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

In a free market, the facts of reality are going to assert their dominance through individuals’ evaluation and therefore their actions.

In contrast, in a distorted market economy by enforcing their policies, governments and central banks can set a platform for a prolonged deviation of expectations from the facts of reality. As a result, it could take a long time for the facts of reality to assert their dominance.

Notwithstanding, neither the government nor the central bank can indefinitely defy these facts. A classic case is the artificial lowering of interest rates by the central bank that results in boom-bust cycles.

Conclusion

We can conclude that in a free, unhampered market economy, individuals’ expectations are likely to correspond to the facts of reality. This is in contrast to a hampered economy where government and central bank policies give rise to expectations that are detached from the facts of reality.

We are also of the view that it is questionable that by means of opinion surveys it is possible to ascertain the future direction of an economy. That a large group of people has expressed a view regarding future economic conditions does not make it more accurate than the view expressed by any particular individual.

What matters is not how many people have participated in an opinion survey but the framework of thinking they have employed in backing up their views.

As a rule, at the peak of the business cycle, most individuals express great optimism regarding the likely economic conditions in the months ahead. Bad business conditions emerge when least expected—just when all businesses are holding the view that a new age of steady and rapid progress has emerged.

Furthermore, what matters is not whether government and central bank policies are transparent, but the effect these policies have on individual’s life and well-being.


1.Murray N. Rothbard, "Economic Depressions: Their Cause and Cure," in The Austrian Theory of the Trade Cycle, ed. Richard M. Ebeling (Auburn, AL: Ludwig von Mises Institute,), pp. 65–92, esp. pp. 65–66.

2.See Milton Friedman, Dollars and Deficits (New York: Prentice Hall, 1968), pp. 47–48.

3.George Reisman, The Government against the Economy (Ottawa, IL:Janeson Books, 1985), p. 5.

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