In 17th century Europe, some people hocked everything, including their houses, to invest in tulip bulbs.
In the early 21st century, some people around the world are hocking everything to invest in houses. Same story, different details?
That question has become the subject of a long and windy debate. To complicate the discussion, the world has recently gone through a boom-bust in technology stocks from the late 1990s to 2002 that has been widely compared in the annals of financial "bubbles" to the tulip mania of almost 400 years ago.
Captivating as it may be, the theoretical argument over what constitutes a bubble doesn't help ordinary investors much. No matter how many I-told-you-so stories we hear now, a clear consensus identifying the recent tech-stock experience as a bubble didn't emerge until after its collapse -- satisfying a famous rule of thumb that bubbles are known only by their bursting.
In the making of investment decisions such as whether to buy a house in Malibu or a technology mutual fund, after-the-fact information comes too late. That's a problem, because nobody who makes those decisions can afford to ignore the issue.
In the absence of better answers, investors can at least imprint on their minds the idea that bubbles represent a separation of the market price from the basic purpose of the asset in question.
As one authoritative writer on the subject, the late economist Charles P. Kindleberger, described them, participants in a bubble are "generally speculators interested in profits from trading in the asset rather than its use of earning capacity."
When something comes to be viewed as a "trading tulip" rather than a flower bulb, we understand that the asset's price has probably broken loose from its moorings.
That is not to say the asset's fundamental value is always simple to determine. Nobody can define for certain the upper limit on the real value of a commodity that enables its owner to grow beautiful flowers, perhaps in ever-increasing quantities.
Likewise, nobody can say for sure how much future earning power the stock of an Internet company such as merchandiser Amazon.com may represent. What can be taken as fact, however, is that stocks are never just blips on a computer screen -- they are always part-ownerships in an enterprise that give their holders a claim on the enterprise's earning power.
So investors can begin an informal test for bubble conditions by examining their own motives for buying a stock. If we are working from some reasoned appraisal of what the company might earn in five or 10 years, based on a study of its business model, we can hope we are on solid ground. If it's because "they're talking about a price target of $500," probably not.
So, too, with houses, which in their essence are places for people to live, not price-appreciation vehicles. It's a reasonable certainty that people will always need a roof over their heads; price appreciation is a wish, not a need.
There was a time, just a couple of generations ago, when the standard advice given to new homeowners was to depreciate one's investment by, oh, 3 to 5 percent a year in doing one's family accounts. Like cars and many other consumer durable goods, houses lost value as they aged. My grandfather passed along that advice to me in 1974 as we sat on the back porch of a small place my wife and I had just bought.
How quaint, I thought even then. Time had already given the younger generation a different set of expectations about the economics of houses.
Then again, we also say "how quaint" today when looking back on assertions, widely advanced less than a decade ago, that stocks in the New Economy were going to behave differently from the way they did in the Old.
Hits on a Web site, it turned out, weren't such a solid basis for projecting a company's prospective earnings five or 10 years hence. You wanted something closer to the reality of how much a company could reasonably expect to increase its earning power.
For all its wide usage, the label "bubble" carries limited information. The Internet stock bubble, as it turned out, wasn't the empty phenomenon that the bubble metaphor suggests. At its center was important progress in technology and productivity.
Still, the prices it put on numerous stocks couldn't be sustained. Between them and the value inherent in their original purpose, there was too much empty space.