Charles Mackay's Own Extraordinary Popular Delusions and the Railway Mania

Abstract

Charles Mackay's book "Extraordinary Popular Delusions and the Madness of Crowds" enjoys extraordinarily high renown in the financial industry and among the press and the public. It also has an extraordinarily low reputation among historians.

This paper argues that Mackay's sins of commission were dwarfed by his sins of omission. He lived through several giant investment manias in Britain, yet he did not discuss them in his books. An investigation of Mackay's newspaper writings shows that he was one of the most ardent cheerleaders for the Railway Mania, the greatest and most destructive of these episodes of extreme investor exuberance.

Mackay's story provides another example of a renowned expert on bubbles who decides that "this time is different." His moves through a sequence of delusions help explain the length and damage of the Railway Mania. He was a free market and technology enthusiast, and faced many issues that are important today, such as government ownership or regulation, interconnection, standardization, structural separation, and analogs to net neutrality. A crushing national debt and high unemployment in an economy pulling out of a deep depression (and in perceived danger of falling into another one) were very important in shaping attitudes towards railway expansion. The analogies and contrasts between Mackay's time and ours are instructive.

Keywords: Railway Mania, bubbles, market inefficiency, extraordinary popular delusions

JEL Classification: E27, E37, E44, G10, L92, N23, N73, O16, O33, O38, R42