name. The professor was Jacob Wolfowitz, whose son Paul I would come to
know during his years in the George W. Bush administration and as president of
the World Bank. Professor Wolfowitz would chalk the equations on the
board and give them to us to study on mimeographed sheets. I immediately
35
THE AGE OF TURBULENCE
saw the power of these new tools: if the economy could be accurately modeled
using empirical facts and math, then large-scale forecasts could be
derived methodically without the quasi-scientific intuition employed by
so many economic forecasters. I imagined how that could be put to work.
Most important, at age twenty-five I'd found a growing field in which I
could excel.
In later years I developed some skill in building quite large econometric
models, and came to a deeper appreciation of their uses and, especially
their limitations. Modern, dynamic economies do not stay still long enough
to allow for an accurate reading of their underlying structures. Early portrait
photographers required their subjects to freeze long enough to get a
useful picture; if the subject moved, the photo would blur. So too with
econometric models. Econometricians use ad hoc adjustments to the formal
structure of their models to create reasonable forecasts. In the trade, it's
called add-factoring a model's equations; the add-factors are often far more
important to the forecast than the results of the equations themselves.
If models have so little predictive power, what use are they? The least-
heralded advantage of formal models is simply that the exercise of using
them ensures that basic rules of national accounting and economic consistency
are being applied to a set of assumptions. And models certainly can
help maximize the effectiveness of the few parcels of information that can
be assumed with certainty. The more specific and data-rich the model, the
more effective it will be. I have always argued that an up-to-date set of
the most detailed estimates for the latest available quarter is far more useful
for forecasting accuracy than a more sophisticated model structure.
At the same time, of course, the structure of a model is quite important
to its success. You can't (or at least I can't) draw abstract models out of thin
air. They have to be inferred from facts. Abstractions do not float around in
my mind, untied to real-world observations. They need an anchor. This is
why I strive to ferret out every conceivable observation or fact about a happening.
The greater the detail, the more representative the abstract model
is likely to be of the real world I seek to understand.
My early training was to immerse myself in extensive detail in the workings
of some small part of the world and infer from that detail the way
36
CITY KlD
that segment of the world behaves. That is the process I have applied
throughout my career. I experience deep nostalgia every time I thumb
through articles I wrote back in my twenties. The substance is from a far
simpler world, but the method of analysis is as current as any I would apply
today.
37
TWO
THE MAKING OF
AN ECONOMIST
I
I
often did my work with the radio on. Korea dominated the news in
1950 and 1951—our military was now fighting bloody battles against
the Chinese, and President Truman dismissed General MacArthur for
his public insistence that the United States should declare a full-scale war
on China. At home, atomic-bomb testing moved from New Mexico to Nevada,
and we had the Red Scare—the Rosenbergs were sentenced to the
electric chair for spying. Amid all this turmoil, what captured my imagination
was the dawning of the atomic age. Some of the scientific work done
during World War II was just then being declassified, and on the side I began
to read deeply in atomic physics. My first foray was a fat technical book
called Sourcebook on Atomic Energy, a government-sponsored synthesis of
available information on the subject that wasn't classified. From there I
moved on to books on astronomy, physics more broadly, and the philosophy
of science.
Like many scientifically minded people, I believed that atomic energy
was the most important frontier we would unlock in our lifetimes. This was
the other side of the fear we all felt of atomic war. The science was extremely
seductive. The atom conferred a power on humankind that could
THE MAKING OF AN ECONOMIST
open a whole new phase of endeavor. This, in turn, called for a new way
of thought.
I discovered that some of the scientists in the Manhattan Project sub
scribed to a philosophy called logical positivism, a variation of empiricism.
Pioneered by Ludwig Wittgenstein, it is a school of thought whose main
tenet is that knowledge can only be gained from facts and numbers—it
heavily emphasizes rigorous proof. There are no moral absolutes: values
and ethics and the way people behave are reflections of culture and are not
subject to logic. They vary so arbitrarily that they're outside the realm of
serious thought.
The mathematician in me embraced this stark analytical credo. It
seemed the exact philosophy for the age. The world would become a better
place, I thought, if people focused exclusively on what was knowable and
important, which was precisely logical positivism's aim.
By 1952 I was happily immersed in working toward an economics Ph.D.
and was earning more than $6,000 a year. None of my friends or colleagues
had much money, and this was more than I needed. My mother and I
moved to the suburbs—not all the way to Levittown, but to a two-family
house in Forest Hills, Queens, a leafy neighborhood within easy walking
distance of the commuter train. At last, I'd found a way to escape the city's
congestion. It was a big step up.
If someone had told me then that I was about to enter the most con
fused and tumultuous phase of my life, I would have been incredulous. Yet
over the next two years, I would marry and separate, drop out of graduate
school, quit my job to go into business for myself—and change my whole
way of looking at the world.
T
T
he woman I married was Joan Mitchell, an art historian from Winni
peg, Manitoba, who had come to New York to study at NYU's Insti
tute of Fine Arts. We met on a blind date—I walked into her apartment and
she had one of my favorite recordings on. Classical music was a passion we
shared. We dated for several months, got married in October 1952, and
split up after about a year. Without going into detail, I will say I was the
main problem. I had no real understanding of the commitment required for
3 9
THE AGE OF TURBULENCE
marriage. I'd made an intellectual choice, not an emotional one, telling myself,
"This woman is very intelligent. Very beautiful. I'll never do better." My
mistake was all the more painful because Joan is an extraordinary person.
Happily we are friends to this day.
Joan was best friends with the wife of Nathaniel Branden, who was Ayn
Rand's young collaborator and, years later, her lover. That's how Ayn Rand
and I met. She was a Russian emigre whose novel The Fountainhead had
been a bestselling phenomenon during the war. She had recently moved
from Hollywood to New York and had developed a small, intense following.
I'd read the novel and found it intriguing. It's the story of an architect
named Howard Roarkwho heroically resists all pressure to compromise his
vision—he even blows up a public-housing project when he finds out that
the builder has altered his design—and ultimately prevails. Rand wrote the
story to illustrate a philosophy she had come to, one that emphasized reason,
individualism, and enlightened self-interest. Later she named it objectivism;
today she would be called a libertarian.
Objectivism championed laissez-faire capitalism as the ideal form of
social organization; not surprisingly, Ayn Rand abhorred Soviet communism,
in which she had been schooled. She saw it as the embodiment of brutal
collectivism. And at the height of Soviet power, she held that the system
was so inherently corrupt that eventually it would collapse from within.
She and her circle called themselves the Collective, an inside joke because
collectivism was the polar opposite of their belief. They would meet
at Rand's apartment on East Thirty-fourth Street at least once a week to
discuss world events and argue into the early hours. The night Joan introduced
me, the group was small, maybe seven or eight people seated in the
austere living room: Rand; her painter husband, Frank O'Connor; the Bran-
dens; and a few others. Ayn Rand was quite plain to look at—short, in her
late forties. Her face was dramatic, almost severe, with a wide mouth, broad
brow, and great dark intelligent eyes—she kept her dark hair in a pageboy
that emphasized them. She had a pronounced Russian accent even though
she'd been in the United States for twenty-five years. She was unrelentingly
analytical, ready to dissect any idea to its fundamentals, and had no interest
in small talk. Yet despite this apparent ferocity, I noticed an openness in the
40
THE MAKING OF AN ECONOMIST
way she approached conversation. She seemed ready to consider any idea
from any person, and engage it strictly on the merits.
After listening for a few evenings, I showed my logical-positivist colors.
I don't recall the topic being discussed, but something prompted me to
postulate that there are no moral absolutes. Ayn Rand pounced. "How can
that be?" she asked.
"Because to be truly rational, you can't hold a conviction without significant
empirical evidence," I explained.
"How can that be?" she asked again. "Don't yaw exist?"
"I... can't be sure," I admitted.
"Would you be willing to say you don't exist?"
"I might...."
"And by the way, who is making that statement?"
Maybe you had to be there—or, more to the point, maybe you had to
be a twenty-six-year-old math junkie—but this exchange really shook me.
I saw she was quite effectively demonstrating the self-contradictory nature
of my position.
But there was much more to it than that. I prided myself on my reasoning
ability, and thought I could beat anybody in an intellectual debate. Talking
to Ayn Rand was like starting a game of chess thinking I was good, and suddenly
finding myself in checkmate. It dawned on me that a lot of what I'd
decided was true was probably just plain wrong. Of course, I was too stubborn
and embarrassed to concede immediately; instead, I clammed up.
Rand came away from that evening with a nickname for me. She
dubbed me "the Undertaker," partly because my manner was so serious and
partly because I always wore a dark suit and tie. Over the next few weeks,
I later learned, she would ask people, "Well, has the Undertaker decided he
exists yet?"
A
A
t least my work at the Conference Board was going well. I was deep
into my most ambitious project, an analysis of the Pentagon's buildup
of jet fighters, bombers, and other new aircraft in the face of Korea and the
cold war. It was going to require a lot of detective work. As soon as the Ko
41
THE AGE OF TURBULENCE
rean War began, the Defense Department classified its procurement plans.
While the aircraft manufacturers knew their order books, military secrecy
was keeping Wall Street and the rest of American industry in the dark. Yet,
the economic impact was too big to ignore: after the post-World War II
lull, military spending had by the 1953 fiscal year zoomed back up to nearly
14 percent of GDP (it was 4 percent in 2006). That was upsetting the markets
for raw materials and equipment, not to mention those for skilled machinists
and engineers, and it was putting a massive question mark over the
business outlook. Most affected by the push to build airplanes were the makers
of aluminum, copper, and steel, all of which were classified as controlled
materials essential to the war effort.
I already knew a lot about the metals markets, so I volunteered to analyze
the buildup, and my bosses agreed. I began with the public record, which
was of almost no help: Congressional hearings on military production schedules
were conducted in secret session, and the published transcripts were
filled with redactions. The number and types of new planes were left blank;
the number of aircraft per squadron, the number of squadrons per wing,
the number of aircraft held in reserve, and the number of noncombat losses
by type—all were blacked out. Then I decided to look at the congressional
hearings of the late 1940s, which I suspected would have much of the information
I'd need. Secrecy hadn't been an issue then. The Pentagon still
was in the process of phasing down, and the top brass would appear before
the subcommittee on military appropriations and explain in full detail how
everything was then being calculated. The military would certainly be doing
it the same way in 1950 as they did in 1949.
I took that information as my base. Now I needed to assemble all the
publicly available facts. I hunted through technical and engineering manuals,
organizational charts, the massive statistical tables of the federal budget, and
the complex language of the materials orders put out by the Pentagon. Gradually
all the data began to fit. For instance, I knew the weights of particular
aircraft and could surmise the proportions of aluminum, copper, and other
materials that went into each type. With all that in hand, I could estimate
demand.
My research appeared in two long Business Record articles in the spring
of 1952 entitled "The Economics of Air Power." Afterward I heard indirectly
42
THE MAKING OF AN ECONOMIST
that some of the Pentagon's planners had been surprised by how closely the
