Was the tulip bubble really a bubble?

I'm a bubble sceptic. Pretty much every time I see someone claim something is a bubble, I disagree. To begin with, the model is sketchy. You only need a decent amount of rational money to drive out the irrational money—and in practice people just don't make money beating the market.

On top of that, most of the instances people claim as examples are dubious. I don't think the tech bubble was a bubble. I don't think the housing bubble is a bubble. I think that a lot of departures from the efficient markets hypothesis are driven by legitimate factors.

But even I thought that some examples in history were "true bubbles"—though I hadn't researched them. Well it turns out that even the south sea 'bubble' and the tulip 'bubble' may not have been bubbles—at least according to a book reviewed for the Journal of Political Economy by John Cochrane in 2001 (pdf). This is because prices were not prices in regular terms, and often represented options, or derivatives, or effectively bets.

1. Tulip speculation used futures contracts, which were illegal. The threat of being excluded from trading was sufficient to get people to pay for small losses, but buyers of futures contracts could and did default on large losses, with backing by the courts.

2. Buyers paid only one-twentieth of each contract price up to a maximum of 3 guilders.

3. The main evidence for a bubble in the classic stories consists of very high prices paid for specific rare bulbs in the winter of 1637, prices hundreds or thousands of times higher than prices for those bulbs years or decades later. (There are no price data immediately after the crash.) Garber documents that other rare tulip varieties continued to command high prices long after the mania, even to the present day, and that "bulb prices decline fast: it is their nature." The first bulb captures the present value of its offspring. Prices then decline rapidly as the supply expands, and newer varieties still are introduced.

4. There was a fundamental shock: "In France, it became fashionable for women to array quantities of fresh tulips at the tops of their gowns. Wealthy men competed to present the most exotic flowers to eligible women, thereby driving up the demand for rare flowers. Munting (1696, 911) claims that at the time of the speculation a single flower of a particular broken tulip was sold for 1000 guilders in Paris. This was a final demand price for a consumption good and not the [speculative] asset price of the bulb."

5. The myth tells of a large inflow of foreign money, lending to speculate in tulips, and economic distress after the crash. There is no evidence for these parts of the story, especially (and most importantly) the last. Shares in the Dutch East India Company rose from 229 in March 1636 to 412 in 1639. 

The whole paper is extremely readable, and reaffirms my belief that just-so stories of irrationality and 'behavioural' behaviour are very often untrue in equilibrium.