Background and Context
Research Background
Financial bubbles have become increasingly prevalent, with recent examples including Bitcoin, Chinese stock market, housing bubble, and dot-com bubble.
Research Approach
The authors conducted a systematic literature review of historical bubbles and found no coherent approach to studying them.
New Framework
The authors propose moving beyond the rationality/irrationality dichotomy toward a new "bubble triangle" framework for understanding bubble causes and consequences.
The "Bubble Triangle" Framework For Understanding Financial Bubbles
- The "bubble triangle" framework identifies three necessary conditions for financial bubbles to form.
- Marketability refers to how easily assets can be bought and sold.
- Money and credit represent the fuel that powers bubbles through available investment funds.
- Speculation occurs when investors purchase assets solely to generate capital gains.
- The spark (technology or government policy) ignites the bubble when all conditions align.
Major Historical Bubbles Through The Centuries
- Financial bubbles have occurred throughout history across different centuries and economic contexts.
- The Tulipmania (1636-37) focused on tulip bulbs in the Netherlands.
- The South Sea and Mississippi Bubbles (1720) involved company stocks and government debt schemes.
- The Railway Mania (1840s) and Bicycle Mania (1890s) were technology-driven bubbles.
- Recent bubbles include the Dotcom Bubble (2000) and Housing Bubble (2008).
How Bubbles Start: Political vs. Technological Sparks
- Bubbles are sparked by either technological innovation or government policy changes.
- Technology sparks create initial excitement about new innovations and potential future profits.
- Political sparks often involve intentional policy decisions that cause asset prices to rise.
- Technology-sparked bubbles like Bicycle Mania or Dotcom have often left lasting innovations.
- Politically-sparked bubbles like the South Sea Bubble were often designed to address government problems.
Destructive vs. Beneficial Bubbles: The Role of Leverage
- Not all bubbles are equally destructive; some can leave beneficial technological or infrastructure legacies.
- Most destructive bubbles combine political sparks with extensive bank leverage and credit-fueled speculation.
- The Mississippi Bubble and Australian Land Boom caused banking crises and severe economic damage.
- Beneficial bubbles typically involve technological innovation with limited leverage or banking system exposure.
- The Railway Mania left Britain with a national rail network; the Bicycle Mania advanced transportation technology.
How Business Historians Can Contribute to Understanding Bubbles
- Business historians can discover and explain lesser-known bubble episodes from regions outside major industrial nations.
- They can bridge quantitative economic studies with rich historical, technological, and political contexts.
- Business historians can explore the relationship between financial bubbles and fraud or white-collar crime.
- They can examine how bubbles reshape political, legal, financial, and corporate institutions over time.
- A multidisciplinary approach integrating historical and economic methodologies improves understanding of bubble dynamics.
Contribution and Implications
- The "bubble triangle" framework offers a more useful approach than the traditional rationality/irrationality dichotomy.
- Understanding the spark type (technological vs. political) helps predict whether bubbles will be destructive or beneficial.
- The level and type of leverage (bank vs. capital market) is crucial for determining bubble consequences.
- Bubbles with political sparks and bank leverage tend to create the most severe economic damage.
- Some bubbles leave positive legacies through technological innovation, infrastructure, or improved financial architecture.
Data Sources
- The "Bubble Triangle" visualization is based on the framework proposed in Section 3 of the article.
- Historical Bubbles Timeline visualization draws from Table 1, which lists historical episodes identified as bubbles.
- Bubble Spark Types visualization is derived from Section 3's discussion of technological and political sparks.
- Destructive vs. Beneficial Bubbles visualization is based on Section 4 and Figure 1 from the article.
- Business Historians' Contributions visualization is based on Section 5's conclusion about future research directions.
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