Last evening I watched a documentary about the phenomenon of “bubbles” in financial markets – or the myth of them, depending on your point of view – in the context of the housing and financial crises. The debate among the various experts interviewed centered around the question of whether a financial market can still behave rationally, even when humans give in to emotions in making their decisions. However the debate never really looked at the elephant in the room, which must be taken into account when discussing why human beings do what we do, and if the reader will indulge me, I would like to take a look, myself.
Historically speaking, one of the classic examples of a financial “bubble” was a phenomenon known as “Tulip Mania”, which hit The Netherlands in the 17th century. The introduction of the tulip from Turkey led to ever-increasing prices for tulip bulbs in Holland, peaking in about 1636-1637. At one point, a single tulip bulb was allegedly trading for more than the price of a good-sized house, or at about ten times the average annual income for a skilled laborer. Eventually, someone had the good sense to say, “I’m not paying that much for a flower,” when a single bulb of the rare and coveted “Semper Augustus” tulip illustrated below was offered for 10,000 guilder; within a fairly short period of time, the market for tulip bulbs subsequently collapsed.
For a people famed for their prudence and business acumen, some of the Dutch really went off the deep end speculating on this rather humble commodity. Yet this speculative boom happened not so much because the Dutch loved and appreciated growing rare flowers – which as it happens they still do, and they are in fact are THE dominant players in the world’s flower industry. Rather, it took place because those who decided to play this game did so for the same two reasons why these types of speculative transactions always take place.
First, those involved in the market thought that if they could buy at a certain price, however ridiculously high, they could then turn around and re-sell it to someone else when the price went up. Second, the more people saw that their peers were getting into the market and doing well, the more they thought that they might be missing an opportunity if they did not get involved themselves. One could make the argument that these were irrational, emotional decisions, given that a tulip bulb is a humble object of limited practical use, or one could make the argument that since not everyone in Holland was swept up into Tulip Mania, the overall rational market forces actually worked, by limiting the damage this speculation did overall.
I am certainly no economist or brain researcher. However I would suggest that there is something more powerful going on than mere emotion or number-crunching in the ridiculous inflation beyond reason of the price of tulip bulbs, stocks, or houses. For rather than being a question of emotional response, per se, as some psychologists would argue, or the “invisible hand” beloved of economists, what many do not adequately take into consideration when looking at these types of events is an even more powerful draw on human action than emotion or money: the attraction of sin.
In 17th century Holland, we can understand how Tulip Mania happened, but we cannot ignore that at bottom it ultimately came about because of a combination of two sins: greed, and envy. The former is the more obvious, and perhaps perversely the more rational, of the two. If I am able to convince someone to purchase at a higher price something which I obtained at a lower price, I make a profit; there is certainly no sin in making a reasonable profit off of your work, whether you have manufactured something yourself, or whether you have been able to go out, find, and sell goods which someone else is willing to pay a premium not to have to go out and make or find for themselves. However, when your plan is to take advantage of the weakness of another in order to make a profit for yourself outside of all proportion to the amount of work you have put into the sale, then Mammon is probably knocking at your door.
The sin of envy is perhaps not as obvious, at first, but it is just as important a motivation in these speculative markets as greed. If Jan sees that Hans is raking it in by selling tulip bulbs, building himself a better house and buying fine silks for his wife and daughters, then Jan may have a change of heart on the lunacy of inflated tulip bulb prices. Jan may want to get involved himself, so that he can “keep up” with Hans, or even try to surpass him in the accumulation of wealth and possessions.
With all of the media hand-wringing and political talk going on of late about how the financial and housing crises happened, and what we ought to do about it given that so many are still struggling, no one seems to have stood up and said the real reason why these things happened. When we get down to the heart of the matter, they took place not because of insufficient legal safeguards, easy credit terms, or bad economic forecasting: they happened because of sin. The thousands of foreclosures we have seen took place for the same reasons given above, i.e. greed and envy.
There is a great deal of focus on blaming the banks and other financial institutions for giving in to a crippling level of greed, and on blaming our government officials for failing to protect us from it. Certainly they should not escape our scrutiny, for helping to make this mess happen. Yet they did not do this on their own, and in seeking to cast the blame on corporations and legislatures, we are lying to ourselves about the truth of why this happened, just as the Dutch did with their tulips stained an infernal red.
The fact remains that no one seems to be willing to ask the more uncomfortable questions of themselves, their families, and their neighbors, such as, “Why does a middle-income family of four need to purchase a brand-new, six-bedroom, five-bathroom house?”, or “Does a lower-income single parent raising two children really need a home renovation loan to get a hot tub and a sunken patio put in?”
The answer, of course, is sin. If sin was unattractive, we would not have such a demonstrable problem with it. We can all point to examples of how otherwise rational, healthy human beings seem to get sucked into doing things that they know, deep down, they ought not to do. As St. Paul puts it, in his Letter to the Romans, at 7:15, “I do not do what I want, but I do what I hate.” I would suggest that this is the key factor which experts are missing, in trying to understand why both markets and, sadly, otherwise rational people behave as they do.
Rather than getting caught up in trying to justify or explain our individual actions, we would be better off simply admitting that we do fall into this pattern of behavior, and realize that it is a fundamental part of human nature. No matter how hard they might try, no economist or politician can stop people from hurling themselves into sin. If you are absolutely intent on throwing yourself off a cliff, and I cannot persuade you of your folly, or put guards and fences around every clifftop, then there is ultimately little I can do to prevent you from doing it – even though I should still try.
Once we emerge from our present financial difficulties as a result of the most recent appearance of the infernal sister act of greed and envy, we will no doubt have a good period of expansion, before they re-appear again for their next performance. This is inevitable, because of our fallen human nature, whatever an economist, psychologist, or other expert may say to the contrary. The best we can hope for is to try to keep these two sins in check, as we are able. Yet ultimately it is for each of us individually, in how we behave, and therefore in the example we set for others, to refrain from indulging in them.
“Semper Augustus Tulip” by Unknown Dutch Artist (17th Century)
Norton Simon Museum, Pasadena, California