Economic history seems to repeat itself constantly. From the tulip mania of the seventeenrh century to the South Sea bubble, and now the internet and cryptocurrency bubble, economic bubbles are ever-present. Despite the multiplicity of causes, origins and tools, the result remains the same: exaggerated price increases followed by a painful collapse. The question that arises is not why bubbles recur, but why we do not learn from them.

 

An economic bubble occurs when the price of an asset rises to levels far exceeding its true value, not due to an actual improvement in productivity or profits, but as a result of a collective expectation that prices will continue to rise. In other words, people don't buy because the asset is worth it, but because they believe someone else will pay a higher price later.

 

The tulip mania in the Netherlands in 1637 is considered one of the earliest recorded bubbles, when tulip bulbs became a symbol of social status, causing their prices to skyrocket before suddenly collapsing. There was no complex financial system behind this bubble, but rather greed, fear, and herd behavior (individuals making decisions by imitating the behavior of others instead of relying on independent analysis of information). This means that markets can be driven by emotion rather than reason.

 

The second significant bubble occurred in Britain and was called the South Sea Bubble of 1720. The South Sea Company was granted enormous trading privileges in exchange for assuming a portion of the national debt. Government debt was converted into shares, and prices soared, fueled by political support and the narrative of quick riches. However, the promised profits never materialized, and the shares collapsed, leaving behind a national financial crisis and a widespread loss of confidence. This demonstrates that bubbles become destructive when speculation becomes intertwined with politics and the management of public debt.

 

In the nineteenth century, with the Industrial Revolution, bubbles recurred with genuinely beneficial projects, such as the railways in Britain. The problem was not the technology itself, but rather over-investment and optimism. Even good projects can become bubbles if they are financed without limits or consideration of the true return. In the 1920s, optimism swept through the US stock market, leading to widespread margin buying and mounting debt. Then came the 1929 crash, which triggered the Great Depression. High debt levels transformed the bubble from a market crisis into a full-blown economic crisis.

 

In Japan during the 1980s, loose monetary policies and financial liberalisation led to inflated real estate and stock prices. After the bubble burst, the Japanese economy entered a period of "lost decades" of stagnation.

 

While the internet technology was real, valuations of companies' stocks were not, resulting in the dot-com bubble of 2000. Markets collapsed, but innovation survived. This illustrates that not every bubble means the asset is worthless, but rather that its price is inflated.

 

In the 2008 global financial crisis, low interest rates, complex securitisation and moral hazard led to a global housing bubble. When it burst, some governments were forced to bail out banks, and society bore the brunt. The lesson from this bubble is that financial innovations do not eliminate risk; they may only temporarily mask it. Cryptocurrencies and meme stocks (stocks driven more by narrative and digital reach than by financial fundamentals) are today's bubbles, fueled by social media, abundant liquidity, and new narratives of a "financial revolution." The sharp fluctuations and frequent crashes resulting from these bubbles have confirmed an age-old truth: technology does not negate the laws of economics or human nature.

 

Despite the differences in eras, bubbles share similar elements: abundant liquidity, a compelling (this time with a different) story, widespread public participation, the marginalisation of dissenting voices, and a sudden collapse. The most important lesson from the history of bubbles is that stability is not the enemy of growth, and that prudent monetary policies, intelligent regulation and avoiding succumbing to collective enthusiasm are not signs of weakness but rather safeguards. In this rapidly changing world, where shocks keep coming, the question remains: are we seeking quick riches or sustainable growth that does not end in a crash?

 

It is also important that a person does not act in a herd-like mentality. The economist Charles Kindleberger said in a phrase inspired by Keynesian ideas, "Nothing is more disturbing to a person than to see others getting rich quickly." Don’t imitate them.

 

The writer is a former Minister of State for Economic Affairs