The costly Tulip

(Blog n°1)

In the beginning of the 17th century, happens what is related as the first history financial crisis: The Tulip mania. Both a fashion effect and speculative investments cause a stupendous increase of the Tulips prices; these flowers become a luxury product within a few years. Regarding the figures that remain from this time, the prices were not reflecting the actual value of these flowers (notwithstanding their incredible beauty). The market validates this recognition by making the prices collapse in the year 1637.

This example illustrates the usual cliché about finance: greedy people exchanging securities for prices based on wind, rumors and assertions such as the global taste of a society for a special type of flowers.

The failures highlighted by this historical event reflect those gangrening the nowadays situation. Are the market prices still related to the actual shares values? The simple fact to be in measure to ask this question implies a possible defect in the global financial organization.  However, the point in this blog will not be to determine if whether or not there is such a difference between market and actual value of securities, simply because a blog is not the good format for such a study. These words are rather going to be focused on the consequences implied by the said phenomenon.

Back to basics: what is finance? It comes from the Latin fine: “end”. So essentially and etymologically, a funding has to deal with time: it can exist only when the whole amount of money is payed back. But if the market and the speculation price a share above its tangible value, there cannot be any repayment of the amount invested. This happened in the previous example of the Tulip mania: the prices collapsed with the demand just at the end of the fashion effect, the flowers owners lost fortunes because of this collapse.

In that case, the trust in a market tending to deviate from the concrete price of goods can be put into question. The market is supposed to help investors and entrepreneurs to meet each other. It is a tool aiming to improve projects realizations, and not to create fake value. This is why the incredible rationally-based and automatically-programmed exchanges can be as performant as possible, anyway they have to be based on human activities or, in other words the most random and chaotic events that could happen. Actually, this chaos needs trust to keep working, expanding and creating value.

Thus, the concrete projects prevail their finance simply because they precede them. However, finance allow the projects to exist. Because of this bilateral strength, trust muss be the base in such in relationship, otherwise the interests would not converge and nothing would be created. So, what is trust? From a human science point of view, it is a feeling including a subjective judgement, determining the base of a reliance relationship. Basically, finance is humanly centered. This is why ethic should be above the exchanges, this is why respect prevail: because Tulip price muss stay stable and relevant.