Toward a Metatheory of Economic Bubbles: Socio-Political and Cultural Perspectives

Socio-Political and Cultural Perspectives

N. Dholakia, R. Turcan

• Publisher: Palgrave Pivot
• Year: 2014
• ISBN:
  9781137361790
• Topic: Business
• Subtopic: Marketing
• Index: Business

Historically, bubbles have been understood primarily in financial-economic terms. In this exciting new work, Dholakia and Turcan argue that bubbles are also a socio-political and cultural phenomena, with intense and accelerating interactions of engineered hype and feverish expectations.

1

Bubble Troubles

Abstract: In this chapter we introduce the reader to the book—to its aim, scope, method and contributions, as well as its structure. The chapter starts with a short introduction to the history of bubbles and bubbles’ impact on our daily lives. The method—the theory building strategy—is presented next, highlighting the four essential elements of a complete theory. These are the “what” aspects, the “how” aspects, the contextual “who-where-when” aspects, and the explanation-seeking “why” aspects. We conclude this chapter by providing short descriptions of each subsequent chapter, linking it to the building blocks of a theory.

Keywords: asset bubbles and everyday life; history of bubbles; theory building; tulipmania

Dholakia, Nikhilesh and Romeo V. Turcan. Toward a Metatheory of Economic Bubbles: Socio-Political and Cultural Perspectives. New York: Palgrave Macmillan, 2014. DOI: 10.1057/9781137361790.0007.

Who sees with equal eye,as God of all,
A hero perish, or a sparrow fall,
Atoms or systems into ruin hurl’d,
And now a bubble burst, and now a world.¹

The first decade of the twenty-first century had an eventful start, at least in economic terms. After March 2000, the so-called dotcom technology bubble burst. In a year-end review, The New York Times summarized the carnage that occurred in the tech stock indexes and in specific technology stocks during 2000:

What a difference a year makes. The Nasdaq [technology-dominated stock market index] sank. Stock tips have been replaced with talk of recession. Many pioneering dot-coms are out of business or barely surviving. The Dow Jones Internet Index, made up of dot-com blue chips, is down more than 72 percent since March. Online retailers Priceline and eToys, former Wall Street darlings, have seen their stock prices fall more than 99 percent from their highs.²

Even before the dust had settled on the dotcom bubble burst, by 2007, the portents were clear that there was another bubble forming in the United States, this time in the residential real estate market, fueled by mortgage credit available on easy terms with minimal collateral requirements. While the dotcom crash wiped out $7–$8 trillion in capital, the housing bubble burst in the United States was of a similar magnitude, wiping out about $5–$7 trillion of inflated housing values.³

Bubbles—periodic episodes where hype about an asset outpaces reasonable expectations about valuing that asset—have been a part of modern economic history. Long before the stocks, bonds, technology, and housing bubbles of recent decades, there was the notorious tulipmania in the Netherlands of the seventeenth century:

Semper Augustus . . . was a tulip of extraordinary beauty, its midnight-blue petals topped by a band of pure white and accented with crimson flares . . . Around 1624, the Amsterdam man who owned the only dozen specimens [of Semper Augustus] was offered 3,000 guilders for one bulb . . . the sum was roughly equal to the annual income of a wealthy merchant . . . A few years later, Rembrandt received about half that amount for painting The Night Watch . . . Yet the bulb’s owner, whose name is now lost to history, nixed the offer.⁴

The tulipmania style bubbles were infrequent and limited in their geographic scope. In the twenty-first century, however, the pace at which bubbles form, inflate, and deflate appears to have accelerated. In the United States, already two bubbles—the dotcom and the housing—punctuate the first decade of the century, and some believe that a third bubble (in stock prices or bond prices or both) is imminent. Contemporary bubbles also reverberate globally, if not in terms of specific asset price inflation/collapse then at least in terms of a global spillover of economic losses and misery. From a purely macroeconomic perspective, a report on the 2007–2009 Great Recession from the International Monetary Fund (IMF) found that the fast-rising developing economies, the so-called emerging markets or EMs . . .

. . . with smaller initial vulnerabilities went into [the Great] recession later and exited earlier, and suffered considerably smaller declines in output during the first stage of the crisis. EMs with stronger external linkages—higher dependence on demand from AEs [Advanced Economies] or larger exposure to foreign bank claims—experienced sharper falls in output during the crisis. The analysis also indicates that countries that experienced pre-crisis credit booms experienced sharper output falls during the crisis . . . Such credit booms were typically foreign-financed and more pronounced for countries with fixed exchange rate regimes.⁵

Parsing the econo-speak above, it is clear that in developing nations with strong global financial linkages—in terms of trade and debt—the Great Recession of 2007–2009, linked inextricably to a real estate lending bubble in the United States, made the financial situation of governments and populations swoon downward strongly. Understanding these bubble processes is, therefore, crucial for managing economic affairs, for crafting government policies, and even for negotiating everyday life of our interlinked planet. This book offers a framework to arrive at a multidisciplinary understanding of bubbles.

While the underlying assets that rise or fall in value during bubble processes are economic, the processes that make assets rise giddily or fall precipitately are more than just economic; these processes are also political, social, and cultural. The processes that play out during bubbles entail intense and accelerating interactions of engineered hype and feverish expectations. It is, therefore, important to view bubbles in a multidisciplinary frame. Indeed, the language of bubbles is permeating fields beyond finance and economics: books on “consumer bubbles” and “technology bubbles” have been published.⁶

Aims and approach of this book

Our aim in this book is to lay down a pathway to construct a multidisciplinary metatheory of bubbles as well as to offer a first version of a theory of bubbles that draws from many economic and social disciplines. We follow a process of theory building whereby an empirically relevant theory in the behavioral and social sciences is built on the notion of relationships rather than on the notion of causality. This does not mean that causality (or prediction) is of secondary or lower importance. It means we have employed a theory building strategy aimed first at improving understanding of bubble phenomena before seeking to improve prediction. If there is a wider understanding of the bubble processes, then perhaps such processes could be attenuated and their excesses avoided.⁷

Building good theories

As we progress in this book, we present our emergent theory of bubbles as a mid-range theory. This book is the first stepping stone; there is need for much more work—theoretical and empirical—on bubbles. We see this book as a catalyst for sustained and dynamic scholarly conversation and future research, leading eventually to the development of a robust behavioral grand theory of bubbles.

We ground inductively the emergent metatheory of bubbles and related types of phenomena, along with their dimensions in the extant empirical realm as well as in the emergent theoretical frames derived from some work on bubbles.⁸ Mid-range theories are solutions to problems that contain a limited number of assumptions and considerable accuracy and detail in the problem specification.⁹ Such theories are workhorses: they do the drudge work of tilling the theoretical fields and sowing the empirical seeds, and often help shape the eventual elegant landscapes of grand theories.

In this initial theory building effort on bubbles, mid-range theorizing helps us manage the complexity of the emergent typology of bubbles and related types. Mid-range theorizing transcends pure description and single empirical observations. Such theories draw upon divergent units of analysis, perspectives, and...

Table of contents

• Cover
• Title
• 1  Bubble Troubles
• 2  Core Building Blocks
• 3  Temporal and Contextual Boundaries
• 4  Hype, Hope, and Bubbles
• 5  Typology of Bubbles
• 6  Bubble Emergence: Toward a Model
• 7  Toward a Grand Theory of Bubbles
• 8  Bubbles: Trouble or Tamable?
• Epilogue
• Bibliography
• Name Index
• Subject Index