Economic bubbles do not have a good press. Alan Greenspan’s famous label of “irrational exuberance,” applied to the “bubble” in dot-com shares in the 1990s, says it all: irrational—who would be in favor of that? And exuberance—clearly the central banker’s term for “frenzy.”
In economic discourse, the term “bubble” is indeed intended to conjure up an image of a mania, a process in which a price or prices are continuously bid upward in a frenzied spiral, in which greater and greater bids are made in the confident belief that prices will be bid ever higher, that the bubble will last forever. Goods (or more accurately, titles to goods) are bought not for their intrinsic characteristics, nor for the reasonable income they might earn, but for the potential capital gain embodied in the ever-spiraling price. Anyone who fails to get on the ladder will lose out, and may reasonably fear being condemned to future penury. The bubble doesn’t simply appear to create instant wealth for some; it actually does create instant wealth, redistributing the wealth of society to those with the courage and foresight to invest in the bubble and away from the timid and short-sighted—and “the devil take the hindmost” (Allen and Gale, 1999, 2000).
The classic bubble was the great Dutch tulip mania of 1636–37, when the accelerating rise in the price of particular exotic tulip bulbs in the autumn of 1636 spread to the prices of common bulbs (Posthumus, 1929; Garber, 1989, 1990; Fridson, 1995). In the single month of January 1637, prices of ordinary tulip bulbs increased twenty times over. As the frenzy showed signs of slowing, the Dutch government anticipated the reaction