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A Very Short Obit

R.I.P.: the Experts, 1929-2008


A recent invitation to speak on the “cause or causes of the current financial crisis” made me reflect on another topic: “the cause or causes of the Great Depression.” To this day there is no consensus among economists as to what caused the severe depression that lasted from 1929 to 1939. Was it the stock market crash in 1929 that brought about the Great Depression? Was it the subsequent banking panics and monetary contraction? Perhaps it was the reduction in international lending and protectionist policies pursued by the US—such as the Smoot-Hawley Tariff Act—that caused the Great Depression. Or perhaps the “great contraction,” as Milton Friedman used to call it [1], was caused by the actions of the Federal Reserve, which allowed a decline in the money supply partly to preserve the gold standard. All such explanations are, of course, ad hoc.

The fact of the matter is that the economic “brains” of the 1920s, the so-called experts, could neither foresee the coming disaster nor, once it was under way, could predict correctly its magnitude and duration. In their 1984 book, The Experts Speak: The Definitive Compendium of Authoritative Misinformation, Christopher Cerf and Victor Navasky mention many of the predictions and comments made by the economic “experts” during the Great Depression.[2] Among these are the following. On October 17, 1929, seven days before the stock market crash of “Black Thursday,” Irving Fisher, the Guru of mainstream economics and professor of economics at Yale University, wrote: “Stocks have reached what looks like a permanently high plateau.” Fisher, the “economic expert,” did not stop there. After the crash, on November 14, 1921, he wrote: “The end of the decline of the Stock Market will . . . probably not be long, only a few more days at most.” A year after the crash, and nine years before the end of the depression, Fisher was still predicting:  “For the future, at least, the outlook is bright.” By 1933 the net investment had turned negative, output of goods and services had declined by one third, unemployment rate had risen to 24%, money wages and prices had fallen by one third, nearly 40% of all banks had collapsed and stocks had lost 90% of their value. This was the “bright” future that the eminent professor of economics had promised.

Fisher, however, was not the only “expert” providing authoritative misinformation. Presidential Advisor and stock market “expert” Bernard Baruch made the following prediction on November 15, 1929: “Financial storm has definitely passed.” Similarly, the Chairman of the Continental Illinois Bank of Chicago, Arthur Reynolds, predicted on October 24, 1929, that the “crash is not going to have much effect on business.” Not to be outdone by these “experts,” in the World Almanac of 1929, Thomas C. Shotwell wrote under the “Wall Street Analysis”: “The market is following natural laws of economics and there is no reason why both prosperity and the market should not continue for years at this high level or even higher.” The government experts were not far behind. The US Department of Labor predicted in December of 1929 that the following year will be “a splendid employment year.”

To be sure, there are always those who “predict seven of the past two recessions,” as the joke goes.  The Great Depression was no exception. The New York Times of October 12, 2008, which reproduced many of the above quotations, added: “Of course, not everyone was so optimistic.” According to the Times, “Roger Babson, a well-known businessman and publisher of business and financial statistics,” offered this warning in a speech before a business conference on September 5, 1929: “More people are borrowing and speculating today than ever in our history. Sooner or later a crash is coming and it may be terrific. Wise are those investors who now get out of debt and reef their sails.” But as the Times also pointed out, a year earlier, the same Babson had said that “the election of Hoover and a Republican Congress should result in continued prosperity in 1929.”

Why were the experts so wrong? They were wrong mostly because economics is an underdeveloped discipline dominated by pure, unabashed ideology. The dominant school of economic thought during the Great Depression was, and remains to this day, the “neoclassical” or marginalist school. But in the “neoclassical” world there is no such thing as a crisis. This is not the real world in which we live. It is a classless world, consisting of “consumers” and “producers.” It is a harmonious world modeled mostly after mathematical physics. In such a world there is no history; there is no past, no present and no future. Nothing of consequence ever happens in this world, especially no catastrophic event. This unreal, insipid and a-historical marginalist world should have been abandoned a long time ago, particularly after the Great Depression. Yet, its seemingly mathematical elegance combined with its unadulterated and brazen defense of capitalism, or “free market” as its proponents prefer to call it, has kept it alive. Of course, since the Great Depression the “neoclassical” theory has been somewhat amended by a few ideas from the British aristocrat John Maynard Keynes, ideas that tried to add some elements of reality to the unreal theory. But the result, the so-called “neoclassical synthesis” or “neo-Keynesianism,” is no more than a hodgepodge of disjointed, unclear and incoherent ideas that are fed to the students of economic theory under the rubric of “micro” and “macroeconomics.”

This sad state of affairs does not allow much intelligent analysis of the past or present.  It also does not allow one to forecast the future, particularly crises. As a 1988 article, written by some mainstream economists and published in the most dominant economic journal, contended: “Neither contemporary forecasters nor modern times-series analysts could have forecast the large declines in output following the Crash [of 1929].” [3] In other words, there was nothing in the toolkit of the Great Depression era economics, or today’s mainstream version of it, that allows us to understand severe economic downturns and forecast them. Yet, explanations of the “causes” of the current crises are widespread.

Among other things, the 2008 financial woes have been attributed to mortgaged backed securities, particularly those associated with subprime mortgages; the housing bubble, which was made worse by predatory, risky and careless lending; exotic financial instruments or derivatives that were allegedly devised by some wunderkind mathematician or physicist on Wall Street, for example, credit default swaps; the events of September 11, 2001, the subsequent US invasion of Iraq and increase in oil prices; irrational exuberance in the stock market followed by a bear market; the Federal Reserve’s repeated reduction in the discount rate and targeted fed funds rate in 2001-2003, the wrongheadedness of the chairman of the Federal Reserve, Mr. Alan Greespan, who recently found himself in a “state of shocked disbelief” to learn that “the self-interest of lending institutions” might not “protect shareholders’ equity” [4]; deregulation of the banking industry, particularly the Financial Services Modernization Act of 1999 or Gramm-Leach-Bliley Act; liquidity problems in general; lack of confidence in the financial system and the credit market, etc.

While each of these “causal” explanations, or a combination of them, might have some merit and need to be explored further, they are mostly after-the-fact explanations.  None of the economists who are popping up in the media today explaining what caused the economic woes of 2008 was able to forecast the crisis a year or two earlier. To be sure, there is always a Roger Babson or a “Dr. Doom” that predicts seven of the last two recessions. But among thousands of economists, the odds are that one or two would be right in forecasting something once in a while. Let us, of course, not forget those who shamelessly forecasted such things as “The Great Depression of 1990.” They might make fame and fortune before 1990, but now the used copies of their books sell for $0.01on Amazon.com.

Financial panics and severe economic downturns are nothing new in a capitalist economy. The history of this economic system, since at least the age of classical political economy, shows that monetary crises and “gluts” occur relatively frequently. This is expected. An economy in which goods are produced not for use but for profit is bound to have gluts now and then. Moreover, in an economic system where acquisitive behavior is considered to be virtuous and greed is said to be good one should expect the relentless creation of new and exotic financial instruments by those on the Wall Street—and, prior to that, on Lombard Street—to swindle one another. One should also expect to see the persistent and ingenious attempts by the money-lenders and the industrialists to prevent new regulations and circumvent the existing ones. Furthermore, in an economy where the livelihood of the masses depends on the whims and wishes of captains of the industry or the financiers, one should expect the masses to be called upon to “bailout” the same tycoons when they are pinched. Such measures, as President Bush said in his October 14, 2008, discussion of the economy, are “not intended to take over the free market, but to preserve it.” These are all expected. What is not expected is our ability to predict exactly when this slumbering beast wakes up, shakes off and lashes out. We do not have the theoretical edifice to allow such forecasting. Those who with great confidence explain the causes of the current crises, as well as those who, post mortem, explained with remarkable certainty the causes of the Great Depression, are probably the ones who least understand the nature of the beast.

As for me, I am glad that my interview concerning the “cause or causes of the current financial crisis” was indefinitely postponed due to “technical difficulties.” My answers probably would not have been what the interviewer expected to hear.

SASAN FAYAZMANESH is Professor of Economics at
California State University, Fresno. He can be reached at: sasan.fayazmanesh@gmail.com


[1] “The Role of Monetary Policy,” Milton Friedman, The American Economic Review, Vol. 58, No. 1 (March, 1968), pp. 1-17.

[2] An expanded and updated version of the book appeared in 1998.

[3] “Forecasting the Depression: Harvard versus Yale,” Kathryn M. Dominguez, Ray C. Fair and Matthew D. Shapiro, The American Economic Review, Vol. 78, No. 4 (September, 1988), pp. 595-612.   

[4] “Greenspan Concedes Flaws In Deregulatory Approach,” The New York Times, October 24, 2008.