There was a nice illustration of some of the basics points that I keep making on the BBC last week.
One is the habit economists have of simplifying everything to the point that they can understand it, which is the point at which their theories have nothing to do with the real world any more. Another is the fact that nobody commenting on the economy, on money, on consumers, on trends or anything else seems to be able to think about more than one aspect at a time.
For example, the economist is quoted:
The real key factor to confidence, he says, is what is going on in the labour market.
That gets shown to be an oversimplification by other commentators, who realise that individual issues make a difference and so does the context. To illustrate that, I got asked last week for a comment about an apparent anomaly in consumer figures. Sales at Thorntons, the chocolate company were significantly down. But Next was showing healthy sales. So the question was – which way is the economy going.
I was a bit puzzled why they wanted a psychologist’s interpretation, to be honest. I’m usually the first one to suggest that psychology is massively underrated as a profession and that the contribution it can make is immense. But I’m not sure I need a doctoral level qualification and lots of experience to reason:
- The weather has been unseasonably hot.
- When it’s hot, people might like ice cream, but probably don’t buy as much chocolate.
- When it’s hot in April, people start feeling like the spring is turning to summer and buy summer outfits, which have started appearing in shops ready for the rush to buy before the summer holiday season.
So is it hard to work out that Thorntons’ sales will be down and Next’s up?
And is it hard to see that there is a bit more to consumer confidence than “the labour market”?
Later on in the article, we get the statement that consumer confidence is all about the price of petrol – and this is allegedly proven because moneyexpert.com readers think lowering prices would improve confidence. It might. But then at various times we’ve been told that fuel prices rising (or falling) are effecting confidence, that rising (or falling) house prices are fueling (or retarding) economic growth and that interest rates are being kept too high (or too low) and this will stall (or start) an economic recovery. I’ve said before that the economy is too complicated to make those sort of predictions with any likelihood of being right.
But apart from these things all being guesswork anyway (who anticipated the market was about to fall because of the Japan earthquake, and rise after the news of Bin Laden being killed, before those events were seen to have happened), the individuals who make up the economy – you and I – are influenced differently. Maybe you regularly shop at Next and see lots of people buying, maybe you don’t drive a car so don’t care if the price of fuel goes up, but you have lots of savings that are getting a lousy rate of interest so you’re pretty optimistic but would be more so if interest rates went up. Or maybe you drive huge distances, like chocolate and see that you are the only one buying and you have a huge mortgage so the only thing that would depress you more would be for interest rates to go up.
And all that is in addition to your natural tendencies to optimism or pessimism, your view of your own job security and all the other factors in your life.
It isn’t simple
But you can do something about your own confidence. You can raise your own level of optimism (to an extent) and you can get more control over your own life and how you view the world. There are lots of ways to do that, there are some posts on it, for example “the pursuit of happiness” and a lot of the books and websites in the “resources” section of this site. I don’t suppose anybody else is going to suggest you do that, but actually, if you put all the different aspects of economic confidence together, it is the most logical action for you to be happier and have more financial control.