• 09 Jan 2014
  • Research & Ideas

The Entrepreneurs Who Invented Economic Forecasting

The new book Fortune Tellers investigates the history of economic forecasting and its roots in the turbulent nineteenth and twentieth centuries. Read an interview with author Walter A. Friedman and an excerpt.
by Sean Silverthorne

In the severe economic, social, and scientific turbulence churning at the dawn of the twentieth century, people were eager for any semblance of stability and predictability. From this need for certainty emerged a group of entrepreneurs who promised to apply scientific methods to predict the economic future, and in essence moderate the risk of investing in capitalistic ventures.

“Forecasters found a ready audience during a time of social and economic turbulence”

In his book Fortune Tellers: The Story of America's First Economic Forecasters, Harvard Business School's Walter A. Friedman chronicles a host of academics, businessmen and, yes, charlatans who ultimately failed to foresee the biggest economic event of the twentieth century: The Great Depression.

In an e-mail interview, Friedman, director of the HBS Business History Initiative, discusses his book and the uncertain times that underscored the risk and uncertainty inherent to capitalism itself.


Sean Silverthorne: Why did you decide to write this book?

Walter Friedman: The idea came to me years ago when teaching "Creating Modern Capitalism," a short course that was once required for incoming MBA students. Tom McCraw, the architect of the course, emphasized the idea that capitalists could be defined as people who "put bets on the future"—by, for instance, making investments, opening sales campaigns, and founding new firms.

The subject of forecasting, I decided, would allow me to explore this idea. How do people predict the economic future? How have forecasting methods changed over time? What makes one forecaster more popular than another? I chose to research these questions by focusing on the first generation of economic forecasters—those who founded their agencies in the early twentieth century. Forecasting is such a deeply entrenched and ubiquitous activity today that I thought it would be interesting to see how it got started. How did a world of astrology and "sign-reading" turn to one of econometrics and leading indicators?

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.

Click on the image to enlarge
Babsonchart of United States Business Conditions.Babsonchart of United States Business Conditions," January 28, 1929, from Roger W. Babson.

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.

Q: How has government's role in forecasting and data-gathering evolved in the US?

A: When forecasting got started, in the early twentieth century, there was little idea that government could or should play a role in stabilizing economic growth. Most people, like Babson, James Brookmire, and the Harvard economists C. J. Bullock and Warren Persons believed that the economy was simply too vast to be controlled in any meaningful way. Others thought differently—including Mitchell and Herbert Hoover. Hoover, who was Secretary of Commerce from 1921 to 1928 (when he began his successful campaign to become president), thought government could play an important role in controlling economic panics by providing objective (i.e. non-commercially biased) predictions of the economic climate. If businesspeople knew of economic conditions six months ahead, he reasoned, they could enact countercyclical policies that would temper any ups and downs. For Hoover, the government would, therefore, help to increase economic efficiency simply by improving the flow of economic information.

This view, in which government agencies could promote economic stability by providing forecasts, was a far cry from the type of direct involvement initiated by Franklin Delano Roosevelt in the New Deal. Still, it was an important stepping-stone from the previous generation who did not fathom a role for government in modifying the business cycle at all.

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.

Q: What are you working on next?

A: I have started a new book on the rise of big business in the twentieth century and its effect on American life. How did we become a nation of "organization men" in the 1950s, to take a term from William H. Whyte? How did that change pathways to success and ideas about citizenship? How did other countries perceive the rise of giant corporations in the United States?

As part of this project, I have been studying the history of Junior Achievement, which was a group founded in 1919 by AT&T president Theodore Vail, Strathmore Paper Co. president Horace Moses, and Senator Murray Crane (R-Mass.). Vail feared that the economic values were lagging among the younger generation of the time and he sought to reverse that trend. He set up a program for successful executives to educate children on the realities of economic life. Today, it is a thriving organization—one that reached 4.4 million US students just last year.