The famous playwright Bernard Shaw once said a famous irony: “If all economists are connected end to end, they will not come to a conclusion.”
So, how do two experienced and knowledgeable economists study and analyze the same data and make different predictions about the national economy? Why do these experts often disagree? As we shall see, there is no simple answer. There are many reasons for the disagreement of economists.
- Economists disagree, because most of them usually belong to two competing schools of economic thought: Keynesian economics and free market economics.
- Keynesian economists believe that the government should play a role in the market, while free market economists believe that the government should let the market adjust itself.
- When forecasting, economists weigh the importance of certain economic factors in different ways, such as gross domestic product (GDP), inflation, unemployment, and interest rates.
- Certain “X” factors, such as natural disasters, wars, and epidemics, may affect economic forecasts and derail economic theory.
- Interpreting economic data is both an art and a science, leading to different views on many economic factors that influence each other.
Two competing schools of thought
The main disagreement among economists is the question of economic philosophy. There are two major schools of economic thought: Keynesian economics and free market or laissez-faire economics.
Keynesian economists were named after John Maynard Keynes, who first expressed these ideas as an all-encompassing economic theory in the 1930s. They believed that with the help of the private sector and the government, Create a well-functioning and prosperous economy.
What Keynes said about government assistance refers to proactive monetary and fiscal policies aimed at controlling the money supply and adjusting the Fed’s interest rate in accordance with changing economic conditions.
In contrast, free market economists advocate the government’s “let go” policy and reject government intervention in the economy is a useful theory. Free market economists — and many outstanding advocates of this theory, including Nobel Prize winner Milton Friedman — are more willing to let the market solve any economic problem.
This would mean that there would be no government assistance, no government subsidies to enterprises, no government spending specifically aimed at stimulating the economy, and no other efforts by the government to help economists consider the ability of a free economy to self-regulate.
These two economic philosophies have their own advantages and disadvantages. But these strongly advocated and conflicting beliefs are the main reason for the differences among economists. In addition, each philosophy colors the way these warring economists view the macroeconomic and microeconomics. Therefore, each of their statements and economic forecasts is largely influenced by their respective philosophical biases.
Other factors influencing economists’ views
In addition to basic philosophical differences, the differences between economists also stem from various other factors.
Let us state that economics is not an exact science, and that unforeseen effects often occur that derail the most successful predictors of economic conditions. These include, but are not limited to, natural disasters (earthquakes, tsunamis, droughts, hurricanes, etc.), wars, political unrest, epidemics, epidemics, and similar isolated or widespread disasters. Therefore, every economic equation must include an x factor to account for unknown and unpredictable factors.
type of data
When predicting the future of the economy (short-term, medium-term, and long-term), economists may study some or all of the following data and other data. Most economists have a personal opinion on which numbers are most useful for predicting the future.
- Gross Domestic Product (GDP)
- Inflation or deflation rate
- employed population
- Market index
- Housing starts
- Existing Home Sales
- Treasury bond interest rate
- Federal Reserve Interest Rate
- U.S. dollar against foreign currency prices
- Lending trends, loan interest rates
- Different types of debt levels
- Personal savings rate
- Corporate and personal bankruptcy rate
- National debt
- Federal budget deficit
- Commodity prices, futures and spot markets
- personal income
- industry sector
- Mortgage default and delinquency
- Supply and demand of various consumer goods and services
- Capital expenditures of businesses and industries
- Consumer debt
- Consumer confidence
- Business cycle
- Monetary and fiscal policy
Why are there differences?
Now suppose that three economists have reviewed some or all of the above data and made three different forecasts for the US economy.
- Economist A might say that the economy will grow in the next two fiscal quarters.
- Economist B might say that the economy will shrink in the next two fiscal quarters.
- Economist C might say that the economy will remain stable in the next two quarters.
Analyzing and interpreting economic data is both an art and a science. In the simplest terms of science, economics is usually predictable. For example, if a product is in high demand and the product is scarce, its price will rise. As product prices increase, the demand for them will gradually decrease. At a certain high price point, the demand for this product will almost cease. Employment is also a predictable indicator. If the national employment rate approaches 100%, then the economy will generally prosper, and employers will have to pay higher wages to attract talent.
In contrast, when unemployment is widespread and jobs are scarce, the oversupply of job seekers will have a negative impact on the economy, and wages and benefits will fall.
The above factors are all predictable factors in economics, and economists generally agree with these factors. However, when interpreting other data, the economic situation is not so clear, and there are more frequent disagreements among experts in the field.
Most of the data that economists look at comes from the past, not the present, because it takes time to collect and sort the data. This has led to economists not always having a clear understanding of current economic conditions.
Some economists may overemphasize the importance of leading economic indicators, while ignoring the importance of inflation or the risk of inflation in a booming economy.
Some economists may misunderstand these data, while others may give too much or not enough attention to certain factors. Nevertheless, other economists have a favorite formula for predicting the future of the economy. The formula may exclude certain data items. If these data items are taken into account, they will make different predictions about the future situation.
Since they did not analyze comprehensive economic data, their judgment may be different from that of economists who considered all important data. Finally, some economists have added an unexpected factor to their forecasts, while others have either completely ignored it or did not pay enough attention to them in their equations. Therefore, disagreements always occur.
Although economics involves numerical data and perfect formulas that can solve various problems and provide insights into economic activities, it is not entirely empirical science. As mentioned earlier, there are too many x-factors in the complex world of economics, which surprised the experts and violated their predictions.
Economists may be engaged in a variety of different jobs. They may work for the government, corporate or bank, brokerage or financial industry. They may hold positions on Wall Street or academia, or serve as reporters. Each of these employers may have goals or agendas that influence their economists’ views, and the different philosophical views of all economists provide the material for honest disagreements.