Financial History Issue 124 (Winter 2018) | Page 20
By Andrew Odlyzko
A famous anecdote tells of Sir Isaac
Newton realizing large gains in the early
stages of the South Sea Bubble, but then
losing all that and more by buying back in
at the top. On the other hand, the fact that
the author of Robinson Crusoe was also
associated with that episode of extreme
investor exuberance is little known. And
that is a pity, since Daniel Defoe’s words,
as well as Newton’s actions, are very illu-
minating about an important aspect of
bubbles that deserves much more atten-
tion. This is the social network element,
involving information dissemination
among investors. What did they know,
how did they know it, how accurate was
what they thought they knew and how
did they interact with each other?
The South Sea Bubble of 1720 had all
the essential ingredients that make invest-
ing today challenging: political turmoil,
rapid globalization, business innovation,
new communication technologies with an
abundance of “fake news” and novel finan-
cial products that befuddled investors.
Those securities might seem simple to us,
but this has to be considered in proper
historical context. The public was less edu-
cated than today, and there was far less of
both finance theory and of general infor-
mation about business and the economy.
On the eve of the South Sea Bubble,
Britain was beginning to enjoy the fruits
of the peace that came after the long and
debilitating War of the Spanish Succes-
sion. It was widely ranked with Holland as
a world leader in technological and com-
mercial development. International trade
was booming, but not without contro-
versy. Weavers were rioting against the
imports of inexpensive Indian textiles,
and one of Defoe’s many jobs was writ-
ing a newspaper set up by the weavers to
push their case for protection. Politics
was extremely partisan, with widespread
suspicions and accusations of treason.
Some were well-founded, as there had
been a major Jacobite invasion in 1715, and
a smaller uprising in 1719, both aiming to
restore the Stuart dynasty.
Today the traditional press is in decline,
and social networks and related upstarts
are beginning to dominate. We are forced
to grapple with the issues of “echo cham-
bers” and “filter bubbles,” which produce
the “post-truth” phenomenon of different
18 FINANCIAL HISTORY | Winter 2018 | www.MoAF.org
groups having wildly divergent percep-
tions of what reported events mean. This
is often blamed on the overabundance of
information. However, similar phenom-
ena can be found three centuries ago, in
an era of information scarcity. This can be
observed in politics, as well as in reactions
to the South Sea Bubble.
Like today, information systems were
being revolutionized. The press was
undergoing rapid development, following
the removal of some of the shackles of gov-
ernment censorship two decades earlier.
London was full of a variety of publica-
tions, as entrepreneurial publishers strove
to find profitable niches, often by catering
to political parties, or the government,
that paid them secret subsidies. Yet the
commercial newsletter sector, distributing
large numbers of hand-duplicated cop-
ies, continued to thrive and served as an
essential feed for the press, especially for
the provincial press that was in its infancy,
with just a handful of papers.
Portraits of Sir Isaac Newton (left) and Daniel Defoe
(right), both investors in the South Sea Company.
Isaac Newton, Daniel Defoe
and the Dynamics of
Financial Bubbles