Fortune Tellers: The Story of America’s First Economic Forecasters by Walter A. Friedman (review)

Humans dislike uncertainty. They wish to be confident about what will happen tomorrow, next year, and even in the afterlife. They worry about what will transpire in their private lives, public affairs, and the economy. Consequently, as economists would predict, markets have grown up through history for products that do, or claim to, reduce uncertainty. Purveyors of these products have used crystal balls, ouija boards, and a variety of religions to make their claims. This fascinating book by Walter Friedman, an historian at the Harvard Business School, describes the growth of a market during the early years of the twentieth century for forecasts of the macro economy at a time when increasing monetization and globalization of the economy made fluctuations in prices, output, employment and other variables of critical importance to economic actors of all kinds.

Friedman tells the story through case studies of prominent entrepreneurs in this burgeoning market. Without exception they all have colorful personal lives that are relevant to their market performance. The first is Roger Babson, after whom Babson college is named. He prepared forecasts of the future by extrapolating from the past, basing his case on the conviction that human behavior is not likely to change, especially behavior based on the fear and greed that he deplored but found to be widespread. Mood swings would continue to generate economic cycles. The main inference for policy he drew from his research was that greater economic stability would come only from improved morality and temperance. Like William Stanley Jevons in Britain before him, Babson compared economic forecasting to weather forecasting and he talked of barometers and other meteorological tools that could be developed for the economy. In his aggressive salesmanship he reminds one of the fictional Elmer Gantry from the same time period who deplored sin but was glad to profit from it.

Next Friedman examines the career of Irving Fisher, much revered in the history of economics but presented here as just another purveyor of prophesies. Fisher’s pitch to his business customers was that he could offer mathematical sophistication, and a more cautious use of conditioned forecasts. John Moody, whose name lives on in the business world today, found inspiration in examining the psychology of entrepreneurs and the financial health of business firms. The Harvard Economic Service, without Babson’s moral outrage and with much more data interpreted by the distinguished statistician Warren Persons, also examined the past to predict the future. But this was largely what would be called later “measurement without theory.” Wesley Mitchell, although the most prominent student of business cycles during this period, seems a little out of place in Friedman’s group. His clients were not the business community as courted by the others, but with his National Bureau of Economic Research were philanthropic foundations and ultimately makers of public policy. Overall the devices used by these forecasters to attract their clients were a bewildering mixture of common sense, Rube Goldberg gimmicks, and simple hucksterism. It can be argued that the forecasters provided something like a defense of evolving capitalism, but this was accomplished through filters other than what we think of as economics today.

The panic of 1907 was a godsend to the forecasters; it was not foreseen and caused terror in the markets. Perhaps, these forecasters claimed, they could warn of the next panic. World War I was agreeable since it generated further instability and demonstrated the use of statistics. The 1920s were the heyday. Forecasters could simply point upward. So long as the good times rolled who wanted to hear from Cassandra? The 1930s, by contrast, brought catastrophe all round. With the exception of Babson who could see a black cloud anywhere, none of the forecasters saw the Great Crash coming, nor were they able to predict the complex movements toward a slow recovery. Babson had to downsize and reorganize. Fisher remained confident throughout...