In order to gain insight into the future state of an economy, many economists refer to a variety of consumer and business surveys. Randomly selected consumers and businessmen are asked to provide their views about where the economy is heading. Thus, if a survey shows that the majority of the surveyed express optimism it is regarded as good news for the economy. Conversely, if the majority of the surveyed are pessimistic it is taken as a bad omen for future economic activity.
But, is it valid to suggest 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?
It would appear that the knowledge regarding future economic conditions is dispersed. The chances of any one particular individual obtaining an accurate picture of the economy are thus very low. In addition, it is held that a large group of people are likely to have more information than an individual.
Hence, the logic underlying consumer and business surveys is 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 will have in their possession a greater amount of information than any given individual. However, more information does not necessarily mean a more accurate knowledge of the future.
In order to ascertain the facts of reality, i.e., to separate the wheat from the chaff, the information must be processed by means of a theoretical framework.
Whether a forecast “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 an accurate assessment of the future state of an economy.
Knowledge of the Future Can Only Be Qualitative
The facts of reality that are employed in forecasting the future are ascertained from historical data.
Contrary to the rational expectations theory the past knowledge of individuals which was instrumental in determining their past actions shapes and constrains individuals’ future values and know-how, thereby influencing future actions.1
If it were otherwise and the past didn’t have any effect on the future a world of chaos would exist, where the accumulation of knowledge would not be undertaken and economic advancement couldn’t take place.
