Why Can't Economists Agree?

Author: Marc Davis

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.

Two Competing Schools of Thought
The principle 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 – controlling the money supply, and adjusting Federal Reserve interest rates in accordance with changing economic conditions. (Read more about Keynes in our article series 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 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 which can upset the most carefully drawn economic forecast are wars, political upheavals, epidemics or pandemics such as influenza, and similar isolated or widespread catastrophes.

Into every economic forecast, therefore, one must include an X-factor in the 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? Or is the 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 – the fluctuating periods when the total production of goods and services increase or decline
• Monetary and fiscal policies (Learn more about economic indicators in our comprehensive Economic Indicators Tutorial.)