Roger Babson predicted the crash of 1929, but the next year told investors to get back into the market. Irving Fischer missed the crash, too, and died poor. He also invented what we now call econometrics, and spent the Great Depression pushing the Federal Reserve to let go of its tight monetary policy. Both served the same purpose. Both created rules that explained capitalism, and made it seem, if still beyond control, at least within comprehension.
Babson and Fischer spent the first decades of the 20th century inventing ways to forecast the economy, to let investors know what was coming. They used different methods, and were mutually suspicious of each other. Fischer, a professor of economics at Yale, dismissed Babson as a nice guy with “no academic standing.” But Babson and Fischer, along with several other forecasters, did for people living in a brand-new industrial society what the Farmers’ Almanac had done for their fathers. “I do think there’s an ideology here that’s being put in place,” says Walter Friedman, “the idea that the future is predictable, that capitalist economies have rules.”
This month Friedman, a historian at Harvard Business School, published Fortune Tellers, a short and shockingly readable history of America’s first economic forecasters. “I was interested in figuring out how people in the early 20th century dealt with the panics they went through,” he says, “and how they dealt with the uncertainty in the economy.”
Friedman organized the book around four men, each with his own style of prediction. Babson produced charts of commodity prices and security values that looked a lot like the ones you see on television in ads for day-trading products. Lines go up, lines go down. Invest when the line is in the right place. Fischer produced complex models that inspired neoclassical economics, the dominant trend in the discipline for the rest of the century. John Moody—of Moody’s (MCO), that John Moody—developed the kind of theory-agnostic value investing popularized by Warren Buffett today. Wesley Mitchell at Harvard founded the National Bureau of Economic Research, still a resource for academics. (And practitioners. And journalists.)
“For me a big part of the story was the powerful metaphor of the business cycle itself,” says Friedman. We take this idea for granted now, that confidence goes up and then down, but the idea had to be discovered. “For the forecasters,” he says, “it gives people dreams of where you are in the cycle, and when the next one’s going to come.” Even if we get the cycle wrong, and almost all of us do, almost all the time, just the knowledge of the existence of a cycle provides some comfort. It turns a financial panic from the wrath of an angry God into something that can be grasped and explained.
Friedman began his work before the financial crisis, and had to add a postscript. From the book:
The cast of characters in 2008 reads like a musical chairs version of 1929. The constellation of commentators included a Yale Professor (Robert Shiller this time, who predicted calamity, instead of Irving Fischer, who did not) and a Wall Street prophet (TV’s Jim Cramer, instead of, for instance, John Moody or Roger Babson).
A century’s worth of attempts to predict the economy has had some value, Friedman believes. “It’s a little like alchemy,” he says. “You can’t create the gold, but in the process of trying, you’ve created a lot of long-standing things.” The concept of gross national product, for example, and Mitchell’s National Bureau of Economic Research. But Friedman also recognizes something else from 1929, what he calls “the seductive belief, held by many, that today we live in a smarter and less risky era than our ancestors, and that calamity will not happen to us.”
In Friedman’s telling, to accept capitalism as a system required that we develop a sort of useful but unmerited arrogance (my words, not his). To even get out of bed in the morning, much less invest in a company, we have to believe that market risk is understandable. It is. But only with hindsight.