The Calculus Diaries - Jennifer Ouellette [47]
—W. S. JEVONS
Like beauty, an object’s intrinsic value rests in the eyes of the beholder. One man’s priceless treasure is another man’s culinary delight. In seventeenth-century Holland, a hungry sailor mistook a rare tulip bulb that was on display for an onion and stole it from a local merchant. The merchant chased him down Amsterdam’s busy streets, catching up just in time to find the sailor “eating a breakfast whose cost might have regaled a whole ship’s crew for a twelvemonth.” That was the going rate for a single bulb at the height of what is now called tulip mania. Incensed, the merchant had the sailor thrown into prison for his crime.
That is one of the more outlandish anecdotes about tulip mania popularized in the nineteenth century with the publication of Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds. Today, the excesses of tulip mania are the stuff of legend, trotted out as a cautionary tale whenever economists find themselves analyzing catastrophic bubble markets.31 Modern economists dispute many details of Mackay’s account, which was based on dubious source material, but it makes for lively reading. And while the sailor’s story might not be true, it epitomizes the kind of irrational exuberance and frenzied overvaluation of assets that so often serve as harbingers of economic disaster.
How did the tulip become such a collector’s item in the first place? Holland is widely known as the land of colorful tulips, and one would think the bulbs would be a cheap commodity. But the bright bell-shaped flower is actually a relative newcomer to the country. In 1593, a Dutch botanist named Carolus Clusius returned from a trip to Constantinople with a few precious tulip bulbs and planted them in his garden, supposedly to study them for medicinal purposes. Then his neighbors broke into the garden and stole some of the bulbs, figuring—correctly—that the exotic flora would bring in a pretty penny. Thus was born the Dutch tulip trade and the onset of a collective mania that drove prices to dizzying heights.
One recorded list of items traded for a single tulip bulb included a bed, some clothing, and a thousand pounds of cheese, but prices rapidly escalated beyond such humble items. In 1624, a buyer offered 3,000 guilders (equivalent to a year’s earnings) to a man in Amsterdam in exchange for a dozen specimens of the rarest tulip, known as Semper Augustus and identifiable by its blue-black petals accented with streaks of crimson and a sprinkling of white. A sale of forty bulbs for 100,000 guilders was recorded in 1635. The most expensive bulbs were far too valuable to be planted, so instead it became the fashion among their (once) wealthy owners to display the plain bulbs—well away from the gaze of famished sailors.
Speculators were desperate to cash in on the gravy train, mortgaging whatever they could to raise capital to invest in a few “starter bulbs,” in hopes of jump-starting a lucrative business in the tulip trade. One transaction records the trade of a farmhouse in 1633 in exchange for three rare bulbs. There was even a thriving futures market for tulip bulbs, with business often being conducted in local taverns; at the height of the frenzy, one bulb changed hands ten times in a single day. But the tulip bubble burst almost as quickly as it formed. One day a buyer didn’t show up with the cash, and panic set in and spread. Within days, bulbs that had sold for staggering sums were now “worth” roughly one-hundredth of their former value.
Such are the harsh realities of supply and demand. Those Dutch tulip speculators might have benefited from a spot of calculus. (Unfortunately it hadn’t been invented yet.) The tools of calculus are particularly well suited to the financial sector, which deals heavily in rates of change: inflation, interest rates, mortgage rates, and the impact of supply