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South Sea Bubble

South Sea Bubble

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Published by: chickenlickenhennypenny on Jun 23, 2010
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 Æ
qui-
£
ibria
 by Caroline Thomas, Student Economic Review, University of Dublin,Trinity College, 2003, Vol 17, p. 17-37
1
The South Sea Bubble
 
The Nation too late will find,Computing all their Cost and Trouble,Directors Promises but Wind,South-Sea at best a mighty Bubble.
(last stanza of Jonathan Swift’s “The Bubble”
1
)(William Hogarth: An Emblematical Print on the South Sea Scene)
2
 
1
Swift, Jonathan,
The Bubble,
1721 in Emmett, Ross B.
Great Bubbles.
London: Pickering and Chatto,2000, p.185.
2
Hogarth William,
 An Emblematical Print on the South Sea Scene.
1721 (reprinted c. 1822). This isobviously a satire of the events of the South Sea Bubble: the London Fire Monument (erected after theGreat Fire of London in 1666) reads: 'This monument was erected in memory of the destruction of thecity by the South Sea in 1720', , investors ride the financial merry-go-round (centre), a female trade liesstarving to death (bottom right) , Villainy whips Honour (centre right) clerics (a catholic, a Jew and a puritan) lay bets (bottom left), the Devil throws haunches of Fortune to the greedy crowd (left centre)and Self-Interest tortures Honesty on the Wheel (bottom centre).
 
 
 Æ
qui-
£
ibria
 by Caroline Thomas, Student Economic Review, University of Dublin,Trinity College, 2003, Vol 17, p. 17-37
2
Contents
1
 
INTRODUCTION................................................................................... 3
 
2
 
THE INCIDENT..................................................................................... 4
 2.1 S
ETTING THE SCENE
...........................................................................42.2 T
HE ESTABLISHMENT
.........................................................................62.3 S
LUGGISH PROGRESS
..........................................................................72.4 A
MBITIOUS DESIGNS
..........................................................................92.5 A
 ND THEN IT BLEW
UP
..................................................................12
3
 
A SELECTION OF EXPLANATIONS.............................................. 15
 3.1 “S
OUTH
-S
EA AT BEST A MIGHTY
B
UBBLE
......................................153.2 T
HE SWINDLE
...................................................................................173.3 I
RRATIONAL BUBBLES
......................................................................193.4 R 
ATIONAL BUBBLES
.........................................................................213.5 “B
UBBLE THEORIES ARE THE EASY WAY OUT
.................................22
4
 
CONCLUSION ..................................................................................... 25
 4.1 D
O WE LEARN FROM HISTORY
?........................................................26
5
 
BIBLIOGRAPHY................................................................................. 28
 
(The Island of Madhead: An image forming part of: Anonymous/Henri AbrahamCHATELAIN?,AFBEELDINGHE van't zeer vermaerde Eiland GEKS-KOP. geligen in deActie-ze, ontdekt door Mons.r Lau-rens, werende bewoond door een verzameling vanalderhande Volkeren. die men dezen generalen Naam (Actionisten) geest.) .( Translated:-"Representation of the very famous island of Mad-head, lying in the sea of shares, discovered by Mr. Law-rens, and inhabited by a collection of all kinds of people, to whom are given thegeneral name shareholders."))
3
 
3
This copper engraving is part of the 'Het Groote Tafereel der Dwassheid’ (The Great Mirror of Folly)and was printed by
 L'Honore & Chatelainm of Amsterdam in 1720
. On the Sitehttp://www.mapforum.com/05/kop.htm
 
, the following explanations and translations are offered:-
QUINQUEPOIX 
: capital of the island, named after the headquarters of the Compagnie in the RueQuimquempoix, Paris.
 R: de Seine, R. de Teems & R. de Maas
: the principal rivers of the three major countries involved: the Seine (Paris), the Thames (London) and Meuse (Amsterdam).
 R: de Bubbel 
: Bubble River 
 Z.Z. have
: South Sea Haven, alluding to the English South Sea scheme.
 M. have
: ieMississippi haven.
Blind voort 
: Fort Blind 
 Bedriegers Stadt 
: Deceivers' Town
 Sottenburg 
: Foolsburg 
Gekkendam
: Fool's Dyke
Windtburg 
: Windburg 
 Leugenburg 
: Liarsburg 
 Dollen huyse
: Madhouse
 Bederf wyk 
: Abandoned Quarter 
 Raas wyk 
: Noise Quarter 
 Bulderendam
: Roaring Dyke
 Malvoort 
: Fort  Evil 
 Armoed 
: Island of Poverty
 Droefhyt 
: Island of Sorrow
Wanhoop
: Island of Despair 
 
 
 Æ
qui-
£
ibria
 by Caroline Thomas, Student Economic Review, University of Dublin,Trinity College, 2003, Vol 17, p. 17-37
3
1 Introduction
Whilst the word “bubble” is most commonly associated with chewing gumand detergent, it has also been used to describe the behaviour of financialmarkets. The original and slightly cheeky metaphor, generally used ex post toexplain how an asset price or even an entire national economy (e.g. Japan) ballooned unsustainably only to then deflate painfully, is far from uncontesteddespite (or perhaps due to) the fact that it “(lacks)
a solid operational definition
”.
4
Individuals’ ideas about the financial markets and in particular about investor rationality tend to lead them to espouse or reject the concept of financial bubbles. In other words, if one considers economic agents to becompletely rational and both securities and information markets to beefficient
5
, then asset prices should be driven solely by fundamentals (
“acollection of variables that we believe should drive assets prices
).The “South Sea Bubble” - a spectacular and almost unbelievable financialventure that failed almost three hundred years ago, sending shock wavesthrough eighteenth-century Britain – is, alongside Dutch Tulipmania and theFrench Mississippi System, one of the “classic bubbles” typically analysed byeconomists. Looking closely at this particular phenomenon makes possiblenot only a better understanding of the venture itself , but also serves as a goodintroduction to a whole assortment of interpretations of speculative episodesoffered by economists. This paper will therefore initially describe the schememore closely. It will examine the historical context: isolate who and whatinspired it and how it was that government was willing to implement it; and briefly portray the events of 1720. Secondly, it will compare and contrastdifferent interpretations offered over almost three centuries. Via a descriptionof a specific “bubble” incident followed by a discussion of variousinterpretations, it is hoped that readers (and the author) may for themselvesanswer the very personal question:“Can prices be driven by anything other than fundamentals?”
4
Garber, Peter,
 Famous First Bubbles
2
nd
edition)
.
Cambridge (Ma.): MIT Press, 2000. p.4.
5
Efficiency markets theory states that financial assets are always priced correctly, accordingto the publicly available information. Thus
if 
the information is perfect then the market pricesaccurately reflect all possible information.
6
Garber, p.4.

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