S+B: Most people, if they’ve heard of him at all, probably know Fisher only for his famously incorrect forecast in October 1929, that stock prices had reached “a permanently high plateau.”
NASAR: Irving Fisher was the quintessential American entrepreneur. You have to remember that the 1920s was a fabulous decade. Contrary to what people said after the stock market crash — that the 1920s were an economic mirage — it was in fact a fantastic decade for technological innovation, for the growth of important businesses and industries, and for productivity and wages. There was no inflation; the price/earnings multiple of the market in 1929 did not seem to be that high. So being upbeat about stock prices wasn’t unusual.
But Fisher had so identified himself with the “can-do” school of American thought that it was difficult for him to realize what was happening.
Unlike Keynes, who had suffered some business reversals in his life, Fisher, bless his heart, had only seen things go up, both in the economy and in his personal affairs. His achievements were impressive. He was a pioneer in discovering the role that money played in the economy’s stability or volatility, and in establishing the link between prices and unemployment. He created the idea of inflation indexing. As early as 1911, he had argued that a diversified portfolio of stocks was a better long-term investment than bonds. He invented the Rolodex to help himself keep track of his contacts and started a company to manufacture and promote it, which later became Remington Rand. He was also the leading wellness guru of the early 20th century.
S+B: So what should we learn about the usefulness of economics from the fact that one of the smartest and most creative economists of his time could be so spectacularly wrong?
NASAR: Well, you have to be careful about what you listen to. If what you listen to is that business managers should focus on making their businesses better, because that’s what drives productivity and growth, then I think you’re golden. I think one thing we’ve learned — and the lesson has been repeated recently — is that we can’t predict the macro economy very well.
Another thing to keep in mind is that the global macroeconomic environment is not the main determinant of the success of individual companies, or even of countries. Because if it were — if that’s what made the difference — then we wouldn’t have the huge disparities in performance that we see, because everyone’s sharing the same global environment. Why was Britain such a success? It’s an island with no resources. Shouldn’t it have been Russia? No, Russia was a basket case. You can compare countries that have been split apart: East Germany and West Germany, North Korea and South Korea. It seems to come down to the local environment, and the decisions that countries and companies make. What is important is whether or not you have an environment that encourages productivity growth, in which managers can focus on running their businesses.
Lessons of the Great Recession
S+B: What lessons can we learn from the policy experience of the Great Depression, compared with the recent Great Recession?
NASAR: Policymakers made a total mess out of the Great Depression. In both 1929 and 1936–37, the Federal Reserve made some disastrous decisions. We have learned quite a bit in the interim. True, the fiscal stimulus this time may have been poorly designed and too small. But on the other hand, the Federal Reserve kept the financial system from collapsing. Today’s policymakers acted with a kind of conviction that was not possible in the 1930s, when the ideas of economists like Fisher and Keynes were very new. That conviction about what to do made action possible. You also had international cooperation instead of each government trying to solve its problems at the expense of its neighbors.