Monday, January 12, 2009

The Madness of crowds

Extraordinary Popular Delusions and the Madness of Crowds By Charles Mackay Templeton Foundation Press; 724pp, £12.99

IT’S A pity Bertie Ahern and his cabinet colleagues hadn’t taken a look at this book during the property boom.

It was published in 1841 and has since been popular among those interested in how societies and economies become subject to short-term enthusiasms that, in hindsight, are revealed as extraordinary follies.

The book is a compendium of, as author Charles Mackay puts it, “the most remarkable instances of those moral epidemics which have been excited, sometimes by one cause and sometimes by another, and to show how easily the masses have been led astray, and how imitative and gregarious men are, even in their infatuations and crimes”. Mackay, a journalist contemporary of Charles Dickens, kicks off with examples of populations losing the run of themselves in relation to returns on investments, giving details of the Mississippi scheme, the South Sea bubble and the tulip mania. The first two involved irrational investment in the shares of two companies – the Mississippi Company in France and the South Sea Company in Britain – in the early 1700s. The third concerned investment in tulips in Holland in the 1600s.

In each case, entire societies managed to convince themselves that fortunes could be made from continued exponential growth in the value of particular items.

Shares in the South Sea Company in London could at one stage be sold for a profit within minutes of their purchase, with the shares being traded for differing prices at opposite ends of a crowded laneway.

When the unreal values placed on tulips finally collapsed in Holland, the frenzy left in its wake a welter of disputes where people who had purchased bulbs at the height of their value tried to enforce contracts for sale with people who no longer wanted to buy them. Sound familiar?

The Irish Times

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