Garber’s challenge to the Dutch tulip market as a speculative bubble

Why pay a high price for an asset? The opening separates two answers. You might expect the asset to produce earnings. Or you might simply expect someone else to pay even more for it later. That second expectation drives a speculative bubble. Once buyers lose confidence that prices will keep rising, prices collapse.

The distinction is about what supports the price, not just whether the price goes up and down. Keep that definition available, because the disagreement will turn on it.

Mackay calls the seventeenth-century Dutch tulip market a speculative bubble. Garber challenges that account. My first reaction is to wonder what Garber could dispute: did the price not crash, or does he have another explanation for it? Let's see his reasoning before deciding that the familiar label settles the issue.

First we get the history. Rare varieties sold at high prices, while common ones were cheap. Think about collectibles: rarity can make one item much more desirable than an ordinary version. We shouldn't assume every tulip bulb commanded the extraordinary price given for Semper Augustus.

According to Mackay, rising prices attracted speculators, prices surged over a few months, and then they collapsed in February 1637. Eventually even prized varieties sold for a tiny fraction of the earlier peak. The exact fraction is less important than the pattern: very expensive, then dramatically cheaper.

That sounds like a bubble. But remember the definition. A rise and crash aren't the whole test; the source of the initial value matters too.

Garber doesn't deny the broad movement in prices. He says it can be explained by fundamentals—earnings the bulbs could produce. Now I'm looking for those earnings. Could an original bulb be valuable because it produces more bulbs to sell?

That's his explanation. A newly developed, fashionable variety can command a high price when it's scarce. As bulbs reproduce and become more readily available, the price of an individual bulb drops. Eventually bulbs sell at reproduction cost. The cheaper later bulbs don't necessarily show that the original purchaser made a bad investment.

The original bulb can produce many descendants. Even if each one sells cheaply, sales of a large number could yield substantial earnings. Paying a lot for the original and receiving much less for each descendant can therefore make financial sense. We need to count the many sales, not compare one purchase price with one later sale price.

This is the crucial response to my initial reaction. A dramatic decline looks like a bubble, but Garber offers a reason an early high price could reflect earning potential rather than mere hope of resale.

I still want to know what those buyers actually did. Were they producing and selling descendants, or simply holding bulbs in hopes of reselling them? The account gives Garber's explanation of how an original bulb could generate a reasonable return; it doesn't show that every purchaser recovered the investment. That is a question we can keep open without losing track of the argument being presented.

Our main-point prediction should focus on Garber's challenge to Mackay. The subject isn't merely tulips or even two economists disagreeing. Garber argues that the tulip market needn't be classified as a speculative bubble because its price pattern can be explained by fundamentals. Reporting that challenge doesn't require us—or the writer—to announce that he has conclusively proved his case.