Where Does the Tulipmania Legend Come

The Dutch tulipmania, the Mississippi Bubble, the South Sea Bubble—these are always invoked with every outbreak of great financial instability. So implanted are they in our literature, that they are now used more as synonyms for financial instability than as references to the particular events themselves. Along with words such as herding and the newly popular irrational exuberance, they now dominate the policymaking, academic rhetoric, and market commentary on the crisis years of 1997, 1998, and 1999.

In general, these events are viewed as outbursts of irrationality: self-generating surges of optimism that pump up asset prices and misallocate investments and resources to such a great extent that a crash and major financial and economic distress inevitably follow. Only some bizarre self-delusion or blindness could have prevented a participant from seeing the obvious, so these episodes are called forth almost as a form of ridicule for such losers.

This book presents the fundamental history of the three famous bubbles. But it is necessary first to come to grips with the meaning of the class of words spawned by these events to understand how these events from so long ago serve the modern regulatory rhetoric. In this small introductory glossary—and I hope not too excessive a detour—I will first work through the meaning of these words and critique them. Then I will present and discuss the definition of the word bubble that can be found in the authoritative literature on the subject. Finally, I will