The Entrepreneurs Who Invented Economic Forecasting..

Prof. Walter A. Friedman of HBS has written this book which should make a great reading. He looks at how economic forecasting as a discipline developed over the years.

HBSWK runs an interview of Prof. Friedman.

Q: Why did the group of pioneering forecasters that you chronicle enjoy so much success with clients and the public? What need were the forecasters fulfilling?

A: The key was the nature of the time. Forecasters found a ready audience during a time of social and economic turbulence. The late nineteenth and early twentieth centuries were a period of severe panics—in 1873, 1893, 1907, and 1920—and also a time of substantial demographic change, as the country moved from being predominantly agricultural to being industrial and urban.

For those who had suffered through financial panics, forecasting offered the idea that economic activity was not simply random, but followed discernable patterns that could be predicted. In a country whose population was moving from agriculture to industry, “business barometers” created the comforting idea that business activity was cyclical in the way that the weather was cyclical with changing seasons. Even the vocabulary of “barometers” and “cycles” was carried over from meteorology to economic prediction. Forecasting, through the use of statistics and economic charts, provided a sort of Farmer’s Almanac for the industrial economy. It provided comfort as well as predictions.

Q: Has the business of forecasting proven to be lucrative?

A; Forecasting was a lucrative business for many of the pioneering forecasters. Roger Babson built a business empire around his weekly forecasts—an empire that included his newsletters, syndicated columns, and eventually a radio program. In 1919 he founded Babson College, today a highly respected institution, to provide him with a pool of workers for his forecasting business. Others, like Irving Fisher, were successful as forecasters in the 1920s but lost everything after the 1929 crash—an event he failed to predict. But, more generally, while individual forecasters came and went, some making it rich and others not, the bigger story is that the industry created key resources for society as a whole.

In the process of trying to make reliable forecasts, economists and entrepreneurs developed index numbers, leading indicators, and new economic charts, and even founded important institutions like the National Bureau of Economic Research. The economist Wesley Mitchell, who was deeply engaged with forecasting in the 1910s and 1920s, served as director at NBER for many years. One of his students, Simon Kuznets, developed [a standard way to measure] Gross National Product there in the 1930s. In all these ways, the growth of the forecasting industry spurred efforts to make sense of economic change.

Great Depression ofcourse contributed to thinking on economic forecasting:

Q: What effect did the Great Depression have on the prediction business?

A: By the time of the Great Depression, several methods of forecasting had become popular. Many of them, including that advocated by Babson and by the Harvard Economic Society, perceived that the economy was best understood by studying recurrent historical patterns or past analogies. They promoted, each in their different way, the idea that economies were like atmospheres—independent, autonomous, and cyclical. But during the Depression, those forecasters who advocated that economies operated according to boom-bust cycles were left stranded. There was plenty of “bust” but there was no “boom” forthcoming. During these years, those people who advocated, instead, that economic activity could be greatly affected by policy gained prestige. Thus, even while Fisher sunk into poverty, his econometric ideas were gaining strength. Of course, the most popular economist of the 1930s became John Maynard Keynes, who similarly advocated that governments could, and should, intervene to control economic fluctuations when economies got stuck in a suboptimal rut. In decades after World War II, econometric and policy-oriented forecasting came to dominate the field.

Looking forward to reading the book sometime…