Individuals or small teams can move markets or persuadepolicymakers with incisive economic analysis.

Economic analysis melds models, data, and experience to prognosticatebroad market movements or to steer policy discussions. It is empirical but notexclusively quantitative, giving both numbers and words their due weight. Itsynthesizes large swathes of information while searching for big picture patternsthat can help businesses, investors, or policymakers to foresee the next bigcrisis or innovation before it overwhelms positions outflanked by an inherentlyvolatile world.

Economic analysis differs from financial price datadissemination and post-market narration, which date from the 16thcentury. It offers less precise predictions than forecasting, which inmodern form began in the 1920s,because it tries to capture sea changes, not middle run trends or short-termfluctuations. Its scope far exceeds that of securities or even industry analysis.

Warren Buffett and Alan Greenspan both exemplify the powerof economic analysis. The former made billions for stockholders throughextensive reading and contemplation rather than relying on technical signals ortrading hunches. The latter’s understanding of macroeconomy conditions provedlargely ineffable but almost infallible as he guided U.S. monetary policy for thealmost two decades now called The Great Moderation.

This post surveys three older but no less important economicanalyses, Economist editor Walter Bagehot’s (1826-1877) lender of lastresort rule, Brian Anderson’s (1886-1949) case for free trade in the ChaseEconomic Bulletin at the apex of American protectionism, and Wilma Soss’s (1900-1986)empirically based campaign to put women on the board of directors of America’slargest corporations.

Bagehot (pronounced badge ut), longtime editor of TheEconomist, explicated the lender of last resort trigger rule employed bythe Bank of England during the periodic financial crises that struck the Cityof London in the Victorian Age. Sometimes called Bagehot’s Dictum, the rule,laid bare by Bagehot in his 1873 book Lombard Street, statedthat to stave off panic and contagion central banks should lend freely to allborrowers with sufficient collateral at a rate of interest high relative topre-panic levels.

Implemented but left unarticulated by U.S. TreasurySecretary Alexander Hamilton(1757? - 1804) during financial panics in 1791 and 1792, Bagehot’s Rule ensuredthat solvent firms could borrow from the central bank when needed but hadincentive to do so only when no private lender would provide better terms. Thecollateral requirements minimized moral hazard while also protecting thecentral bank from losses. In the aftermath of the 2008 global financial crisis,central bankers, including the Fed’s BrianF. Madigan, pointed to the continued overall usefulness of Bagehot’s Rulewhen “interpreted in the context of the modern structure of financial marketsand institutions.”

A Ph.D. economist, Anderson wrote economic analyses for the ChaseEconomic Bulletin for much of the 1920s and 1930s. One of his themes wasthat America thrived due to trade, not tariffs. Policymakers ignored hisanalysis until America’s high tariff regime exacerbated the Great Depressionand helped foment the Second World War. As nineteenth century French politicaleconomist Frederic Bastiat (1801-1850) putit, “Barriers result in isolation; isolation gives rise to hatred; hatred,to war; war, to invasion.”

Especially relevant for policy discussions today, Andersonwarned against what he termed “thebalance of trade bogey.” Americans fetishized a “favorable balance of trade,”but “the fear” of imports, he explained, “is an idle one” because “Europe willnot merely send us goods, but will also provide us with funds with which to payfor them.” “A rich capitalist country,” he concluded, “can afford to importmore than it exports.”

Financial journalist and notorious corporate gadfly Soss usedher weekly NBC radio show, Pocketbook News, to push for corporategovernance reforms like cumulative voting and independent audits.

Importantly, Soss leveraged her empirical studies of widespreadfemale stockownership to induce many major U.S. corporations in the 1950s, 60sand 70s to put qualified women, like AliceE. Crawford of the Corn Exchange Bank, on their boards. Women remainunderrepresented in C-suites but, thanks in large part to Soss’s trenchantanalysis and promotional efforts, female directors are no longer anomalies.   

Economic analyses require information acquisition but alsothe ability to process data and news as rationally as possible given the naturalconstraintsof the human brain. Many of the best models are mental, incapable of beingexplicitly shared because they form from embodied human capital, or what wasonce known as wisdom.

To gain an edge over competitors, economicanalysts think opportunistically and flexibly, like a fox, hunter, or naturalintelligence, not in well-worn rows, like a hedgehog, farmer, or artificialintelligence. Like Anderson, Bagehot, Buffett, Greenspan, and Soss, the besteconomic analysts read widely and critically, selecting readings based on theirperspicacity rather than reputation or popularity. Then, they write.