Is it possible to talk ourselves into recession? To what extent do our moods affect economic behaviour? These are of course reasonable questions. But listen to this piece on the Today programme. What do notice?
The thing is, the discussion is entirely about consumer behaviour. A moment's thought, however, tells us that confidence - and especially irrational moods - are more likely to affect corporate spending:
- no individual consumer is big enough to affect the economy. But a few firms are. Extreme pessimism or optimism in a few households, then, is irrelevant - but it might be very important in a few companies.
- There are millions of consumers, whose irrational optimism or pessimism might well cancel out. However, there are a few dozen large corporations that really matter for the economy, and there's less reason to suppose the decisions these take will cancel out, not least because bosses have similar backgrounds and outlooks. As Chuck Prince, ex-CEO of Citigroup famously said, 'as long as the music is playing, you've got to get up and dance.'
- Bosses are selected for over-confidence and conformity. This makes it more possible that bosses' mistakes - either too optimistic or too pessimistic - will be correlated, and thus that mood swings might affect the economy.
Two facts corroborate these suspicions.
First, economists find it much harder to forecast capital spending than consumer spending. Since 2000, the average error (regardless of sign) in January's forecasts for that year's consumer spending growth has been 1.1 percentage points. The average error in forecasts for investment growth has been 2.7 percentage points. This suggests that conventional models - which focus upon observable factors such as interest rates and incomes - go more wrong in forecasting corporate than consumer spending. Which is a sign that perhaps corporate spending, more than consumer spending, is prone to swings in 'animal spirits.'
Secondly, the behaviour of a small minority of firms determines whether we get recession or not. In the 1989-91 recession, 10% of firms accounted for 80% of the gross fall in sales and 85% of the gross fall in employment.
All of which raises the question. Why, given all this, should anyone discuss the role of mood and confidence solely in the context of consumer spending?
I fear there's an ideological bias at work - which is all the more pernicious for being subconscious. I mean this in two senses.
First, there's a reluctance to think of boardrooms as being driven by sentiment, psychology and mood. Journalists at least - even now! - think of 'senior people' as being hard-headed experts, and only consumers as being ignorant and irrational (when Peter Lunn rightly disputed the latter I suspect he was going off piste).
Secondly, there's a reluctance to acknowledge the role of power in the economy. Yes, consumer spending is determined largely by people's wages and employment security. But what determines those? And what if the decisions that do so are systematically irrational or ill-informed? These are questions which are not to be asked. And in not doing so the BBC helps to avoid capitalists' power and rationality from falling into question.