Email   Print

The need for tulips

Jurriaan Kamp, Editor-in-Chief.

Photo: Christopher Lucas

The very first recorded investment bubble had to do with tulips in the Netherlands in the 17th century. At the time, new tulip varieties were traded at prices 20 times higher than the annual income of a skilled craftsman. In one story, someone even bought a special tulip bulb with 12 acres of land. The bubble burst, as they’ve done so many times since.

We tend to think bubbles are wrong. But they serve an important purpose. They finance creativity, opportunities and economic growth. The tulip mania of the Dutch Golden Age brought the development of many extraordinarily beautiful flowers. In the 19th century, many people made—and subsequently lost—a lot of money building the railways that provided the necessary infrastructure for the Industrial Revolution. Without the railway bubble, there wouldn’t have been an Industrial Revolution. More recently, we experienced the Internet bubble that imploded in 2000. Again many people lost a lot of money after others made fortunes. Yet the bubble laid the foundations for the digital infrastructure driving today’s economy.

For the past few months, we’ve seen a new bubble bursting. It looks like the same story all over again. But it isn’t. First of all, the losses are much bigger than during the Internet bust. The housing crisis threatens the very roots of the international financial system. But there’s something else: It isn’t so clear what upside this bubble has served. Granted, more Americans than ever own their own homes. But the rise in home ownership over the past decade hasn’t been so big, perhaps a few percentage points. That rise doesn’t explain the huge amounts of money now being lost.

The housing bubble is a consumption bubble. Americans have borrowed $1 trillion more than they earned over the past 10 years. And they spent that money. Not on railways, digital infrastructure or, for that matter, renewable energy projects. No, they spent it on consumer goods, most of which have, well, been consumed by now. So the tragedy of the current bubble is that after the dust has settled and balance has been restored in the market, there isn’t much to celebrate. The party is simply over.

It’s interesting—and scary—to note how much creativity and intelligence has gone into making money with money instead of making money with new, meaningful goods and services. Maybe history will record the present bubble as the ultimate example of what greed may ruin. Money manager Woody Tasch argues the case for Slow Money in this issue. Tasch wants to “bind” money again, not so much to the gold standard of the past but to the soil. Investments should benefit the Earth on which we live. In his perspective, that’s the missing connection between the individual and the objective of a sustainable planet (see the story on page 26). It’s a fresh message that comes at the right time. And it brings us full circle: Tasch would certainly favor investing in tulips.

P.S. Please visit my blog at odemagazine.com/jurriaankamp for an “intelligently optimistic” take on the news.