Chaos in the Markets - Moral, Legal & Economic Signals in Three Fantastic Bubbles

42 Pages Posted: 3 Aug 2004

See all articles by Christian C. Day

Christian C. Day

Syracuse University - College of Law

Date Written: June 14, 2004

Abstract

Markets are sometimes accused of "irrational exuberance." Some distrust stock markets because of "predatory" behavior by speculators. Three fantastic bubbles - Tulip mania, the Mississippi Company and the South Sea Company are held out as horrid examples of market excess and malfunction by the public and sophisticated commentators alike.

Tulip mania never occurred and was, instead, a rational attempt to organize markets for rare commodities in a primitive futures market. The Mississippi Company collapse and the loss of liquidity in France are linked to the South Sea Bubble. Both the Mississippi Company and South Sea Company were spectacular investments with major structural flaws. But they were not morality tales.

This paper delves into the economics, finance, psychology, legality and morality of these bubbles. It demonstrates that the markets often worked rationally and efficiently, that the investments were not wildly unsound, and that exogenous factors (the Plague in Holland) and politics and illegality in France may have played major roles in these "disasters." The paper concludes that markets got it right and that popular wisdom has failed to appreciate the market's wisdom.

Keywords: Market bubbles, Tulip mania, Mississippi and South Sea Bubbles, early capital markets

JEL Classification: G00, G10, G30, K22, N13

Suggested Citation

Day, Christian C., Chaos in the Markets - Moral, Legal & Economic Signals in Three Fantastic Bubbles (June 14, 2004). Available at SSRN: https://ssrn.com/abstract=572123 or http://dx.doi.org/10.2139/ssrn.572123

Christian C. Day (Contact Author)

Syracuse University - College of Law ( email )

Syracuse, NY 13244-1030
United States
315-443-3650 (Phone)
315-443-4141 (Fax)

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