Sunday, June 8, 2008

Extraordinary Popular Delusions

Extraordinary Popular Delusions and the Madness of Crowds

Extraordinary Popular Delusions and the Madness of Crowds is a popular history of popular folly by Charles Mackay, first published in 1841. The book chronicles its targets in three parts: "National Delusions", "Peculiar Follies", and "Philosophical Delusions".
The subjects of Mackay's debunking include alchemy, beards (influence of politics and religion on), witch-hunts, crusades and duels. Present day writers on economics, such as Andrew Tobias, laud the three chapters on economic bubbles.


Among the alleged bubbles or financial manias described by Mackay is the Dutch tulip mania of the early seventeenth century. According to Mackay, during this bubble, speculators from all walks of life bought and sold tulip bulbs and even futures contracts on them. Allegedly, some tulip bulb varieties briefly became the most expensive objects in the world, until the bulbs bubble burst in 1637.
Other bubbles described by Mackay are the South Sea Company bubble of 1711–1720, and the Mississippi Company bubble of 1719–1720.
Two modern researchers, Peter Garber and Anne Goldgar, independently conclude that MacKay greatly exaggerated the scale and effects of the Tulip bubble. Mike Dash, in a footnote to his modern popular history of the alleged bubble states:
The history of the tulip mania itself, however, remains remarkably obscure, and even now it has never been the subject of an exhaustive scholarly inquiry.
....My general feeling, after reviewing the available material, is that even after sounding the necessary notes of caution about the reliability of the popular accounts, historians and particularly economists remain guilty of exaggerating the real importance and extent of the tulip mania. (p.222, footnote)
Financier Bernard Baruch credited the lessons he learned from Extraordinary Popular Delusions and the Madness of Crowds with his decision to sell all his stock ahead of the financial crash of 1929.[1]
Financial writer Michael Lewis includes the financial mania chapters in his book The Price of Everything as one of the six great works of economics, along with writings by Adam Smith, Thomas Malthus, David Ricardo, Thorstein Veblen, and John Maynard Keynes.

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