles is predicting when they will burst, and when to get your money out, before it's too late.

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