I’ve been reading Charles Mackay’s 1841/1852 book Memoirs of Extraordinary Popular Delusions and the Madness of Crowds (Noonday Press, 1932), on the recommendation of a friend. It chronicles, in entertaining, anecdotal fashion, a variety of popular crazes that took place throughout European history, including alchemy, animal magnetism, the Crusades, and witch hunting. (The Crusades had a real justification, but that is a topic for another time.) It is most admired by economists for its accounts of three famous economic “bubbles.” The first is the Mississippi Bubble that took place in France in 1719-1720, a consequence of out-of-control speculation on the French colony in Louisiana under policies orchestrated by John Law, Scottish economist and Controller General of Finances under the French regent, Philippe d’Orléans. The second is the South-Sea Bubble, which happened in Britain at almost the same time, also bursting in 1720. This was the result of speculation on the South Sea Company, which had been permitted by Parliament to take on the national debt. The third is the Dutch “Tulipomania,” a collective frenzy of investment in tulip bulbs that fell apart in 1636-37, and is known as the first recorded economic bubble.
In reading the history of nations, we find that, like individuals, they have their whims and their peculiarities; their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first. We see one nation suddenly seized, from its highest to its lowest members, with a fierce desire of military glory; another as suddenly becoming crazed upon a religious scruple, and neither of them recovering its senses until it has shed rivers of blood and sowed a harvest of groans and tears, to be reaped by its posterity. (p. xix)
The book emphasizes the moral damage that accrues to a society that becomes obsessed with obtaining something for nothing: order breaks down, the low become puffed up while the high debase themselves, and crime and immorality become the order of the day. Robert Walpole fervently opposed the scheme of the South Sea directors to take on the debt:
He warned them, in eloquent and solemn language, of the evils that would ensue. [The bill] countenanced, he said, “the dangerous practice of stock-jobbing, and would divert the genius of the nation from trade and industry. It would hold out a dangerous lure to decoy the unwary to their ruin, by making them part with the earnings of their labour for a prospect of imaginary wealth. The great principle of the project was an evil of first-rate magnitude; it was to raise artificially the value of the stock, by exciting and keeping up a general infatuation, and by promising dividends out of funds which could never be adequate to the purpose.” In a prophetic spirit he added, that if the plan succeeded, the directors would become masters of the government, form a new and absolute aristocracy in the kingdom, and control the resolutions of the legislature. If it failed, which he was convinced it would, the result would bring general discontent and ruin upon the country. Such would be the delusion, that when the evil day came, as come it would, the people would start up, as from a dream, and ask themselves if these things could have been true…. (p. 50)
As for the “Tulipomania,” who can forget the story of the Englishman who inadvertently destroyed a precious tulip bulb?
This gentleman, an amateur botanist, happened to see a tulip-root lying in the conservatory of a wealthy Dutchman. Being ignorant of its quality, he took out his penknife, and peeled off its coats, with the view of making experiments upon it…Suddenly the owner pounced upon him, and, with fury in his eyes, asked him if he knew what he had been doing? “Peeling a most extraordinary onion,” replied the philosopher. “Hundert tausend duyvel!” said the Dutchman; “it’s an Admiral Van der Eyck.” “Thank you,” replied the traveller, taking out his note-book to make a memorandum of the same; “are these admirals common in your country?” “Death and the devil,” said the Dutchman, seizing the astonished man of science by the collar; “come before the syndic, and you shall see”….When brought into the presence of the magistrate, he learned, to his consternation, that the root upon which he had been experimentalizing was worth four thousand florins; and, notwithstanding all he could urge in extenuation, he was lodged in prison until he found securities for the payment of this sum. (p. 93)
According to Wikipedia, the Tulip Mania may not have been a true bubble and may not have been anywhere near the scale described by Mackay. Mackay’s notion of popular delusion creates its own bias towards exaggerating the madness of crowds. In any case, this book is at once droll entertainment and a salutary warning for our own time. Economic bubbles in themselves are a real enough threat, but we have many, many more layers of delusion that we’ll need to unpeel, like that tulip-root, before we can get to the root causes of the wreck that’s been made of our society.