Financial history is a large part of the Yale ICF’s identity and something that ICF Faculty Director, William Goetzmann, and ICF Deputy Director, Geert Rouwenhorst, care passionately about. In this piece, Scott C. Miller, a Yale ICF postdoctoal fellow in economic and business history, writes about the importance of teaching history in business schools today.
In June of 2009, an interviewer asked the legendary economist Paul Samuelson what advice he would give to someone entering graduate study in economics. “This is probably a change from what I would have said when I was younger,” Samuelson replied, but “[I would urge them to] have a very healthy respect for the study of economic history, because that’s the raw material out of which any of your conjectures or testings will come.”
Samuelson spoke from an extensive knowledge of the academic landscape, where courses on economic and financial history have largely fallen by the wayside. This is especially true in business schools, where programs are short and most students aim to cram as much “training” into their MBA’s as possible. Administrations follow that demand structure, only occasionally allowing a senior faculty member to offer a history-based class as a pet project. As one faculty member at a top-10 program recently told me, “I get to teach one history class a year now, but I had to buy that right by teaching corporate finance for three decades.”
That is not to say that faculty are blameless either. As a senior SOM professor told me, “If you ask any faculty member if economic, financial, or business history is important, they would almost assuredly say yes. However, if, come recruiting season, they had to choose between another macroeconomist and a business historian, they would choose the macroeconomist.”
There are of course some exceptions—several top-20 programs provide consistent historical offerings, even if many of those courses do not advertise as such. Nevertheless, the fact remains that, to most business schools, history provides marginal value at best—it makes an interesting elective, but is not and should not be at the core of what they provide to students.
I propose—as Samuelson did—that this needs to change. While historical questions rarely arise in investment banking or consulting interviews, the ability to think in historical frameworks provides students of all stripes the capacity for analytical depth that outstrip their peers.
So what does teaching economic, financial, and business history provide to students of business schools?
- It prevents bad, ad-hoc uses of history in decision making. Whether we acknowledge it or not, humans are historical animals. We base most of our decisions not on incoming data, but rather on the historical and cultural frameworks through which we filter that data. Since historical and cultural forces shape not only how we analyze information, but also what and how data is even collected, historically-minded analysts are much better positioned to not simply process the data they have, but understand what data they are missing and why they are missing it.
On a practical level, teaching economic, financial, and business history well in business schools will help prevent the ultimate analytical error: fighting the last battle. Since humans intrinsically look to the past for guidance, they tend to find solutions in the past as well. Unfortunately, nothing in history is ever exactly the same and sourcing specific solutions from past experience will almost assuredly end in failure. On the contrary, the well-taught, historically-minded analyst will not look to what specifically happened in the past, but rather what filters and historical dynamics influence how events emerge and evolve.
- It promotes long-term thinking. While we are unlikely to break the tyranny of the quarterly report any time soon, teaching history forces business school students to think in the longue durée. Analysts who think in the long term are less susceptible to mistaking volatility spikes for the greater trend, and thus better structure investments and firms that are successful over 20, 50, and even 100 or more years. (My SOM colleague Paul Schmelzing’s work on the “suprasecular” decline of interest rates over the last 700 years is a perfect example of this.)
- It fosters humility. At the beginning of my economic and financial history courses, students routinely begin questions with some variation of, “We know that these people were less sophisticated than us, so…” By this they tend to mean, “we have better data, more developed analytic theory, and better computational tools, so I know that we would not have made these mistakes.” Interestingly enough, however, this prelude always disappears by the end of the semester.
As students learn economic and financial history, they see that debt-deflation cycles hit first-century Rome and 20th-century New York in eerily similar ways. Sophisticated short-selling schemes and complex derivative contracts caused the US’s first financial crisis in 1791. Financial contagion spread from the UK to the European continent in 1846-47 as fast as it did in 2008 (and then produced the widespread revolutions in 1848.) In other words, the people of the past were not ignorant bumpkins. We are subject to asymmetric information, negative externalities, and deficient regulatory apparatuses just like they were. If 16th-century Dutch merchants can fall victim to “popular delusions and the madness of crowds,” so can we.
- It reminds students of the raw power to shape society that they will soon wield. I firmly believe that economic crises, not political or social trends, cause profound societal shifts. The Depression of the 1780’s, not independence from Great Britain, resulted in the U.S. Constitution. The Great Depression, not the Progressive Era, stimulated the New Deal and modern social safety net. As I said above, the 1848 Revolutions that turned European streets into warzones emerged from a massive economic recession.
This is not to say that policy schools and humanities departments don’t matter. However, it is largely business school graduates who will make the economic, financial, and business decisions that prepare the ground for massive societal change. As business schools train students to make these decisions, they have the duty to remind them of the implications of these decisions as well.
In 2009, Paul Samuelson came to realize these facts only after a long and storied career. His point, that history, economics, business, and finance are interconnected and inseparable, and need to be treated as such, should be heeded by students, faculty, and administrators alike. By relegating history to the far-flung corners of elite business schools, we deny the intrinsic character of the subjects we study and teach, and risk condemning our students to a cycle of mistakes that can, in fact, be avoided.
About Scott C. Miller: Scott C. Miller is the International Center for Finance postdoctoral fellow in Economic and Business History at the Yale School of Management. He earned his Ph.D from the University of Virginia in 2018, specializing in the transformation of the American economy after independence from Great Britain. Scott’s work explores the re-creation of commercial networks, domestic markets, trade systems, and business practices in the midst of post-Revolutionary economic, political, and social turmoil. His recent publications include ““Never Did I See So Universal a Frenzy”: The Panic of 1791 and the Republicanization of Philadelphia” in the Pennsylvania Magazine of History and Biography and numerous case studies and articles on financial crisis and their political ramifications with Darden Business Publishing.