How an Austrian Economist Explains The Tulip Bubble

Tracy Alloway (0:09)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

So Joe, did you know I went to Amsterdam this summer?

Joe Weisenthal (0:20)

I think I recall seeing some Instagrams that look pretty awesome.

Tracy Alloway (0:26)

Well, yes, the Instagrams were awesome because it's a really gorgeous city. But I gotta say, they take flowers pretty seriously there.

Joe Weisenthal (0:35)

I'm pretty sure that's one of the things too that I remember from your Instagram. And they're sort of famous for that, just gorgeous horticulture. Is that a word?

Tracy Alloway (0:48)

Horticulture of all types, yeah. But tulips is clearly a big part of that, and Amsterdam and Holland is famous for growing varieties of tulips. And in Amsterdam, they even have a tulip museum that I actually went to.

Joe Weisenthal (1:03)

I kind of think I know where we're going with this because we're still part of our bubble series of episodes where we look at famous bubbles throughout history. And of course, you're talking about Amsterdam's tulips.

Tracy Alloway (1:17)

That's right. And we actually already teased this one in some of our previous episodes. I think I actually called it the quintessential financial bubble, which isn't entirely correct, I have to say, because although tulip mania has a reputation as one of the first ever financial asset bubbles, there are a lot of people that take issue with that description and actually say it wasn't a bubble at all, it was a rational investing behavior for the time.

Joe Weisenthal (1:46)

Yeah, it's very controversial because first of all, it is in a sort of pop culture sense, probably the quintessential bubble. Whenever you talk about another bubble, you always hear people say, oh, this is tulips all over again.

So when we talked about the beanie baby bubble on an episode a long time ago, they're like, oh, this is the new tulips. Whatever it is, people just sort of know tulips. But it is a very controversial episode throughout history. Obviously, it was prior to a lot of the financial press, so there's still a lot of examination of what really happened.

Tracy Alloway (2:20)

Yeah, and let me just lay the scene, I guess, before we dig into it. So in the 1600s, tulips became this massive thing in Holland, as we all know, and there are these famous statistics about a single rare bulb trading for the price of a whole house in Amsterdam, or one bulb being worth 12 acres of land, that sort of thing.

And when we look at it retrospectively, we think why in the world were people paying that kind of money for what was basically an ephemeral thing, right? You have the tulip, it lasts for a little while, but then eventually the flower dies, and unless you grow some more tulips out of it, it's this thing that just passes by really quickly.

Joe Weisenthal (3:01)

That's absolutely right. But you know, like, it's funny because obviously, supposedly people paid all this price for tulip bulbs, but they are really beautiful. So sometimes I wonder, is it maybe was worth it? I mean, they're really nice.

And you have to figure, like, most things didn't look very good back then, you know. 1600s, everything is sort of grimy, and life was dirty. Like, maybe it was worth it.

Tracy Alloway (3:21)

That's the romantic in you, Joe. All right, so we're actually gonna look at the tulip bubble today, but we're gonna look at it from a slightly different angle.

Never let it be said that we don't bring you something unique on the Odd Lots podcast. Today, we're actually gonna be looking at the tulip bubble from a sort of Austrian school of economics theory.

Joe Weisenthal (3:45)

This should be good. So we're taking one of the most sort of controversial bubbles and we're going to look at it through the lens of perhaps one of the most polarizing schools of economics. So I feel like that's a winning combination right there.

Tracy Alloway (4:01)

Yeah, and can I just say the Austrian school of economics is the only one that my dad, who is my barometer for all things sort of mainstream America has ever asked me about. He never asked me about Keynes or monetarism or anything like that.

Only the Austrian school of economics.

Joe Weisenthal (4:16)

I suspect he'll like this episode then.

Tracy Alloway (4:18)

Yeah, all right. With us to discuss the tulip bubble is Doug French. He is the author of a book called Early Speculative Bubbles and Increases in the Money Supply. So you can sense the Austrian school right there in the title.