For What It’s Worth: The Historical Epistemology of Financial Bubbles

Thursday Lecture Series

  • Image Credit/Caption: William Hogarth, "The South Sea Scheme"

Financial crises have long served as exemplary trials of economic rationality. Many observers have cited financial panics as instances of the collective limitations of human rationality, of what Victorian chronicler Charles Mackay memorably called “extraordinary popular delusions and the madness of crowds.” Yet, at the same time, such sudden ruptures have often served to reaffirm and even strengthen belief in rational standards of economic behavior. “Bubbles”—significant deviations in price from the “intrinsic” value of an asset—are usually explained in ways that affirm a unitary, rigid view of what rational economic behavior ought to look like. Economic historians, divided on the “rationality” of a given historical bubble, nonetheless generally agree on what such rationality is. This talk proposes a very different approach—to examine past bubbles not as assays of a monolithic rationality, but as moments of crisis in economic knowledge.

Drawing together methodological insights from historical epistemology and behavioral economics—particularly recent attempts to model financial bubbles in terms on investor “disagreement”—Deringer will analyze the specific calculations sophisticated observers used to model one notorious “bubble” asset: the stock of the South Sea Company in 1720. A close reading of especially adventurous valuations from the period suggests that, in the midst of the South Sea mania, what qualified as “rational” was precisely the question. Observers were faced with a range of plausible, divergent ways of valuing that Stock, none of which constituted a single, discernibly correct viewpoint. By reconstructing such disagreement, we can see how social contexts create variable boundaries around rational, and ethical, financial behavior. We can also see why humanistic analysis provide a productive—indeed, necessary—complement to social-scientific approaches in understanding economic life, in past and present.