Down the Memory Hole: why we should give more priority to economic and financial history

A few months ago I found myself teaching third-year students for about one hour on the historical experience of stocks and bonds in relation to the risk/return characteristics. I’m sure most people who have taught finance will have come across these phenomena, where one finds oneself referring to a for the students historical but in ones own case very pertinent event, in my case the 1987 crash, and looking up realizing that this is so far beyond the life abd professional experience of the students that you may as well be talking about the reforms of the Roman bureaucracy by the Emperor Titus.

We know that people generally speaking tend to engage in what financial economists call “hyperbolic discounting”, which applies both to the past as well as the future, resulting in a shorter term perception, giving greater weight, greater than would be appropriate given the distribution of outcomes, to more recent events. This also manifests itself in a number of other financial and behavioral biases. The bottom line is that there is always a tendency for people to consider that this time really is something new. And of course, this flies in the face of what we know from history. Probably the best book on economics and finance over last couple of years has been the book by Reinhard / Rogoff ” this time is different”, credit should know, it’s almost certainly not. In my view this book should be compulsory reading for anybody who thinks about being involved in financial and economic markets at any level. In my case the 1987 crash was memorable, of course as a major event in finance, and also because on that Monday I started work on the Central bank of Ireland.

This memory, and the realization that for many students, and don’t forget them in a couple of years these students will be the ones that will be managing your money, and knowledge of financial, business, or even economic history, is lacking. Earlier this year a study was undertaken by the St Paul’s Institute, which looked at the economic and financial historical knowledge of London finance professionals. The full study, available here, is a fascinating read about the attitudes of finance professionals in the city of London around the areas of ethics and integrity. What was reported widely, see for example an interesting report here, was a city professionals exhibited a profound lack of knowledge around the economic and financial history of the own profession. Quoting from the London Independent

In an indication that memories fade fast within the banking sector, less than a third of employees were able to pin point 1980 and 1991/92 as the last two dates major recessions took place in the UK. In contrast, more than three-quarters of respondents correctly answered that the post-credit crunch recession began in 2008.

Equally, almost seven in 10 people had no idea that this year is the 25th anniversary of the “Big Bang”, the major deregulation of Britain’s banking industry that allowed London to become the financial capital of the world – and an inevitable epicentre of the ongoing economic turmoil.

To me this is profoundly worrying. The words of George Orwell are very apt: he who controls the past controls the future. And it’s not just me that worried…the CFA Institute, the professional body that certifies and regulates the “front office” portfolio and institutional managers, is reported today in in the financial Times as also being concerned. The report is behind the financial Times registration barrier, registration is free, and provides limited access to a number of articles per month. Nonetheless, some quotes from it are illustrative.

CFA UK, which represents 9,000 investment professionals, argues that the study of financial history should form a major part of all compulsory education for retail and wholesale investment professionals. “Financial amnesia disarms individuals, the market and the regulator,” the body said. “It causes risk to be mispriced, bubbles to develop and crises to break.”

The education requirements for investment professionals in the UK do not oblige them to have “any understanding of financial history”, added Will Goodhart, chief executive of CFA UK. While the UK’s Financial Services Authority sets the framework for the Investment Management Certificate, the country’s most widely recognised qualification for investment professionals, CFA UK sets the questions. Mr Goodhart suggested that about 15 per cent of the syllabus focus on financial history.

The British CFA programme should be reformed to include “a practical history of financial markets, designed to remind us about the effects of liquidity, psychology and regulatory failure”, the report said.

It also advised the boards of financial institutions to undertake an annual “amnesia check”. “It would be reassuring to know that once a year the board of a financial services firm had reminded itself that this time it is not different,” Mr Goodhart said. The

The CFA Institute have a relationship with the number, about 100, universities where they provide input into Masters level degrees in finance The idea here is that the Masters in finance cover much of the ground of the professional qualifications of the CFA Institute, although no exemptions are given, and that they therefore provide both an academically rigorous as well as industry focused experience for students. Trinity College Dublin and University College Dublin are the only two such universities in Ireland which have courses so aligned. The MSc in finance in Trinity College, and the MBS in finance in UCD are the relevant courses. It’s instructive to note that examining the syllabi for these courses there appears to be no opportunity for students to study financial history. I should note that the initial design of the MSc in finance and Trinity College was mine, and therefore I should take some responsibility for not having included as an optional module, ab initio, a module on financial and economic history. In my defense I can note that there was a proposal the following year have such a module, but it was not felt that there would be sufficient numbers of students interested to warrant offering the course. And, the sad fact is, that this is probably the case. Students who have never been exposed to history are not likely to have an inherent appreciation of the importance of history.

What about other courses? I am the external examiner for the Masters in financial economics at University College Cork, and it is an excellent course of course, but it does not have a module on financial history. The University of Limerick offer a wonderful degree at Masters level in computational finance, the Masters In finance and capital markets in Dublin city University has been on the go for a number of decades and again provides excellent training, and there is a recently developed masters in financial engineering at NUIM. None of these, insofar as I can see from examining the course lists online, offer students a module in financial history.

it doesn’t seem to be any better in economics. The TCD masters in economics does not appear to have a module available on financial or economic history; nor does the largest masters in economics degree course, that run by UCD. This also seems to be the case in NUIM, and in Cork.

What about MBA degrees? If our financial and economic professionals were not been trained in a manner, which incorporates as a formal module and understanding of history perhaps, business masters of the universe are so being taught? Again from my knowledge there is no such module on the MBA Trinity , nor on the MBA offered in UCD, despite it being the only MBA in Ireland which is “triple accredited” and the only MBA in Ireland ranked in the Financial Times rankings. In fact the only mention of history on the UCD MBA site appears to be in the promotional brochure outlining the history of Dublin.

I haven’t looked at the situation in UK, USA. That would be an interesting master’s thesis, for a student to examine attitudes and approaches to the incorporation of financial and economic history into graduate professional training programs. But I am pretty certain that situation which I have described here in Ireland is representative of the vast majority of courses. The teaching of economic and financial history has never been a core strength, particularly in Ireland, of business schools. Even within economics departments economic history, still less the history of economic thought, has tended to be a very minority sport. Ireland in recent years has been blessed in having exceptionally talented economic historians, such as Kevin O’Rourke in TCD, and Morgan Kelly and Cormac O’Grada in UCD . Kevin has now left Trinity College, has taken a professorship at All Souls College Oxford; Cormac has retired; Morgan showed in his analysis of the economic crisis the benefits which a good grounding in historical concepts can provide.

The reality is that as people move and retire they are unlikely to be replaced, certainly not the same levels, and given that it takes decades of dedicated skill to achieve the levels of knowledge then certainly not at the same level, ab initio, in terms of intellectual firepower. Yet, who can doubt that a greater knowledge of history would be useful? Who can doubt that were people, particularly those entrusted with our financial and economic well-being, more aware of the cycles of the economy and of the markets, that they would be at least better armed in relation to realizing that this time is not different, and that by observing and learning from the past we can at least not be excused the knowledge that “we never knew this could happen”. Of course, there are no smart green nano bots, no patents, and very few high-tech spin-offs that come from providing economic and financial history courses. And therefore, given the dreadful trudge towards turning universities into some form of annex to an ill-defined “Smart economy” we will continue to churn out highly technically skilled economic and financial graduates whose only exposure to economic and financial history has come about through individual course leaders dropping nuggets of information into their courses, or for the select few more so motivated, from their own autodidactic endeavors. And that is one way to ensure that we have a dumb economy and one that is doomed to prove Santayana right : Those who cannot remember the past are condemned to repeat it.


14 thoughts on “Down the Memory Hole: why we should give more priority to economic and financial history

  1. Pingback: Ninth Level Ireland » Blog Archive » Down the Memory Hole: why we should give more priority to economic and financial history

  2. soundmigration

    \Interesting read. Could i make a few comments. Hmm where to start. Ok The illusion that financial or economic “history” can be taught as discreet subjects falls foul of several pedagogical potholes. Sorry if this is seems a little combative, but to be honest I think its needed. Its not directed at you specifically Brian, but at academia and the framing of the points about.

    There are serious intellectual issues withinin the idea that financial and economic “history” can be taught as a discreet subject w/o exploring the cultural, social and political environments of the time. I would go so far as to say that any historical interpretation that doesn’t seek to utilise an anthropological perspective is doomed to be laden with the ideological underpinnings of the teacher/insitutions. Many assumptions and value judgements remain integral, but more critically remain invisible to the students. Eg for example ive lost count of the times ive heard economist completely misrerpresent how money came into use across different societies. More recently discussions with former and current students of economics and finance are both apologetic and weary. This is the same for several friends who work in those sectors.

    There is the assumption that and MBS and that academia as it serves society actually functions to create critically thinking individuals. That is demonstatably false. For example I have yet to hear, read or see any Irish academic or professional/Celeb economists speak to the scientific bio physical reality of say climate change or peak oil. That these issues (the externalisation of bio physical “costs” of 200+plus years of industrialisation based on the expanding use of fossil fuels or the reality that peak oil means for undermining entire social-economic-political systems across much of the globe) goes someways to suggest that rather than being an essential human endevour, the study of economics and finance as it is currently formulated is akin learning of multiplications table. The formal learning of rules of behavior, false mathematical models that seek to represent social relations w/o much regard for the social bit in the relationships. From the outside it actually seems an academic field that seems somewhat autistic in what it deems not part of its own field, or indeed what it practitioners seems ignore as issues of concern. It seems much more like the active engagement of rote learning laden with ideological assumptions about how our society should function, not the development of critical knowledge about how we can resolve current crisis.

    For example in this short paragraph.
    “Who can doubt that were people, particularly those entrusted with our financial and economic well-being, more aware of the cycles of the economy and of the markets, that they would be at least better armed in relation to realizing that this time is not different, and that by observing and learning from the past we can at least not be excused the knowledge that “we never knew this could happen”.

    1) At what point in history did people collectively decide to “entrust” a few with our collective “financial and economic well-being”. At what stage from the transitions from feudalism to present day neoliberalism – a broad sweep of 500 years say – was there *ever* an official process of consensual entrustment. It didnt happen, It never happened. Why is that? What where the social, structural., political and cultural force at play? If the starting point of a question of serious intellectual worth, ie how are we not to repeat mistakes of the past – contains in its DNA premises that themselves serve to cloud critical thinking rather than illuminate then what is actually served. How much worse is this if the assumptions unconscious and unnoticed, rather than understood and ignored.

    2) The cycles of the economy and markets cannot be fully understood as abstracted concepts based on ‘rational decision making’ or other concepts that frame economics as something separate from society. Yet again this is an ideological myth that only can be validated with the absence of critical awareness beyond sectoral interests.

    3) There remains questions around the concepts of knowledge itself, and how that relates to the businesses opportunites that we call Universities. What knowledge is validated?. Who does the validating.? Eg Is my work about banging out papers and books as is required from the institution of the university.? Is there a contradiction between having my own “intellectual shtick” upon which my career is validated amongst my peers and from which i derive respect, and the continual generation of knowledge that informs action – praxis – that that consciously seeks to serves all of society- knowlegde that brings us closer to resolving real problems? It is in the quagmire of this serious collective inability to frame what knowledge should/could from tenured academics within the university hierarchy that makes nonsense of any “Smart Economy” discourse. Universities cant see that they are part of the problem in creating human artifacts as they goes about the business of being businesses? Would we be better served with social institutions of learning? How likely are businesses to come up with useful conceptual paradigms of economic and financial history that don’t simply repeat the amoral logic of double entry book keeping?

    “Those who cannot remember the past are condemned to repeat it.”
    And those who look at the past via a narrow prism of present ideology probably won’t make the same mistakes, merely different ones.

  3. Richard Ramsey

    Economic & financial / business history should be compulsory Yr 1 modules. My own experience was mixed. BSc in Economics & Human Geography & MSc in European Economics & Finance 1992-96 both at Loughborough Uni. My degree was good as it combined economic geography with economics. Modules covered included the Industrial Restructuring of the British Space Economy. Included Big Bang Financial Deregulation in London. Global Cities was another and covered the rise of London NYC & Tokyo etc. Dr Jonathan Beaverstock ( now at Nottingham Uni.) took these. Also had a North America Module that included Sunbelt versus Rustbelt regional growth etc. All of these were essentially economic history mixed with economics. I found that these mixed with standard macro / micro policy and theory filled in many gaps in the economic narrative. However, straight economics undergraduates didn’t gave the scope to take these modules and in my view lost out. For straight economics there was an optional economic history / Japan module which was chosen by very few. It was perceived as ‘boring’ which much of economic history pre ‘the likes of Nial Ferguson tended to be. All economics Ugrads also had a compulsory German economy module in yr 2. This focussed on post WW 2. Some pre-WW2 would have been useful Weimar / hyperinflation etc. Outside of this German module and human geography modules, there seemed to be little detailed analysis of key economic events e.g. 1991/92 UK recession. housing crashes etc. In my MSc in European Economics & Finance there were optional modules (financial economics avoidance strategy!) that covered European Institutions and Policy. This was actually quite good as framed UK US & EU economic policies. This, to some extent, complemented ‘the European Economic Policy Issues modules. On the Finance side there was no finance history. Something along the lines of Niall Ferguson’s ‘Ascent of Money’ would have been useful here. In the Financial Institutions Systems & Markets we covered in considerable detail the dreaded ‘Credit Crunch’ and banking crises – namely, the Scandinavian one in the 1990s. The latter appeared to be Prof David Llewellyn’s pet subject. Overall, I think broad economic / financial history should be given the same focus / weight as research methods or some of the quantitative analysis modules. Without a thorough background in each of these disciplines limits your ability to perform economist roles. Would English undergrads not study Shakespeare? Perhaps until the credit crunch etc economics and finance were taught without a historical context. The Great Depression was arguably viewed as something akin to the ice age and required little attention to be paid to it as it was ‘in the past’. I have been struck in economist & banking circles at the lack of knowledge / experience of recessions / housing booms and busts etc. What If this was the case in other fields such as medicine? Without understanding history we are likely to repeat the mistakes of the past. Now, following the credit crunch recessions etc there is an unprecedented interest in economic / financial history. As a result, the next generation potentially will be better informed and equipped to deal with economic and financial events than the current generation.
    Find me on @ramseconomics twitter

  4. Cathyby

    Coming from an non-economics or academic finance background, I think some grounding in history is essential. I remember in 1999 talking to intelligent people who had graduated 2 or 3 years before who quite seriously told me that shares would never plummet again. Five years later I was hearing the same about house prices.

    So it’s plain this information won’t come out of the ether, and it’s not that impressive coming from the lay person ten years older than you talking about crashes and bubbles bursting. If financial and economics graduates are to get a proper view, and I would suggest, a proper scepticism about theories stating “it’s all different now”, a properly grounded view of history is essential.

  5. smackovsky

    just three small observations:

    1) The personal attacks (in print) against Prof Kelly after every article he wrote would always mention that his research interests were in Medieval Economies and was unqualified to comment on the 21st century property economy of the Irish republic.

    2) the collapse of the Asian tigers in the late 1990s should have been warning enough for what was going on 3 to 4 years later in ireland.

    3) All of Scientific and Engineering degrees are essentially degrees in the history of science and engineering

    bonus remark) an interesting MSc topic would be the estimation of unused patents in existence, thus ridiculing the priority to turning Universities into smart economy centres of innovation.

  6. Jerry Dwyer

    Hi Brian,
    Very interesting.
    I agree that students should have some idea of the range of possible outcomes — such as housing prices can indeed fall and often have — before they leave school. They do not get this now, probably not in the least. Economic history is seldom taught even in Ph.D. programs in the U.S. any more, and financial history does not exist as an area of study outside economic history programs. 1990 is “history” for many people in finance. I also doubt that many students would have taken it in the MSc in Finance. It would be an interesting course to teach, although I am not so sanguine that such knowledge would prevent people from getting carried away or even slow them down.

  7. Randal Pontiff

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  8. R. W. Schmitt

    My husband, who does energy engineering, used this for a career day presentation in my daughter’s 2nd grade class. It was a good book for them. The kids liked it, and it became a part of their class library. It helped introduce some good energy saving concepts to them. Basic ideas, nothing too deep – but age appropriate.

  9. Pingback: Disruptive Innovation and Irish Universities post-Leporte | Brian M. Lucey

  10. Noel Kinahan

    Interesting that the subject of history of economics should be investigated more closely.However, I don’t believe we have to look too far in Ireland to find some answers. I refer to Trinity College alumni George Berkeley an empiricist, monetary reformist, philosopher and rated with the best such as Aristotle. His journey started out following the formation of the Bank of England ( Modern banking system ) and subsequently what is considered the first global financial crashes the South Sea and Mississippi Bubbles. His works have been studied by Adam Smith, Benjamin Franklin and many others down through history and more recently highlighted by Senator Joe Johnston, Professor of Applied Economics in Trinity (and mentioned in his book “Bishop Berkeley’s Querist in Historical Perspective”). Again recently in Trinity College the ghost of Berkeley was raised at a debate on the future of banking, with Senator Sean Barrett, Eamon Ryan (Green Party) and myself on the panel, where Berkeley’s model outlined in his treatise “The Plan of a National Bank” was exemplified and compared with one of the pillars of the German banking system the Sparkassen public savings banks. Sometimes we don’t have to look too far for solutions and alternatives. Is it a case of what works in practice must be proven to work in theory.
    He asked: “Whether it would not be more reasonable to mend our state than to complain of it; and how far this may be in our own power?” (The Querist, part 1, Q 106)

    “A Bank wherein there are no Shares, would be free from all the Evils of Stock-‐jobbing [Speculation]. A Bank, whereof the Publick makes all the Profit, and therefore makes good all Deficiencies, must be most secure. Such a Bank prudently managed, would be a Mine of Gold in the hands of the Publick…..The Advantages of such a bank in restoring Credit, promoting Industry, answering the Wants, as well of the Publick as of private Persons, putting Spirit into our People, and enlivening our Commerce, will, I suppose, be evident to whoever shall consider the Queries of late proposed to the Publick” George Berkeley, 1737.

    1. cathyby

      Hi Brian,

      Very interesting – thanks for that! Will tweet under @irishphilosophy (my dedicated Irish philosophy twitter) too for those interested.

      There’s a lot of Irish economic history worth writing about. Unfortunately, I haven’t got to it yet…


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