In Defense of Tulip Bubbles
I have never understood why the tulip bubble is used as an insult.
The Meme
The tulip bubble is the go-to cautionary tale about speculation. Bitcoin critics love it. “It’s tulips all over again.” The implication: speculative manias are bad, irrational, destructive, and we should know better.
But should we?
The Reality
The tulip mania was in 1636-37. Almost 400 years later, the Netherlands is still the flower capital of the world, accounting for around 60% of the global flower trade.
The capital that the bubble brought built out infrastructure and expertise that remained long after the price collapsed. Horticulture, breeding, classification, logistics, auctions, contracts, trade networks. All of it still has them ahead four centuries later.
Plus, the bubble was only among elites speculating on futures contracts. Regular people didn’t lose money. And long term, it was very good for the country.
Some cautionary tale.
The Pattern
Same story with every bubble: railroads, electricity, dotcom, Bitcoin, probably AI.
Bubbles are about price, not capabilities. The price collapses. The capabilities remain.
The railroad bubble of the 1840s bankrupted most investors. It also built the rail network that powered the industrial revolution. The dotcom bubble wiped out trillions. It also built the fibre infrastructure and web ecosystem we all use today. Every time, the same pattern. Overinvestment, crash, permanent capability gain.
The Mechanism
People invest out of conviction and/or greed. This can result in overfunding, causing accelerated infrastructure buildout, causing real productivity gains, but much less than expected in the mania phase, causing price collapse, causing most to go under. But survivors (and society) inherit fully built infrastructure.
This is just markets being markets. Intent is self-interest, but outcome is collective benefit.
Is a 2-3 year bubble in some industry where some rich people lose money worth it if your country then goes on to dominate that industry for the next few centuries? Obviously yes.
”But It’s Inefficient”
Inefficient compared to what? And based on what metric?
Central planning will tend to underbuild, too slowly, and be too fragile.
Incrementalism might be locally efficient but loses globally. You get leapfrogged.
You cannot know which ideas will win, or size the bets appropriately, or coordinate millions of actors rationally.
Markets are inefficient if your goal is minimizing wasted capital. They are the most efficient known system if your goal is discovering and deploying new capabilities quickly when outcomes are unknowable. They are the most efficient idea selection process that we have.
If you know the future, you don’t need markets. You don’t.
The Modern Problem
Maybe modern bubbles are different? The critique is that it’s all “numbers on a computer”. The capital disappears with little to show for it, unlike physical railroads.
Fair point, but I think the bigger problem is distribution of losses. In the old days, bubbles were equalising. Rich people lost most. Therefore they didn’t have as detrimental an effect on the real economy.
Today, governments step in to socialise losses via taxes, inflation, debt, and bailouts. Bailouts reward bad ideas and bad capital allocators causing misallocation of capital long term. This undermines the very idea selection process that underpins why free market capitalism works. The solution isn’t to prevent markets doing market things. It’s to stop doing bailouts and let failures fail.
There’s also a question of why “sensible” investments became unattractive. Maybe when money stopped being a store of value, people moved to the stock market, which became overvalued, so then everyone just apes into anything else. Maybe money becoming shit causes such second-order effects. That’s a whole other post.
Conclusion
Bubbles are about price, not capabilities.
The tulip bubble wasn’t a cautionary tale. It was an investment in dominance that paid off for centuries. The critics using it as a warning against Bitcoin might be accidentally making the best case for it.
Bubbles aren’t just tolerable. They’re necessary. The alternative is stagnation. I’ll take the mania.