[amazon_link id=”0691159114″ target=”_blank” ]Fortune Tellers[/amazon_link] by Walter Friedman is a provocative title for a book about economic forecasters – or perhaps not. For many people would agree about the resemblance between the two activities. Besides, this is the tale of the early forecasters who preceded or perhaps more charitably laid the foundations for the model-based, computerised macroeconomic forecasting of our own times.
[amazon_image id=”0691159114″ link=”true” target=”_blank” size=”medium” ]Fortune Tellers: The Story of America’s First Economic Forecasters[/amazon_image]
The first character to stride onto the stage is literally a fortune teller. Evangeline Adams was an astrologer who offered stock market tips and predicted business trends for affluent New Yorkers in the early 20th century. Her enormous influence was cemented by the claim to have correctly forecast the 1929 stock market crash. Friedman writes: “Even in her own time, many regarded Evangeline Adams as a fraud and a scam artist. Her success, however, points to a profound anxiety about the future. Capitalism, after all, is a uniquely future-oriented economic system.” The other characters range from the more respectable Roger Babson, whose forecasts prefigured technical analysis, based on charts and trends, to the highly respectable Irving Fisher, who based his forecasts on theory and models, and John Moody, who collected masses of detailed data and analysed the figures, founding what would become the famous ratings agency.
The book is a great read, based as it is around the personalities of these early forecasters. A surprising number were sufferers from tuberculosis – it is hard to resist the amateur psychology of speculating that they particularly wanted to foresee the future, living as they did in the shadow of mortality. They were inventive and entrepreneurial. Babson (who founded Babson College in Wellesley*) built the world’s largest relief map of the United States. Fisher patented a precursor to the Rolodex and invented a prize-winning tent to aid the treatment of tuberculosis. He also built a machine showing the circular flow of income in the economy, well before the famous Phillips Machine.
These men (Adams is the only woman) founded businesses, wrote books, travelled around giving lectures and promoting themselves. I can see a terrific movie in the ‘forecasting wars’ of the 1920s as these larger-than-life, quintessentially can-do Americans competed with each other to call the stockmarket, win followers and make a fortune. Leonardo di Caprio, Benedict Cumberbatch, and George Clooney, with Tilda Swinton as Evangeline Adams. It would be a great way to tell the story of the bubble and stockmarket crash. It was an era of such forecasting mania and desire to know the future that even AT&T and Macy’s started generating their own economic forecasts in the 1910s. The government, too, got into the business, through Herbert Hoover and Wesley Mitchell in the mid-1920s.
I spent a couple of years in the late 1980s producing macroeconomic forecasts, enough time watching the sausages being made to put me off eating them. Nate Silver’s book [amazon_link id=”0141975652″ target=”_blank” ]The Signal and the Noise [/amazon_link] has an excellent chapter on economic forecasts, comparing and contrasting them to weather forecasts. The problems are similar – non-linear dynamic systems of great complexity, although economics is harder because the ‘particles’ are conscious human beings. Weather forecasting is much improved at very short time horizons but still not good longer term, despite the huge increase in data collection and processing that has occurred. It is foolhardy to think economic forecasting will ever be accurate. Forecasts are no more than a tool for thinking about current trends. Still, as Friedman points out, the appetite for forecasts will never diminish, and that demand will always create a corresponding supply.
* Corrected from earlier thanks to Edward Hadas
Small correction. Babson founded Babson College in Wellesley Mass. Wellesley College was founded in 1870. Larger comment: One of the peculiar aspects of investment theory is the assumption that the current price of an asset is a best estimate of the present value of future cash flows, a calculation which, for shares at least, requires applying an arbitrary discount rate to a totally imaginary infinite series of numbers. A simpler theory could probably be developed, with less ludicrous assumptions.
Thank you for the correction, now amended in the text.
On the larger point, it is surely right that expectations of future cash flows to have some influence on current share prices, perhaps a large one, but of course I agree that it can’t be the only influence, nor the calculation as “rational” as theory has it.
On forecasting, what do you think of Deirdre McCloskey’s criticism of it in If You Are So Smart
It is (almost) always a good idea to agree with Deirdre McCloskey.
I’ve read the paper of that name, not the book. I think it makes three points: (1) a weak version of the efficient markets hypothesis is true by common sense, if not by definition – it is hard to beat the market; (2) many economic outcomes are either self-fulfilling or self-averting so it’s impossible to evaluate forecasts; (3) economists talk like we are “outside” the model, but of course are not – this was the subject of my Pro Bono Economics lectures last year, The Economist as Outsider: