The Heisenberg Principle and Economics
A quick skim of The Wall Street Journal on a daily basis for just a week should prove to you that the Heisenberg principle does indeed apply to economics. The Wall Street Journal provides daily analyses of economic events and economists’ perspectives on what has happened as well as what is likely to happen. The Wall Street Journal ‘s curculation is evidence that these analyses are taken seriously by both businesspeople and consumers.
To see how economists’ predictions change the course of economic events, look at economists’ assessment of leading and coincidental indicators and the subsequent movement up or down in the markets for stocks and bonds. Leading indicators are used to predict what is likely to happen in the future, while coincidental indicators are used to describe the economy’s current condition. When the economists say that the indicators demonstrate that the economy is in a recession or entering a recession, consumers and businesses react immediately to prepare for the anticipated recession by reducing consumption and investing more cautiously. This often serves to hasten the onset of a recession, fullfilling the economists’ original prediction. In turn, if consumers and businesses expect good times ahead, they invest and spend their money more confidently. High levels of investment and consumption translate to strong economic growth.
An examination of “Orders for Durable Goods Plunge by 6%,” [The Wall Street Journal, May 25, 1995] yields an example of how this cycle works. Note Marilyn Schaja’s prediction that the Fed will move toward “an easier policy stance” and the reaction of investors in the bond markets to this statement and others similar to it; the bond market soared due to speculation that interest rates might be cut soon. This is only one example of how economists’ predictions directly affect the bond market, but the bond market rises and falls dramatically each day in response to speculation about what the Fed will do or whether the
To see how economists’ predictions change the course of economic events, look at economists’ assessment of leading and coincidental indicators and the subsequent movement up or down in the markets for stocks and bonds. Leading indicators are used to predict what is likely to happen in the future, while coincidental indicators are used to describe the economy’s current condition. When the economists say that the indicators demonstrate that the economy is in a recession or entering a recession, consumers and businesses react immediately to prepare for the anticipated recession by reducing consumption and investing more cautiously. This often serves to hasten the onset of a recession, fullfilling the economists’ original prediction. In turn, if consumers and businesses expect good times ahead, they invest and spend their money more confidently. High levels of investment and consumption translate to strong economic growth.
An examination of “Orders for Durable Goods Plunge by 6%,” [The Wall Street Journal, May 25, 1995] yields an example of how this cycle works. Note Marilyn Schaja’s prediction that the Fed will move toward “an easier policy stance” and the reaction of investors in the bond markets to this statement and others similar to it; the bond market soared due to speculation that interest rates might be cut soon. This is only one example of how economists’ predictions directly affect the bond market, but the bond market rises and falls dramatically each day in response to speculation about what the Fed will do or whether the