Self-study
P1
In economics, the term "speculative bubble" refers to a large upward move in an asset's price driven not by the asset's fundamentals—that is, by the earnings derivable from the asset—but rather by mere speculation that someone else will be willing to pay a higher price for it. ███ █████ ████████ ██ ████ ████████ ██ █ ████████ ███████ ██ ██████ ███ ██ █ ████ ██ ██████████ ████ ███ █████ ████ ████████ ██ █████ ███ ███ ████████ ██ ████ ██ ████ ██████ ███
Intro to Topic ·
Speculative bubble
Speculation is when I buy a machine merely because I speculate that someone else is willing to pay more for the machine. If everyone thought like that, it would drive up the price of the machine. Contrast with buying a machine because I expect that the machine can produce goods that will earn a return on my investment.
Mackay ·
17th century Dutch tulip market is example of speculative bubble
Garber ·
Disagrees; it's not
P2
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Background Facts ·
Netherlands was center of tulip cultivation
One Semper Augustus bulb, a prized variety, sold for $11k (in today's money).
Mackay ·
Rapid price increase attracted speculators which further fueled price increases leading to sudden price collapse
P3
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Garber ·
Price rise and fall can be explained by economic fundamentals
Garber ·
Explanation of price rise
A new and prized variety naturally commands higher prices. This accounts for the initial rise in prices.
Garber ·
Explanation of price fall
Over time, there is more supply of the prized bulbs leading to a fall in prices.
Garber ·
But that's not a speculative bubble
Original high price of the bulb was rationale. The bulbs produced future generations of bulbs and hence produced a return on investment. It was not just speculation that someone else will be willing to pay even more for the bulb.
Passage Style
Critique or debate
Phenomenon-hypothesis (RC)
25.
The passage states that Mackay ███████ █████ ███ ██ ███ ██████████
a
The rapid rise ██ █████ ██ █████ █████ █████ ███ ███ ███ ██ ███ ██████████████ ██ ███ ███████ ████ █████████
Not stated. Although Garber claimed that the rapid rise in price could have resulted from the fashionability of tulips, we’re never told Makcay’s thoughts on the fashionability of flowers and their contribution to price.
b
The prices of ███████ █████████ ██ █████ █████ █████ ██████ ███ ███████████ ███████ █████ ██ █████ ███ █ █████ ██████████ ██ ████████████
c
The Netherlands was ███ ████ ██████ ██ ███████████ ███ ███████████ ██ ███ █████ █████████ ██ ███ ███████████ ████████
Not supported as Mackay’s belief. We have no evidence Netherlands was “the only” center of cultivation/development of new tulip varieties in the 17th century or that Mackay believes that it was.
d
The very high ██████ ██ █████ ██ ███ ███████████████████ █████ █████ ██████ ████ ███ ███████████
e
Buyers of rare ███ ████ █████████ █████ █████ █████ ████ ██████████ ████ ██ ██████ ████████ ████ █████ ██████████ ████ ███ ████████ ██████
Not supported as Mackay’s belief. Garber is the one who thinks people might have derived reasonable investment returns from the original tulip bulbs. But Mackay believes the tulip market involved a speculative bubble.