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Zenith 2023 ↘ 4) Social Issuest 48

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Can you imagine a tulip worth more money than an average house? To many, this may
seem like an outrageous question. However, during the period between 1634 and 1637,
the cost of a single tulip bulb reached 5200 guilders; that was roughly 20 times the annual
income of a carpenter. So why exactly did this happen? Stocks, real estate, and the tulips I
mentioned above have all sold for much more than they were worth at some point in history.
In all cases, the prices rose and rose until abruptly plummeting. Economists call this state a
‘bubble’.

To better understand this phenomenon, let’s go back to the tulip story. The 1630s was a
period in Dutch history at its finest. Known as the Dutch Golden Age, it was an era in which
the city of Amsterdam became an important port, connecting the country with outside
culture and imports. Amsterdam was brimming with skilled merchants and traders, who
displayed their wealth by living in mansions surrounded by gardens of flowers. And one
particular flower was in high demand: the tulip.

In economics, when demand for a certain
resource or service increases, the market
value follows. When the demand exceeds
the supply, the market value surpasses the
intrinsic value. This is exactly what happened
during the 1630s as Tulips were scarce and
values soared upward. Another more recent
example of this is the dot-com mania of the
1990s. Stocks in new and exciting websites
were the tulips of the 20th century. The more the demand for stocks increased, the higher
the prices would soar.

The price of stock is based on the supply and demand of investors. When a company is
predicted to earn more in the future, stock prices tend to go up and investors buy more of
the company’s shares. This raises prices even further, due to an increased demand. This
can potentially lead to a feedback loop, where investors get caught up in the hype and
ultimately drive prices far above intrinsic value, creating a bubble.