Devil Take The Hindmost
By Edward Chancellor, Macmillan £20
This is a gem of a book, which describes the main episodes of rampant speculation over the past 400 years. Its great strength is the richness of the historical material, which leaves the reader to ponder the extent to which the abiding characteristics of human nature can lead to speculative excess.
One of Chancellor's continuing themes is the suspension of the normal human standards of reasoning or enquiry. In a true speculative mania, a sort of madness takes over.
But that is not how a mania starts. They usually arise at the inception of a new technology or industry. Justifiable price rises create a positive feedback and then the market moves to a further stage of 'euphoria' when contact with fundamental values is lost.
In the 1840s, the craze was railways. 'Railway time,' it was said, would transform forever the pace of human existence. And it did.
The trouble was that even such a transformation was not enough to justify the prices paid for railway shares.
Chancellor refers to attempts by modern believers in efficient markets to rewrite history and eliminate the record of speculative bubbles. They have invented the concept of the 'rational bubble'. But their attempts are less than convincing, particularly when those on the other side - arguing that speculation can be dangerously destabilising and needs to be controlled - include a poacher turned gamekeeper, George Soros.
Compared with such manias as the South Sea Bubble, the present US equity bull market is not even on the radar screen, but whereas the collapse of the South Sea bubble - like the Dutch tulip mania before it - left the real economy pretty much unscathed, this one has the potential to cause deep damage. What really concerns is the blithe assumption that corporate earnings will continue growing at 10% or 12% a year in an economy where there is next to no inflation and whose sustainable real growth rate might be 3%.
But, for the moment at least, such thinking is disregarded.
Instead, the market is driven by the past record of equity outperformance, which is taken to mean that equities are bound to perform well in the future.
So the more overvalued the market gets, the more it seems to promise future gains. This state of mind will be familiar to readers of Chancellor's intriguing book.
Roger Bootle is managing director of Capital Economics.