W hat’s the silliest thing you have heard in the past year or two? Take your time. Our candidate comes from Tobias Meyer, Sotheby’s head of contemporary art, who declared in 2007 that “the best art is the most expensive because the market is so smart.”

Now, we are great admirers of the wisdom of the market. But would even the most doctrinaire free-marketeer—one, anyway, not dazzled by the glitter of the contemporary art world—argue that market price determined aesthetic value? The philosopher David Hume famously argued that “durable appreciation,” not any intrinsic quality, ultimately provided the measure of artistic value. Whether Hume was correct is a matter of dispute. But at least he placed the locus of value in long-term public judgment and delectation, not sticker price.

We came across that quotation from Mr. Meyer in “A Second Tulip Mania,” an article by Ben Lewis and Jonathan Ford in the December issue of the English monthly Prospect. The piece is not about horticulture, but culture—at least, it is about the bubble now showing itself in a debased precinct of culture, the world of contemporary art. That’s “bubble” as in “South Sea Bubble”—the early eighteenth-century stock scam that ruined thousands, including many aristocrats—or the mania for tulip bulbs which swept through Holland in the mid-seventeenth century. Charles Mackay, in his nineteenth-century classic, Extraordinary Popular Delusions and the Madness of Crowds, explained how it works. Stage One: enthusiasm evolving promptly into euphoria:

At first, as in all these gambling mania, confidence was at its height, and every body gained. Many individuals grew suddenly rich. A golden bait hung temptingly out before the people, and one after the other, they rushed to the tulip-marts, like flies around a honey-pot. Every one imagined that the passion for tulips would last for ever, and that the wealthy from every part of the world would send to Holland, and pay whatever prices were asked for them… . Nobles, citizens, farmers, mechanics, sea-men, footmen, maid-servants, even chimney-sweeps and old clothes-women, dabbled in tulips. People of all grades converted their property into cash, and invested it in flowers. Houses and lands were offered for sale at ruinously low prices, or assigned in payment of bargains made at the tulip-mart. Foreigners became smitten with the same frenzy, and money poured into Holland from all directions.

Naturally, the euphoria could not last. Stage Two: sudden disillusionment declining directly to depression, then despair:

At last, however, the more prudent began to see that this folly could not last for ever… . As this conviction spread, prices fell, and never rose again. Confidence was destroyed, and a universal panic seized upon the dealers. …Defaulters were announced day after day in all the towns of Holland. Hundreds who, a few months previously, had begun to doubt that there was such a thing as poverty in the land, suddenly found themselves the possessors of a few bulbs, which nobody would buy, even though they offered them at one quarter of the sums they had paid for them. The cry of distress resounded every where, and each man accused his neighbour. Many who, for a brief season, had emerged from the humbler walks of life, were cast back into their original obscurity. Substantial merchants were reduced almost to beggary, and many a representative of a noble line saw the fortunes of his house ruined beyond redemption.

S ound familiar? As Messrs. Lewis and Ford show, the circuit from euphoria to catastrophe is not confined to the housing market and over-leveraged hedge funds. It applies, with ghastly pertinence, to that carnival of pretense and grotesquerie, the world of contemporary art. Stage One, the acceleration. It was an international inebriation: “The Chinese painter Zhang Xiaogang saw his work appreciate 6,000 times, from $1,000 to $6m (1999–2008); work by the American artist Richard Prince went up 60 to 80 times (2003–2008). The German painter Anselm Reyle was unknown in 2003; you could have picked up one of his stripe paintings for €14,000. Now he has a studio with 60 assistants turning them out for about €200,000 each.”

M essrs. Lewis and Ford analyze what’s happening in the world of contemporary art—or, rather, in the world of the contemporary art market—as a “classic investment bubble.” There’s a lot to be said for the analogy—or maybe it’s more than an analogy. The metabolism of the contemporary art market has learned a lot from the “specullecting” practices—part collecting, larger part financial speculation—of entrepreneurs like Charles Saatchi, the advertising mogul who was so immensely successful at insinuating the values and methods of celebrity advertising into the world of contemporary art. First, find some unknown young artists who produce items of nugatory aesthetic but substantial shock value; buy their wares for a song; then open your own museum to exhibit them and devote your immense skills as a PR specialist to talking them up. Presto: huge profits, some of which can be reinvested in next year’s crop of enfants terribles.

But Saatchi seems almost amateurish next to the financial moguls who have entered the art market in recent years. “The Georgian Boris Ivanishvili,” Messrs. Lewis and Ford report, “spent $95m on Picasso’s Dora Maar au Chat—a work of art that he still hasn’t unpacked. When it was flown back to Tbilisi, the airport was closed down and the army turned out to ensure the work’s transfer to a secure warehouse.” Ivanishvili and others like him “didn’t simply shove their wealth into contemporary art, they imported the strategies of financial investment into art collecting.” More. Faster. Richer. Higher… . Pop.

But this bubble is now deflating. Sotheby’s share price has lost three quarters of its value over the past year, sinking from its peak of $57 in October 2007 to $9 in early November—close to its 1980s low of $8. The latest round of contemporary art auctions in London has gone badly. In October, the Phillips de Pury sale made only £5m—a quarter of the minimum estimate; at Christie’s almost half the lots didn’t sell; and an air of denial hung over the Frieze art fair like a fog.

Even as we write, the final phase of the bubble—panic, followed by a sudden burst—is upon us. Leavening the panic is denial, which yields some extravagant rhetorical tergiversations. “The propaganda of the art entrepreneurs,” write Messrs. Lewis and Ford, “has also reached a final level of absurdity. We were told that the decline of paper assets would lead to ‘a flight of capital into art.’” Just last June, the excellent Tobias Meyer informed the public that the art market goes in only one direction: up. “For the first time since 1914,” he said, “we are in a non-cyclical market.” Tulips, anyone?