Celebrated playwright George Bernard Shaw once famously quipped: "If all economists were laid end to end, they would not reach a conclusion."
So, how is it that two experienced, knowledgeable economists study and analyze the same data and each comes up with a different forecast for the nation's economy? Why do these experts so often disagree with one another? As we will see, there's no simple answer; there are many reasons for economists' differing opinions.
Tutorial: Microeconomics 101
Two Competing Schools of Thought
The principal disagreement among economists is a matter of economic philosophy. There are two major schools of economic thought: Keynesian economics and free-market, or laissez-faire, economics.
Keynesian economists, named after John Maynard Keynes, who first formulated these ideas into an all-encompassing economic theory in the 1930s, believe that a well-functioning and flourishing economy may be created with a combination of private sector and government help.
By government help, Keynes meant an active monetary and fiscal policy, which works to control the money supply, and adjust Federal Reserve interest rates in accordance with changing economic conditions. (Read more about Keynes in Giants of Finance: John Maynard Keynes.)
By contrast, the free-market economists, alternately called laissez-faire economists, advocate a government "hands off" policy, rejecting the theory that government intervention in the economy is beneficial. Free-market economists - and there are many distinguished advocates of this theory, including Nobel Memorial Prize winner Milton Friedman - prefer to let the marketplace itself sort out any economic problems that may occur. That would mean no government bailouts, no government subsidies of business, no government spending designed specifically to stimulate the economy, and no other efforts by the government to help what the economists believe is the ability of a free economy to regulate itself. (Learn more in Free Market Maven: Milton Friedman.)
Both economic philosophies have merit and both have flaws. But these strongly advocated and conflicting beliefs are a major cause of disagreement among economists. Moreover, each philosophy colors the way these warring economists see the economy, both the macro economy and micro economy. As a consequence, their every pronouncement and economic forecast is influenced in large measure by their respective philosophical biases.
Besides their elementary philosophical differences, disagreements among economists arise because of a variety of other factors.
Let's stipulate that economics is not an exact science, and often unforeseen influences may occur to derail the most successful forecaster of economic conditions. These would include, but are not limited to, natural disasters – earthquakes, tsunamis, droughts, hurricanes etc. Also among the unforeseen events that can upset the most carefully drawn economic forecast are wars, political upheavals, epidemics or pandemics such as influenza, and similar isolated or widespread catastrophes.
There, an X-factor must be included in every economic equation – the unknown and unpredictable. When forecasting the future of the economy – short-term, mid-term and long-term - economists may study some or all of the following data, as well as additional data. Most economists have a personal preference for which numbers are the most useful for forecasting the future.
Some of the data economists study and analyze are cited below. The information is gleaned from both government and private sources.
Types of Data
- Gross domestic product (GDP): Is it growing, shrinking? By what percentage? Is GDP flat or stagnant?
- Inflation or deflation rate
- Employment numbers
- Jobless numbers
- Market indexes
- New housing starts
- Existing home sales
- Treasury interest rates
- Fed interest rate
- Money supply
- The price of the U.S. dollar against foreign currencies
- Borrowing and lending trends, and interest rates on loans
- Debt levels in various categories
- Personal savings rate
- Business and personal bankruptcy rates
- National debt
- Federal budget deficit
- Commodity prices, future and spot market
- Personal income
- Industry sectors – Economists examine them sector by sector to assess their health and future performance
- Mortgage defaults and delinquencies
- Supply and demand of various consumer goods and services
- Capital expenditures of businesses and industries
- Consumer spending
- Consumer debt
- Consumer confidence
- Business cycles
- Monetary and fiscal policies (Learn more about economic indicators in our comprehensive Economic Indicators Tutorial.)
Assume now that three economists look at some or all of the above data and make three different forecasts for the U.S. economy.
- Economist A might say that the economy will grow in the next two fiscal quarters.
- Economist B might say the economy will shrink in the next two fiscal quarters.
- Economist C might say that the economy will remain flat for the ensuing two quarters.
Why the Disagreement?
Analyzing and interpreting economic data is both art and science. In its simplest scientific aspect, economics is generally predictable.
For example, if there's a high demand for a product and the product is scarce, its price will go up. As the price for the product increases, demand for it will taper off. At a certain high price point, demand for the product will almost stop. Employment numbers are also a predictable indicator. If national employment is near 100%, then the economy, generally, will be flourishing and employers will have to pay higher wages to attract personnel.
By contrast, when unemployment is widespread and jobs are scarce, wages and benefits decline because of an over-supply of job applicants producing a negative impact on the economy.
The above factors are among the predictable elements of economics and economists usually agree on them. When interpreting other data, however, the economic picture is not as clear and disagreements arise among the experts more frequently in this area.
Some economists may over-emphasize the importance of leading economic indicators while discounting the significance of inflation, or the risk of inflation in a vigorously growing economy. (Learn more about leading indicators in our article Leading Economic Indicators Predict Market Trends.)
Some economists may misinterpret the data; others may give too much weight, or not enough, to certain factors. Other economists have a favorite formula for predicting the economic future that may exclude certain items of data that, if considered, would project a different picture of future conditions. Because they have not analyzed a comprehensive mix of economic data, their judgments may be at variance with economists who have taken all the significant data into account. Lastly, some economists build an element of the unexpected into their forecasting; others do not, or do not give it enough weight in their equations. Therefore, disagreements always occur.
The Bottom Line
Although economics deals with numerical data and well-established formulas that work to solve various problems and provide insight into economic activity, it is not a completely empirical science. Furthermore, as mentioned, too many x-factors – the unpredictable, including unintended consequences – may occur in the complex world of economics, thus surprising the experts and defying their forecasts.
Economists may be employed in a variety of different jobs. They may work for the government, for business, or in the banking, brokerage or financial industries. They may hold positions on Wall Street or in academia, or work as journalists. Each of these employers may have objectives or agendas which color the opinions of their economists. The economists whom we notice have disagreements are those who are widely quoted in the media, or who write books, or appears on radio and television. Countless others have their disagreements or agreements quietly, beyond the scrutiny of the public. Finally, as mentioned at the beginning of this article, economists have differing philosophical views of their discipline, and these also provide fodder for honest disagreement.
Like economists, analysts are relied upon for forecasts as well. Read how their predictions can have a heavy influence on the stocks they cover in our article Analyst Forecasts Spell Disaster For Some Stocks.