Why economists disagree

A Macroeconomic

Policy Roundtable

“If the price of beef goes up and nothing else changes, people will buy less beef.”

• This is a principle on which all economists agree. It includes several assumptions and abstractions.

• The utility for consumers, per dollar spent on beef at different quantities, has correctly been determined and is constant.

• Maximizing utility is an incentive for consumers.

• Consumers make rational decisions.

• When it comes to predicting if people will buy less beef in the future, economists will disagree.

• Keynes roughly said “The only reason economists make predictions is to make astrologists look good.”

Why economists disagree

• Different Time Periods

• Different Assumptions

• Different Economic Theories

• Different Values

Different Time Periods

• One economist might state that the current policy of the government will lead to inflation. Another might disagree.

• Both could be right if they are talking about the effects of the policy on inflation at different times – for example six months from now compared with two years from now, or thirty.

Different Assumptions

• Because an economy is a complex system, it is often hard to predict the effects of a particular policy or event. Therefore, to be able to make predictions, economists must make certain assumptions.

• One economist might assume the federal budget deficit will become larger next year. Another might not.

• These different assumptions could be the result of their assumptions about projected economic growth, tax revenue, and or government spending.

Different Economic Theories• Economists have yet to settle a number of important questions,

especially those concerning macroeconomics. Macroeconomics deals with the behavior of the economy as a whole, or large aggregate subdivisions of it, and how to influence the behavior. Economists have several different theories or explanations about what influences macro behavior.

• “Supply will create Demand.” “Business Cycles are driven by unanticipated changes in Demand and Inventory.” Post-Keynesians Theorists, Neo-Classical Theorists, Public Choice Theorists, Rational Expectations and the Efficient Market Hypothesis, Multiple Equilibrium Theorists, Globalization’s International Flows and Economies of Scale, to name a few.

• Until these theories are reconciled or until one of them is widely accepted as best; economists will disagree on macroeconomic questions, let alone predicting future outcomes, because the economists are using different theories.

Different Values

• Statements by economists often contain more than just analysis and a prediction about results of a particular policy. They recommend a policy because the results agree with their own values – the results they prefer.

• Disagreements are often about which outcome economists prefer. The economic policies they recommend are determined by their preferred outcomes.