The Usefulness of History

February 14th, 2006

People seem to agree on the general principle that knowing your history is valuable. Otherwise, Santayana’s oft-misquoted maxim–“Those who cannot learn from history are doomed to repeat it”–would not have evolved to near-cliché.

This observation leaves off the questions of how we learn from history, or reconcile the widely divergent interpretations of past events, or whether some of us might not prefer to repeat history, at least some of the choicer bits.

The passage of time and the objective fact of events are distilled to some selection of events that one chooses to observe and consider. It demonstrates the inevitability of some a priori assumptions that lead a historian to choose, because of the limitations of time, space, and intellect, one event over another. Causality is argued or merely implied by the selection and ordering of events in a book or speech. Even where someone with all sincerity strives to be objective, the same constraints require selectivity based on some criteria, whether it is disclosed or not. It is this simple: to pick a still-compelling topic, the Civil War officially lasted from April 12, 1861 (opening bombardment on Fort Sumter) to April 9, 1865 (Appomattox). That’s 1,458 days of history that directly involved millions of people. One historian’s entire career, to say nothing of this or that book or essay, can effectively deal only in historical vignettes, or accept those already deemed significant by others.

This challenge leads to vigorous debate and new treatises that look for a new angle on events from decades or centuries ago. Perhaps it is what people mean by “living history.”

If in the popular imagination history is transparently important, in the popular economic imagination history is given less credence—very commonly, none at all. Proclaimed new paradigms practically change with the seasons, so they are hardly worthy of the adjective or the noun attached to them, which must be one unspoken reason for the insatiable demand for new labels for old ideas in business.

The practical issue of history for the decision-maker is the extent to which it helps set the course for the future. My meaning here is nothing utopian, it can be as homely as answering the simple question of what we do next month. The thread of cause-and-effect gets lost when we try to trace it far back enough, but its relative invisibility doesn’t mean it is not there. The idea of a truly new paradigm, one somehow freer of antecedents than all that preceded it (it hurts my head just to write that), is patently absurd. History matters.

In a broad sense, the art and science of judging entrepreneurial action is understanding a set of relevant facts about the present, or history-up-to-right-now, and discerning those things that are subject to change from those that are not. That judgment, which may ring vaguely of the Aristotelian/Platonic feud over universals, is modified by the time frame that concerns the entrepreneur–typically but not exclusively less than 10 years. Whether the foreshortened time frame makes the distinction easier is another question.

Fortunately, success in business does not depend on perfection. In an economic sense, objective valuations don’t exist, only comparative ones. Some one could say that the little-mourned, and for anyone much younger than me, little-remembered Yugo was a terrible automobile. That standard is comparative, not absolute: the frame of reference was all other available cars. Conversely, someone who had only known the Ford Model A might have swooned over the Yugo’s [comparative] speed, safety, and reliability, if not its aesthetics.

There is a universal of sorts in human endeavor, and yet again I tip my hat to the Austrian economics for helping us understand this: people move to better their condition. Our routine failure to do so reliably is a subject for another essay. The statement might seem self-evident, and indeed it is THE a priori of Austrian economics. This betterment might include, in various combinations for various people, looking to extend leisure time, lessen the aptly-named disutility of work, improve health, lessen anticipated risks, etc. The problems are always with us. It is the solutions that change. Not to get mired in semantics, but it commonly more descriptive to describe entrepreneurial change as a refinement in tools, not a truly novel solution.

The problem is it is easy to mistake means for ends, to assume a fundamental shift in the state of human affairs when the means to an end is changed through innovation. Fundamentally, the problem remains, and the search for better solutions [tools] continues. It is not an end of history, but at most the close of a chapter.

In manufacturing, much is made of the rising competition from China’s own manufacturing sector. Is this new? Well, China’s involvement is, of course, but two decades ago it was Japan, and after that South Korea and others. And in the years well before that quarter-century anomaly following World War II where the U.S. was the only significant economic force in the world, our major competitor was…England (years and years ago). What is most interesting is that among all the sectors in which small firms have a presence in the U.S., manufacturing is one of the few that has thrived in the past few decades. The competition for better solutions, the challenge for individual firms to stay in the game by attending to their own innovation, far from ruining small manufacturing firms in the U.S. has kept them, on the balance, especially vital.

“New paradigms” are most often new names for old problems, or new tools for established solutions. History isn’t set aside, it is confirmed.

All of us have some sense of history. Entrepreneurs especially so. It is typically unspoken, but they put themselves and their ideas on the line, and wrapped up in this idea is their knowledge, their experience, their calculations as to how their new thing will find a niche, and whatever innate aptitudes they possess. Until the knowledge is acted on, the risks of being wrong are minimal–that is, being wrong is not expensive.

If the crux of the argument is that everyone has some de facto view of practical history, then the question becomes whether it is beneficial to future action to examine critical assumptions, or better to bump along leaving well enough alone.

The fact is, whenever people sit down to revisit some past event, and have some means of checking memory against other more reliable records, it is surprising what a jumble our minds make of these things. A telling example is a study that compared the diagnoses and treatment meted out by credentialed psychiatrists against the diagnostic skills of their receptionists. It turned out that the receptionists were within a couple percentage points of their bosses’ accuracy. Why? Not being trained, but having easy access to feedback [historically relevant facts] enabled them to fine tune their diagnostic capabilities. Apparently, the psychiatrists made no similar effort to check diagnoses against results.

The example is simplified and probably simplistic, but the pattern holds true in entrepreneurship. Perception needs regular refinement and correction from relevant data; it doesn’t take volumes, and it is not a full-time job (for the entrepreneur), but it is an ongoing process. The implications, to the extent we operate with inadequate data–for a definition of adequate consider the comparative value question above–we risk making future decisions on incorrect assumptions about events and their causes.

This quote from Keynes is a nice capstone; in fact, it might have stood in for the whole essay:

“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”