According to modern economic theory -- which holds that markets are efficient, i.e., that share prices reflect intrinsic values and that speculators are simply rational economic agents intent on optimising their wealth -- the history of speculation is a dull affair. In the world of efficient markets there are no animal spirits, no crowd instincts, no emotions of greed or fear, no trend-following speculators, and no "irrational" speculative bubbles. Yet the activities of speculators down the ages appear to me to be richer, more diverse in motivation and extraordinary in result, than anything described by economists. My own approach is closer to that of Charles Mackay, Dickens's friend and the author of Extraordinary Popular Delusions and the Madness of Crowds (1841), who provided the first popular accounts of the Tulip Mania, Mississippi, and South Sea bubbles. For Mackay, speculative manias were a manifestation of the occasional tendency of society to succumb to delusion and mass madness: "Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one." ...

The course of the Tulip Mania was similar to that of many later stock market manias. Just as the Tulip Mania was initially stimulated by a price rise for precious bulbs which attracted new entrants into the market, so stock market booms are commonly triggered by a sharp climb in the share prices of a particular sector -- whether railway stocks in the 1840s or motorcars in the 1920s -- which entices outsiders to speculate. It is another common feature of bull markets that as a mania progresses, the quality of the stocks that attract speculation declines -- a rising tide floats all ships, even the most unseaworthy. The "tulpenwoerde" was no different: speculation in the Semper Augustus bulbs gave way to a manic trade in breeder bulbs. Several other features of Tulip Mania are common to later stock market booms: rumours fuelling the boom, the rapid growth of leverage through the use of futures and paper credit, conspicuous consumption among speculators, sharply rising prices followed by sudden panic without cause, and initial government passivity followed by belated intervention.

The Austrian economist J. A. Schumpeter observed that speculative manias commonly occur at the inception of a new industry or technology when people overestimate the potential gains and too much capital is attracted to new ventures. Perhaps the speculators of the 1630s, entranced by the novelty of the tulip, were anticipating the development of the Dutch flower industry, now the largest in the world. If so, as with many later speculators, their foresight was not to be rewarded financially. As James Buchan observes, the vision of speculators is vitiated by their delusive conception of time: "The great stock market bull seeks to condense the future into a few days, to discount the long march of history, and capture the present value of all the future." More often than not, the future turns out to be less tractable than the speculator would wish. ...

· THE CARNIVAL OF SPECULATION

An engraving entitled Flora's Cap of Fools by the Dutch artist Pieter Nolpe, published shortly after the demise of the Tulip Mania, depicts tulip dealers haggling inside a giant fool's coxcomb. During the American bull market of the 1990s, the most popular on-line investment forum has been The Motley Fool: its young founders wear coxcombs in public as they propose their "Foolery" as a path to stock market riches in place of the "wisdom" of Wall Street. This reappearance of the fool in the imagery of speculation is not fortuitous. Speculation grew out of the crowds and bustle of the Renaissance fairs and carnivals, and although the carnival was in decline and fairs had been replaced by permanent stock exchanges, the carnival spirit lingered in the markets.

Gambling was prevalent at carnivals and fairs. It was a typical carnival activity, both profane and antihierarchic: in the face of fortune, social distinction counts for nothing and everyone becomes equal. The carnival was accompanied by what the Russian literary critic Mikhail Bakhtin called a "grotesque realism," which involved the parodic degradation of values as everything spiritual was transferred to a material level. The Liturgy of the Gamblers was often found among the parodical texts. Carnival language was irreverent and obscene, it was the language of Billingsgate (the London fish market) which remains the vernacular of stock markets to this day. The carnival spirit of equality also suffused the exchanges. As Vega writes in Confusion de Confusiones (itself a parodic carnivalistic title), "a witty man, observing the business on the Exchange, the studied impoliteness there, remarked that the gamble on the Exchange was like death in that it made all people equal."

While the spirit of carnivalism endures in the stock market, the speculative mania represents a continuation of the carnival proper. Both carnival and mania produced "the world turned upside down." The carnival offered a moment of release from the rigidities and religious demands of the medieval world, when the traditional social hierarchy was inverted and the village idiot became carnival king. Although the modern market economy is far freer than its medieval antecedent, it has created new tensions. While the carnival deliberately undermined the authority of the Church, the speculative mania reverses the nostrums of capitalism such as devotion to a professional calling, honesty, thrift, and hard grind. Like the carnival, it provides only a temporary release since when the mania collapses these values are reinforced.

The medieval carnival was a cyclical event occurring in a special time divorced from daily realities -- the French historian Emmanuel LeRoy Ladurie refers to what he calls the "orgasmic interim" of the carnival. The time of the speculative mania is also both cyclical and abnormal -- afterwards speculators recall it as unreal and dreamlike. For Bakhtin, the carnival is "linked to moments of crisis, of breaking points in the cycle of nature or in the life of society and man. Moments of death and revival, of change and renewal, always lead to a festive perception of the world." This accords with Schumpeter's observation that speculative manias generally appear during periods of profound economic upheaval. The Dionysiac aspect of the carnival survives in the conspicuous consumption and revelry of speculators. Both carnival and speculative mania end in similar fashion. Order is restored after the carnival by the symbolic burning of the carnival king in effigy. After the mania, the leading speculators -- from John Law of the Mississippi Company in 1720 to Michael Milken, the junk bond king, in 1990 -- are pilloried, stripped of their wealth, and imprisoned. Like the carnival king, they become scapegoats for the sins of the community and are sacrificed so that normality can return.

The spirit of speculation is anarchic, irreverent, and antihierarchic. It loves freedom, detests cant, and abhors restrictions. From the tulip Colleges of the seventeenth century to the Internet investment clubs of the late twentieth century, speculation has established itself as the most demotic of economic activities. Although profoundly secular, speculation is not simply about greed. The essence of speculation remains a Utopian yearning for freedom and equality which counterbalances the drab rationalistic materialism of the modern economic system with its inevitable inequalities of wealth. Throughout its many manifestations, the speculative mania has always been, and remains to this day, the Carnival of Capitalism, a "Feast of Fools."