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Making of the New Economy:
TulipMania, Dotcoms and Thereafter Madhukar Shukla (April 16th, 2001) In the 17th
century Holland was gripped by a bizarre frenzy of market speculation. The item
of trade were the tulip bulbs - a rare commodity at that time. So pervasive was
this "get rich quick" greed, that the rich, the aristocrats, the
knaves, the craftsmen, the inn keepers, the peasants - people from all walks of professions - got infected by it. …and then in 1937, the
market crashed, leaving thousands pauper and bankrupt. This story of, what has come
to be known as, Tulipmania is very much reminiscent of the recent dotcom
mania, and rush for tech stocks. Countless articles in recent times (try any
search engine) have drawn parallel between the New Economy "bubble"
(!!!) and this footnote from the history. The similarities are remarkable, and
it is worth learning one's lessons from the history. The obvious - and popular -
lesson, of course, is that what goes up too quickly also comes down as easily,
that bubbles burst, that business can survive only on the
"fundamentals" not on speculative trading… Perhaps, true. But
there are other lessons too, which are far more critical than these obvious
ones. There are two facts that
make this story interesting and curious: ·
Tulips
are inherently and historically alien to Holland. They are neither the local
produce of the region, nor the local climatic conditions are suited for their
cultivation (even now), and ·
Tulips
have no intrinsic value: the period
when Tulipmania gripped the country was when plants and flowers were cultivated
for their medicinal or herbal properties. Tulips have neither. But let us first look at
what the Tulipmania was, and how it got created. Though Holland is now known
for tulips, surprisingly, they are not the natural produce of the region.
Tulips grow on high altitudes, and are native to the snowy mountainous regions
of Central Asia (Tien-Shan, the Pamir Alai Mountain ranges, and the Ajerbaijan
and Armenian regions). In fact, the name "tulip" comes from Persian
"toliban", meaning the turban. It was from these regions that they
spread to far-flung places, and reached Europe through the court of Turkish
Ottoman Empire. The Turks had started
cultivating these flowers as long back as 1000AD, but the flower were primarily
meant for the pleasure of the Sultan and his entourage. During that period in
Persia, tulips symbolized wealth, prestige and prosperity, and were apparently
not for the consumption of peasantry. Tulips formed a design motif for
ceramics, architecture, fabrics, and other decorations. Turks had strict laws
on cultivation and sale of tulips. For instance, during the reign of Sultan
Ahmed III, buying and selling of tulips outside the capital was forbidden, and
was a crime punishable by exile. Tulips reached Holland in
1593, when Prefect Carolus Clusius, who used to be head the Royal Medicinal
Gardens in Prague and Vienna, sought religious sanctuary in Amsterdam. Clusius
was a renowned and ardent botanist of his time, and a protestant by belief (it
was because of his religious beliefs that he had to fled to a more tolerant
country like Netherlands). In Holland, he was appointed
the curator of the Leiden botanical gardens, which was the first botanical
garden in the Western Europe. Among the collection brought by Clusius were the
tulip bulbs (as the story goes, the tulip seeds were originally given to him by
De Busbecq, a Flemish ambassador to the court of Sultan Suleiman in
Constantinople, the seat of Ottoman Empire). Clusius' interest in tulips
was purely scientific, but for the local populace these brightly colored
flowers were becoming a curiosity. With typical Dutch instinct for cultivation
and business, many saw an opportunity to make money here, and offered to buy
tulip bulbs from him. But Clusius was rather possessive of his scientific
specimens, and refused to part with the bulbs. Clusius' refusal was perhaps
also rooted in his professional pride in cultivating the tulips. Grown from the
seeds, tulips take seven years to produce a flowering bulb. And Clusius had
cultivated his tulips from seeds. Bulbs, on the other hand, provide a quick
substitute for cultivation. It is but natural that a true master will not let
his toil pass on to plebian mercenaries. In any case, faced with such
stubbornness, it was but natural that one night some prospective buyers broke
into Clusius' garden and stole some of the tulip bulbs. Clusius was so
disgusted by this act, that he gave up dealing with tulips, and never
cultivated them again. However, 'freed' from the botanical gardens, from then
on, the cultivation of tulips began slowly and surely in private small gardens
around the cities of Leiden and Haarlem. And thus, the foundations of the Dutch
tulip industry were created through an act of burglary. The first tulips were a
rarity, and only the wealthy could afford these beautiful flowers. The rich
clamored after them, and tulips soon became a status symbol. The concept of
tulip farming was still unknown, and tulips were grown by planting individual
bulbs in the "renaissance style" gardens of the day. As the
popularity of tulips grew, the demand started outpacing the supply, and the
price of tulips started shooting up. The Tulipmania Till 1630, tulips were grown
and traded among a handful of rich connoisseurs. But soon some entrepreneurial
people noticed an opportunity to make quick money in these transactions. What
further fuelled this craze were the "Rambrandt-type"
"broken" tulips. "Breaking" of tulips was a curious
phenomenon of the flowers breaking into vivid and solid flames and stripes of
different colors, giving the flowers a unique look and beauty. These were
unusual flowers, since they could not be bred. Out of a hundred of flowers bred
from identical bulbs, only two or three would "break" (of course, it wasn't know at that time that
the "breaking" of tulips was dues to a viral infection; such tulips
are banned now, though cultivators have since perfected the techniques of
hybridization, which gives similar two-colored tulips). Soon trading of tulip bulbs
became a business by itself. The increasing demand for the flowers fuelled a
speculative frenzy in tulip bulbs very similar to what we have seen in dotcoms
and techstock in the recent years. Not only the rich and aristocrats, but
almost the entire Dutch community - knaves, artisans, peasants, innkeepers -
became obsessed with this new "business". They left their jobs,
trades, wives, lovers and became tulip grower and speculators
("florists" or "blommists", as they came to be known). The
prices of tulip soared. Records show that single bulbs were sold for as much as
3,000 guilders (around US$1,500), or in terms of what it meant at that time,
equivalent to: ü 2 loads of wheat ü 4 loads of rye ü 4 fat oxen ü 5 swine ü 12 sheep ü 2 hogsheads of wine ü 4 barrels of beer ü 2 barrels of butter ü 1,000 pounds of cheese ü 1 complete bed ü 1 suit of clothes ü 1 silver tankard ü
...and
a sizeable wagon to haul it all away! Initially, the buying and
selling involved real and actual tulip bulbs, but soon new and more speculative
systems of trading evolved and replaced the business transactions. There were
three factors that contributed to the building up a speculative market (again,
the parallels with the dotcoms /tech-stocks market are glaring): ·
Firstly,
as the demand for tulips increased, the valuation criterion of tulip bulbs
changed. Till 1620s, tulips were sold by bulbs, but by 1634, people started
selling tulip bulbs by weight. Now, all the investor had to do was to plant a
few bulbs, and speculate on its future weight. ·
Secondly,
the popularity - and rarity - for the "broken" tulips built up a
speculative market (after all, who knew if the tulip would break or not). A
broken tulip could be sold for as much as equivalent to the price of a house in
Amsterdam (or equivalent to 15 years of wages for an average brick layer). ·
And
lastly, since tulips bloom only from July to November, a system of "wind
trading" got evolved; a notarized bill would be issued for transactions of
bulbs which were still below the soil surface - in fact, a number of
transactions would have taken place by the time tulip actually bloomed -
sometimes without tulip ever changing hands. It was enough to show a piece of
paper attesting the ownership of bulb to sell it at a higher price - without
producing the actual bulb. Soon, tulips became a
currency by themselves. During the peak of Tulipmania (1634-37), their value
changed from day to day, and prices were quoted like shares and stock (the term
"bourse" has its origin from the fact that the speculators held their
meetings in the house of the noble family of Von Bourse). …and then the
"bubble" burst And then, in 1937 the market
crashed, when a group of sellers could not get the prices they wanted. In a
bout of panic selling, the price structure of tulips collapsed overnight.
Suddenly people came to their senses and realized the artificiality of tulip
prices. On April 27, 1637, an official decree was issued declaring that the
sale and purchase of tulip bulbs was to be conducted in the same way as any
other business. Speculations ceased, leaving thousands of people pauper and
bankrupt. The Lessons So what are the lessons?
Most accounts of the Tulipmania end with the market crash. The story is used as
a reminder about how the "bubbles" so to say burst, how the markets
don't run on sentiments, and how rationality eventually overtakes frenzy.
Parallels are also drawn with the stock market crash of 1929, South Sea Bubble,
and the like. True, the did bubble burst,
markets regained their sensibilities, and the rationalists had the last laugh.
But let us also look at what happened thereafter, for that is where the
real lessons lie. For one, even when the
Tulipmania was supposed to have passed, the prices of tulip bulbs never really
came down drastically (even in 1640s, a "broken" tulip bulb would
fetch as much as 1,200 guilders, or about US$600). Moreover, even if in the
short-term, Tulipmania was a great fiasco and anticlimax, in the long run it
was the forerunner of major societal - business, economic, cultural, and technology
- transformations. After all, once thhe bubble burst, and the party got over,
people did not just go back home and started living as if nothing had changed.
For instance: ·
It
gave birth to whole new industry in Holland (and Europe). In spite of not having
either the right kind of terrain or climate, Holland has emerged as the largest
producer of flowers (not just tulips) in the world. Today, nearly half of
Holland's 47,150 acres flower bulb farmland is used for growing tulips. The
country produces nearly 3 billion tulips annually, and exports two-third out of
these. And world's largest auction house for flowers is also situated in
Amsterdam. ·
It
gave rise to new technologies of hybridisation and cross-breeding. Over a
period of time, cultivation of "broken" tulips was banned, when it
was found that they were actually infected by a virus. However, since such
bi-colored, flamed and striped tulips were in great demand, the cultivators
cross-bred tulips to come up with genetically-stable "look-alikes"
hybrids, e.g., red-and-yellow 'Keizerkroon' (introduced
in 1750), red-and-white 'Cordell Hull' (1933) and maroon-and-white
'Vlammenspel' (1941), etc. ·
Given the natural proclivity of tulips to
grow on high and cold mountainous regions, it is remarkable what the demand for
tulips did for the Dutch cultivation technology. For a country situated below
sea level, and where the winters are more wet than cold, growing tulips
required major innovations. The Dutch, over a period, invented systems that
provide winter soil drainage. In the coastal bulb growing regions, one can see
the farms surrounded by drainage ditches with quickly draw surplus water from
the field, and flow it to the sea through the canals. These innovations helped
not only the cultivation of tulips, but also of many other crops (e.g., potato,
corn, tobacco, tomato, etc.) which were just gaining a foothold in the region.
The agricultural gains from these innovations actually far acceded the cost of
the Tulipmania. ·
The
Tulipmania also had its impact on the culture and art of the country. In those
days, the craze for tulips was so strong, that its motifs found their way into
cultural forms (and those who could not grow tulips made a living out of making
art, furniture, embroidery, and ceramics featuring tulips. Records also show
that many tulip watercolour painting of that period were actually catalogues
for tempting the buyers. In many ways, the other
"bubbles" also show similar long-term transformations. The bull run
of 1925-29 in the US stock market, for instance, did lead to market crash. But
it also represents a period when the general public was made accessible to the
stock market. Similarly, the crazy
scheme of John Law in the 18th century - commonly remembered as the Mississippi
Bubble - was a grand failure, and plunged France and Europe in severe
economic crisis; but was a also a precursor of the "new economy"
which worked on paper currency, and acted as a stimulant to overseas trade… the
list can go on. Emergence of New Paradigms The point is that these
frenzied periods in the history are the 'inflection points' when new new
paradigms (new markets, new industries, new businesses) emerge, and as the
systems theory points out: the long term states of a complex system cannot
be predicted from the short-term behavior of the system. Perhaps an example from
human body would clarify: Consider our immune system.
It is an amazing and mysterious system, which has the ability to find out
solutions, generate antibodies and fight new viruses. What makes it amazing in
its ability to generate new solutions is that it can generate antibodies for
not only those viruses that are stored in its memory, but even for those
which it has never encountered earlier. How does it do it? By going in for the same
kind of frenzy as these "bubbles" describe. Once the immune system
detects a foreign body (bacteria, virus, toxins, parasites) in the system, it
goes into a massive experimentation of producing various permutations and
combinations of antibodies based on the patterns (not specific solutions) that
it retains in its memory. Most of these antibodies are a failure - in fact,
most are harmful to our organism (that's why get the fever) - but that's the
only way in which the immune system can find the "solution that never existed
earlier." Once having found the
solution/right antibody, the infection is fought off, and the new pattern is
retained in the systems' memory for future use (well, this is what happens in
all inoculations we get in the childhood). In the process, the immune system
also gets transformed. Now, if you put ·
"new
opportunity" instead of "foreign body"; ·
"economy"
instead of "immune system"; ·
"entrepreneurs/speculators"
instead of "antibodies"; and ·
"new
economy " instead of "new antibody"... the picture is complete.
isn't it? ***** |
