You will never see it coming
Capital Thinking • Issue #527 • View online
There has never been a period in history where the majority of people didn’t look dumb in hindsight.
History is Only Interesting Because Nothing is Inevitable
Morgan Housel | The Collaborative Fund Blog:
Nothing that’s happened had to happen, or must happen again. That’s why historians aren’t prophets.
Wars, booms, busts, inventions, breakthroughs – none of those things were inevitable.
They happened, and they’ll keep happening in various forms.
But specific events that shape history are always low-probability events. Their surprise is what causes them to leave a mark. And they were surprising specifically because they weren’t inevitable. A lot of things have to go right (or wrong) to move the needle in what is an otherwise random swarm of eight billion people on earth just trying to make it through the day.
The problem when studying historical events is that you know how the story ends, and it’s impossible to un-remember what you know today when thinking about the past. It’s hard to imagine alternative paths of history when the actual path is already known. So things always look more inevitable than they were.
Now let me tell you a story about the Great Depression.
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“After booms come busts,” is about as close to economic law as it gets. Study history, and the calamity that followed the booming 1920s, late 1990s, and early 2000s seems more than obvious. It seems inevitable.
In October 1929 – the peak of history’s craziest stock bubble and eve of the Great Depression – economist Irving Fisher famously told an audience that “stock prices have reached what looks like a permanently high plateau.”
We look at these comments today and laugh. How could someone so smart be so blind to something so inevitable? If you follow the rule that the crazier the boom, the harder the bust, the Great Depression must have been obvious.
But Fisher was a smart guy. And he wasn’t alone.
In an interview years ago I asked Robert Shiller, who won the Nobel Prize for his work on bubbles, about the inevitability of the Great Depression. He responded:
Well, nobody forecasted that. Zero. Nobody. Now there were, of course, some guys who were saying the stock market is overpriced. But if you look at what they said, did that mean a depression is coming? A decade-long depression? No one said that.
I have asked economic historians to give me the name of someone who predicted the depression, and it comes up zero.
That stuck with me. Here we are, bloated with hindsight, knowing the crash after the roaring 1920s was obvious and inevitable. But for those who lived through it – people for whom the 1930s was a yet-to-be-discovered future – it was anything but.
Two things can explain something that looks inevitable but wasn’t predicted by those who experienced it at the time:
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Either everyone in the past fell for a blinding delusion.
Or everyone in the present is blinded by hindsight. -
Either everyone in the past fell for a blinding delusion.
Or everyone in the present is blinded by hindsight.
We are crazy to think it’s all the former and none the latter.
The article will attempt to show what people were thinking in the two years before the Great Depression. I’ll do so with newspaper clippings sourced from the Library of Congress chronicling what people actually said at the time.
People who were just as smart as we are today and who wanted to avoid calamity as much as we do today – what were they thinking just before the economy collapsed into the Great Depression?
People who were susceptible to the same behavioral quirks and humble laws of statistics as we are today – what did they think of their booming economy?
How did they feel?
What did they forecast?
What worried them?
What arguments were convincing to them?
History is only interesting because nothing is inevitable. To better understand the stories we believe about our own future, we must first try to understand the views of people who didn’t yet know how their story would end.
We only think something is inevitable if it’s obvious. And things only look obvious when everyone’s talking about them and predicting them.
When you look back at what people said in the late 1920s – their confidence, their clarity, their logic – you can’t help but wonder what we are confident in today that will look foolish in the future.
What those things might be, I don’t know. It wasn’t obvious in the 1920s. It won’t be obvious in the 2020s.
That’s what makes history interesting – nothing’s inevitable.