Can surveys provide insight into the state of the economy?
In a free market economy, expectations tend to move in tandem with the facts of reality. Contrast this to a hampered economy where gov't policies give rise to expectations uncoordinated with reality
In order to gain insight into the state of the economy, some analysts utilize consumer and business surveys. Randomly selected consumers and businesspersons are asked to provide their views about the state of the economy. If a survey shows that, the majority of those surveyed express optimism it is regarded as good news for the economy. Conversely, if the majority of those surveyed are pessimistic it is taken as a bad omen.
It appears that the information regarding economic conditions is dispersed. Hence, the chances of any particular individual having an accurate picture of the state of the economy are low. Hence, it would appear that selecting a large number of individuals randomly has a higher likelihood of securing an accurate picture of economic conditions than one individual.
It is quite possible that a group of individuals will have more information than any given individual. However, more information does not necessarily mean a better understanding of economic conditions.
In order to ascertain the facts of reality the information must be processed by means of a theoretical framework. Whether the assessment of economic conditions “makes sense” is determined not only by the amount of information available but also whether a theory, or a thinking process, is in tune with the facts of reality. As long as the individuals surveyed have not disclosed the theories behind their views, there is no compelling reason to regard various confidence or sentiment surveys as the basis for the assessment of the state of the economy.
Also, note that various consumer and business surveys are considered useful because these surveys could establish likely changes in the demand for goods and services. Thus, a strengthening in consumer and business confidence indexes can be associated with a strengthening in the demand for goods and services conversely; a weakening in the indexes raises the likelihood that the demand for goods and services is going to weaken. Given the popular view that demand causes supply it seems that by establishing the likely direction of the confidence indexes one can ascertain the likely future course of the economy.
However, following the Say’s law we know that increases in supply generate increases in demand i.e. supply causes demand and not the other way around. What is required for economic growth is a suitable infrastructure.
Furthermore, according to Mises the knowledge of the future can only be qualitative,
Economics can predict the effects to be expected from resorting to definite measures of economic policies. It can answer the question whether a definite policy is able to attain the ends aimed at and, if the answer is in the negative, what its real effects will be. But, of course, this prediction can be only “qualitative”. It cannot be “quantitative” as there are no constant relations between the factors and effects concerned.1
Can positive thinking prevent a fall in economic activity?
Given the view that expectations are the key driving force of the economy, some commentators hold that "positive" thinking and large dosages of "good" news can prevent the development of pessimistic expectations and in turn bad economic conditions. In this way of thinking individuals are depicted as driven by a psychology susceptible to wild swings.
It is then crucial not to upset this psychology in order to keep the economy prosperous. Hence, whenever various commentators discuss the state of the economy, they try to portray the bright aspect of it. Even when the economy falls into a recession, various influential commentators are very guarded in their speech. On this Rothbard wrote,
After the disaster of 1929, economists and politicians resolved that this must never happen again. The easiest way of succeeding at this resolve was, simply to define "depression" out of existence. From that point on, America was to suffer no further depressions. For when the next sharp depression came along, in 1937-38, the economists simply refused to use the dread name, and came up with a new, much softer-sounding word: "recession". From that point on, we have been through quite a few recessions, but not a single depression. But pretty soon the word "recession" also became too harsh for the delicate sensibilities of the American public. It now seems that we had our last recession in 1957-58. For since then, we have only "downturns", or, even better, "slowdowns", or "sideways movements". So be of good cheer, from now on, depressions and even recessions have been outlawed by the semantic fiat of economists; from now on, the worst that can possibly happen to us are "slowdowns". Such are the wonders of the "New Economics".2
Again, the main reason for this gentle talk is a view that soft language is not going to upset individual's confidence. If individual’s confidence is kept stable then stable economic activity will follow, so it is held.
On account of the view that stable expectations imply economic stability, economists hold that government and central bank policies must be transparent. If policies are made known in advance, surprises will be avoided and volatility will be reduced.
We suggest that what matters is that individuals’ expectations correspond to the facts of reality and not whether these expectations are stable. Stable expectations cannot undo the damage caused by loose monetary and fiscal policies. Moreover, irrespective of whether individuals are successful in identifying the facts of reality or not, these facts are going to assert themselves.
Thus, if we have identified that individuals’ real incomes are declining, then this is a fact of reality. Regardless of individuals’ confidence, it is this fact that is going to force the decline in consumer outlays.
Expectations in free versus hampered market
Expectations emerge in response to individual’s evaluation of the facts of reality. In a free market economy, whenever individuals form expectations that run contrary to the facts of reality this sets in place incentives for a renewed evaluation and different actions.
For instance, as a result of an incorrect evaluation, too much capital was invested in the production of product A and too little invested in the production of product B. The effect of the over-investment in the production of A is to depress profits, because the excessive quantity of A can only be sold at prices that are low in relation to costs.
The effect of under-investment in the production of B will lift its price in relation to cost, and will raise its profit. It is likely that we would then have a withdrawal of capital from A and a channeling towards B, implying that if investment goes too far in one direction, and not far enough in another counteracting forces of correction will be set in motion3. In a free market, the facts of reality will assert their dominance quickly through individuals’ evaluation and therefore their actions.
This is however not so 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.
Conclusion
We can conclude that in a free market economy, individuals’ expectations will have a tendency to move in tandem with the facts of reality. This is in contrast to a hampered economy where government and central bank policies give rise to expectations that are uncoordinated with reality. We also conclude that the fact that a large group of people express an opinion regarding the state of economic conditions does not make it more accurate than the view expressed by any particular individual.
Ludwig von Mises The Ultimate Foundation Of Economic Science, Sheed Andrews and Mc Meel Inc p 67
Murray N. Rothbard The Austrian theory of the trade cycle Mises Institute p 65-66.
George Reisman, The Government Against the Economy (Ottawa, ILL.: Janeson Books, 1985), p 5