Why Study History?

In this time of concern for getting a good job after graduation, can there be any less useful college major than history? (Alas, "this time" has been around for generations.) My exposure to history majors at Cornell profoundly disavowed me of this opinion decades ago.

One of my good friends in my Cornell MBA program, Bill, had been a history major at Cornell College ("the other Cornell," as he was proud to say.) We had very good times together in our two years in Ithaca and I wasn't surprised that Bill did well after graduation, ending up working for a Chicago bank. He moved into managing bonds, and has been responsible for investing bond funds worth billions of dollars. "What did history have to do with the bond market?" I wondered. At reunions, I discussed this question with Bill and learned that in studying history, Bill had developed the ability and skill of reading voraciously, analyzing masses of data, and projecting likely outcomes, given past experiences. Bill's success in business demonstrates the wisdom of the George Santayana aphorism "Those who cannot remember the past are condemned to repeat it."

Indeed, in this troubling time of dealing with the excesses of the sub-prime mortgage debacle, some of us ask how this is any different from the past debacles of derivatives, savings and loan deregulation, and junk bonds. Perhaps those who studied history concluded they could repeat the financial killings some had made in those markets by just changing the details of the type of investment, hoping that government regulators hadn't studied enough history to see parallels and the inevitable consequences.

Another revelation on what the study of history really is about came during the inauguration activities for Cornell University's then-new president, Hunter Rawlings, who is a classicist. One of the inaugural sessions I attended was entitled "What is a Classicist?" In that session classicists were described as scholars specializing in ancient Greek and Roman history. But contrary to my impression that historians merely memorized dates and facts about past eras, I learned that the study of history is about discovering what actually happened in the past. The session painted a picture for me of historians being Sherlock Holmes-type characters, piecing together disparate hints and clues to form hypotheses to fill in the blanks. As a Sherlock Holmes fan - and today, loving the TV series House, MD for his ability to do the same in the medical field - had I been taught history beyond the boring rote memorization of dates and facts, I may have become fascinated by history and pursued its study. [On making this observation at the Rawlings inaugural, someone recommended a little novel to me: Josephine Tey's The Daughter of Time. It's a wonderful history mystery!]

Of course, history courses in our school curriculum are there to develop memorization abilities in students. But just as the purpose of math courses go beyond enabling students merely to "do math" (see my blog "Why Study Algebra"), history courses go further to teach students about relationships and consequences - what happened because a combination of events, decisions, or circumstances occurred. Ultimately, history teaches its students about beliefs of people in their age and environment.

Having been such a poor student of history, I can now relate to the importance that we all develop the skills related to the higher order study of history. There are other ways to develop these skills. But it's important that we recognize that because of our own lack of success in studying certain subjects in our typical education curricula, we may keep setting ourselves up for the recurrence of major problems in our own history.

Regulate or de-regulate?

Regulation vs. deregulation. Alas, it's a false black/white, either/or choice. And a dangerous one.

Our current economic crisis is an example of what has occurred many times in past, given slavish adherence to deregulation dogma. In an almost religious quest for deregulation, we've suffered a repeat of the kind of impact we saw with the savings and loan crisis, derivatives debacle, junk bonds, etc. (yet with each occurrence, we've seen an increased magnitude of impact). In fact, the over-leverage by financial institutions in their investment in mortgages is reminiscent of the over-leverage by investors in the stock market of 1929.

Deregulation shouldn't be a religious quest by believers in a free market. The New York Stock Exchange - a global exemplar of a free market - depends on a high degree of regulation to ensure its reliable, efficient operation.

Now, with the problems caused by decades of over-deregulation, we can expect government regulators to step in and close the barn door after they've let the horses out. I'm not arguing that we don't need additional regulation. Re-regulation is needed to attempt to prevent similar bad things from recurring in the future. Such regulation may be appropriate, but trying to preventing unwanted outcomes is not the only approach that should be considered.

My first job was in management consulting within a public accounting firm. As a young associate, I was taught lessons in basic controls. Such controls are of two types: prevention controls and detection controls. Prevention controls keep bad things from happening (for example, preventing employees from stealing money from their company). Detection controls don't directly keep bad things from happening, but detect bad things after they happen (finding out that an employee stole money from the company). Well, what good is that? In the theft example, if the company had something of the employee's, it could claim restitution of the stolen funds - from the employee's next paycheck or pension funds. 

Given all the focus on and resistance to regulation, it appears that few lawmakers, government regulators, or bureaucrats know of these 2 types of controls. They focus solely on prevention controls. What's wrong with that? Prevention controls are very expensive. And they're often viewed to be oppressive. In fact, they are sometimes inappropriate, given the level of risk and the potential of detecting the problem and possibility of gaining restitution. 

So let's hope this time, policy makers, regulators, and bureaucrats consider such detection controls instead of relying solely on prevention controls. If they don't, they'll inevitably over-regulate, putting us into yet another round of ping-ponging to over-regulation begetting frustration then under-regulation again. And each time, it will cost us each more.