Interest rates, inflation, gross domestic product, growth. Promises, promises, promises. Unemployment, debt, bills, benefits, poverty, wages, prices. Supply and demand, surplus value, profit and loss, share prices, investment.

These are the words we associate with the cost of living. And, in this column I have discussed all of them over the past couple of years. Often accompanied with lots of numbers and, occasionally, charts, graphs and illustrations. 

But, whilst all of these are important, they are consequences of the economy, not the reasoning behind the economy. The word that is important in that respect is: confidence.

Consumer confidence dictates consumption. Business confidence dictates what that consumption buys. So it is important to understand confidence.

In the UK consumer confidence has been rising for the past eighteen months; over the past year consumer confidence rose by 6.5%.

But what does this mean exactly, and how do they know?

The consumer index is based on a random survey of consumers who are asked to assess how confident they feel about their personal finances. Now imagine being asked that question. On what basis would you be able to say you were positive or negative about your future finances? An extremely optimistic jobless person might anticipate a big lottery win, or just getting a new job, and say their prospects were positive. Whilst an extremely pessimistic person with a good job might anticipate price rises (which may or may not happen) or fear losing their job and say they are negative about their financial future. 

The point is that either could prove to be right or wrong, but neither can know with any certainty one way or the other. Nonetheless, Ian Stewart of Deloitte commented: “The revival in consumer confidence speaks to a wider story of an economy that has turned the corner.” Possibly. Or maybe it tells us that consumers are as delusional as the apologists for capital when it comes to the future state of the economic system on which they both depend.

Measuring confidence is rather like measuring happiness. It is hard to define and even harder to measure. According to the World Happiness Report for 2024, Finland was the happiest place in the world. The UK was 20th. Perversely, given its current warmongering, Israel ranked 5th.

So does this mean you can never find an unhappy Fin? Hardly. The question asks people to imagine a ladder graded 1 to 20 where 1 is the best life possible and 20 the worst life. It does not ask you whether you feel happy, it infers happiness from where you place yourself on a status scale. It may, or may not, be measuring happiness.

Like confidence, happiness is an emotion. It has no defined measurement scale. Nobody has yet devised a confidence-ometer. We are asking people to place themselves on a scale and from their answer inferring something very different. This is hardly science. 

Yet how confident people are in their future can have very real effects in the real world. Feeling confident that you will have a job for the next 12 months may encourage long-term spending. Only seeing headlines that you may need to take out a mortgage to put the central heating on soon may well have the opposite effect.

The questions asked by GFK, who run the survey the British Government tend to rely on, asks people to assess, predict, analyse, forecast and understand. This assumes that people can do all these things. But even if they can assess their financial situation and predict how it will look in 12 months time, what does that tell us? Are we asking them whether they are, by nature, pessimistic or optimistic? Are we asking them whether, for example, they believe they will win the lottery in the next 12 months? And, let’s just suppose for a second that somebody says they feel very confident that they will win the lottery this year, are we also asking them to predict the odds that this will happen? It seems as useful as asking whether they think we will have a white Christmas, with the exception that, depending where you live (it’s highly unlikely in Saint Lucia, for example), a white Christmas is a possibility for many of us. 

Business confidence is measured by asking a very simple set of questions. The question is whether their business performance would increase, decrease or stay the same over the next 12 months. In April 2024, 23.7% of respondents thought it would increase over the next 12 months, whilst 9.6% thought it would decrease. So what?

When we ask people how they will vote in the next General Election, we can see how accurate our poll is. We have a real set of results to compare with the predicted ones. When we ask people – whether consumers or businesses – to predict their future finances, we have no way of knowing whether they are right or wrong. To do that we would need to go back and ask the same people to assess how well their predictions worked out from a year ago. 

Most people simply would not know. Can you remember whether you felt optimistic or pessimistic about your chances of improving your position in life 12 months ago? I don’t know about anyone else, but I can barely remember what I did yesterday or a week ago. These are exercises in futility.

Why do them then? They are used as indicators of the economy. Business predictions, unlike consumer ones, can become self-fulfilling prophecies. The pessimistic business owner will act as if their prediction is going to come true. They will be cautious and looking to cut costs. Their prediction of business getting worse can happen simply because they have expected it to. In that sense, their confidence level can have an important knock-on effect. But even that is only true to a certain amount.

Being confident about your future implies you have some control. And in a capitalist economy, as we all know, it is dog eat dog. Much of the business environment is entirely outside the control of an individual business. It is not confidence that causes the economy to go into decline but the nature of capitalism.

Boom and bust is not a consequence of how confident you or I feel. It is a consequence of capitalist competition and the inevitability of over-production followed by slump. That is not a prediction by the way. The capitalist boom and slump cycle has been well documented for the past 200 years. And it is also well documented that the booms are getting shorter and the slumps longer. 

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