What is it about?
Advancing the theory of sequestered capital, this article provides the first ever explanation of the timing of the Tulipmania boom, in 1636, and bust, in 1637. Underground planting of the tulip bulbs in 1636 sequestered planted quantities and development of future yields. The price boom coincided with mid November planting in 1636. The bust in futures-contract prices occurred in the first week of February 1637, coinciding with bulb sprouting which signaled bulb quantities and future yields. What happened was no "mania;" rather the prices of futures contracts rose due capital sequestration and corrected as information about future yield emerged.
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Why is it important?
For hundreds of years, Tulipmania has be held up as an example of the irrationality of market participants and hence the unreliability of the free market price system. This article not only provides a rational explanation, it provides the only extant explanation of the timing of this historic boom and bust.
Perspectives
In 2016, my co-author, the late David Chandler Thomas (1954-2021), and I discovered a lacuna in the Austrian-school's theory of capital. This lacuna we termed "sequestered capital." It is capital under development that does not inform market price so long as it development is unobservable by market participants. Without an understanding of sequestered capital, Austrian business cycle theory has been, like irrational exuberance stories about financial crises, unable to say anything definitive about the time at which boom turns to bust. With sequestered capital in play however, Austrian capital theory provides insights into this timing.
James E McClure
Ball State University
Read the Original
This page is a summary of: Explaining the timing of tulipmania's boom and bust: historical context, sequestered capital and market signals, Financial History Review, August 2017, Cambridge University Press,
DOI: 10.1017/s0968565017000154.
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