Economic forecasts, liberty linked in history
The idea of liberty was a new one when our nation was founded. People had gotten so used to their destiny being controlled by someone else — from conqueror to king — that they considered it the normal state of affairs. North America, though, presented a different reality of boundless resources and opportunities, fertile ground for the idea, and the ideal, of liberty.
From the very beginning, economics played a significant role in the movement that would become the American Revolution. It was an economics that was different from economics as it existed then; even different from the market economics of Adam Smith, whose “Wealth of Nations” was published in 1776. It was an economics with individual liberty as its heart, control of one’s own destiny as its soul.
From the outset, then, there was a conflict between American economics and the idea of economic forecasting. Americans neither needed nor wanted economic forecasts. They didn’t need them because under the increasingly controlling British system every American would know precisely what his or her economic future held. And that was decidedly what they didn’t want. That was what the Revolution was all about.
That’s not to say that Americans, like everyone else in the known world, lacked interest in those who claimed to foretell the future. It’s just that the future they were interested in involved matters of state — the outcome of battles or wars – or, more frequently, matters of the heart and what we today call relationships.
It wasn’t until the delusion-tinted realization that profits and fortunes could be made in financial markets that economic forecasting took off. The first explorers of the field were fortune tellers who saw a new, untapped market for their service and shifted gears from predicting disasters and describing your next romance to predicting stock prices.
The real pioneers of the economic forecasting business, though, were the academics, whose credentials elevated them somewhat above the average palm reader or card shuffler. These economic forecasters believed that their constantly improving and increasingly complex methodology made their forecasts more accurate — a claim that never grows old, apparently, for it sounds familiar today.
The dream of getting rich not by doing something but by outguessing others in financial markets never grows old, either. And an entire industry has grown up to support that dream, amassing considerable wealth on its own account in the process.
An important part of that industry has been the economic forecasters who lend academic credibility and cryptic methodologies to the predicting business. They succeeded in driving out the fortune tellers and zodiac analysts who had dominated the industry and replaced their mumbo jumbo with the higher-order mumbo jumbo of econometric models.
It all began, though, with a blank sheet of paper and the burning desire to advance what we had learned about economic forces and put it to good use — making a better, more prosperous world, and some personal profit in the process.
There is no better way to gain an understanding of how economic forecasting began than reading Walter A. Friedman’s new book, “Fortune Tellers,” published by Princeton University Press just this year. It shines a light on the entrepreneurs like Roger Babson and John Moody who created the economic forecasting field a century ago and transformed it into successful businesses. Friedman also describes the pioneering work of Irving Fisher and other economists who attempted to provide forecasting with a foundation in economic and statistical theory.
Friedman’s book gives us a better understanding of how we got to where we are, which is financial forecasting that works … until it doesn’t work.
At their present levels of precision and reliability, economic forecasts do not represent a threat to liberty. It would be helpful, of course, if the forecasting models improved enough to provide warnings of excessive levels of stupidity, incompetence or greed that can foment a major recession. Fully reliable economic forecasts, though, might not be all that smart a goal for economics or for our country
To be truly reliable, economic forecasts would have to eliminate liberty. The two concepts are as incompatible in today’s America as they were in 1776. And while it is liberty that causes economic mistakes and financial crashes it is also the source, the only source, of innovation, productivity and economic growth.
So here’s to liberty on this Independence Day. May we keep it well.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.
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