Consumer Expectations Don't Tell Us Much About The Real State Of The Economy

good vibes

In order to gain insight into the current and future state of an economy, many economists hold that it is helpful to get the view on this from consumers and businesspersons. Randomly selected consumers and businesspersons are asked to provide their views about the current and the future state of the economy.

Thus if the majority of those surveyed express optimism it is regarded as good news for the economy ahead. Conversely, if the majority of surveyed are pessimistic it is taken as a bad omen for future economic activity.

Is it valid to hold that surveys can tell us where the economy is heading? Moreover, why should we regard an opinion supported by a large percentage of people as any more credible than the view of a particular individual?

The prevailing view is that the knowledge regarding possible future economic conditions is dispersed. It is held that a large group of people is likely to have more information than any one individual.

Therefore, the chances of any individual obtaining an accurate picture of the economy are thus very low.

Consequently, it is logical to conclude that a large group of people selected randomly has a high likelihood of securing an accurate picture of future economic conditions.

It is quite possible that a group of people is going to be better informed than any particular individual. However, greater information does not necessarily mean better knowledge of the future.

Whether a forecast seems to be reasonable is determined not only by the amount of information available but also by whether a theory employed to make the forecast makes sense. In order to ascertain the facts of reality the information must be processed by a theoretical framework.

As long as the individuals surveyed have not disclosed the theories behind their views, there is no compelling reason to regard various surveys as the basis for an accurate assessment of the future state of an economy.

Can Positive Thinking Prevent Decline in Economic Activity?

Given the view that individuals’ expectations are important drivers of economic activity many commentators hold that "positive" thinking and a large dose of "good" news can prevent the emergence of “bad” expectations and thus a decline in economic activity.

Individuals are seen as driven by a mysterious psychology that is susceptible to wild swings. It is then crucial not to upset this psychology in order to keep the economy prosperous.

These days whenever various experts discuss the state of the economy, they try to portray the positive aspect of it. Even when the economy falls into a recession, various influential commentators are very guarded in their speech. 

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