Most of us prefer optimism rather than pessimism. That is why photographers always tell their models to smile. In campaigns, political candidates usually are smiling, and voters almost always opt for the optimists. Thus, Ronald Reagan, the perpetual optimist, was preferred over Jimmy Carter, the “gloomster.”
The consumer confidence index report is awaited eagerly each month. Optimism is what is wanted. Economist John Maynard Keynes stated that “animal spirits” influenced economic activity. Those who are pessimistic are less able to capitalize on economic trends.
Daniel Kahneman, a psychologist and winner of a Nobel prize in economics, wrote that overconfidence was “the engine of capitalism.” He stated that an uncritical approach to the odds of a successful project may be essential. He noted that the chance of a venture business succeeding for five years was only about 35 per cent. Yet, most individual entrepreneurs infer that the probability for a favourable outcome is appreciably higher.
Most, when questioned, consider themselves to be quite successful, whatever that means, so it is not surprising that optimists are inclined to be entrepreneurs.
Still, there are many reasons for pessimism. This columnist grew up in the “dirty ’30s” and constantly feared a return to that terrible era. Furthermore, nowadays one can observe the results of the excess of enthusiasm as governments and individuals plunged too deeply into debt. It will take a long time for those surpluses to be worked out; retrenchment has become essential in order to return to solvency. Also, given our present economic troubles, it is prudent to be careful and avoid commitments that cannot be funded.
Nowadays, particularly in certain depressed areas, one can note wasteful investments; the row of empty houses testify to “irrational exuberance,” to quote the previous chairman of the U.S. Federal Reserve Board. Inasmuch as the preceding two decades witnessed almost unprecedented prosperity, it was widely assumed that individual favourable results were due to people’s skills. It was believed that the good outcome in large measure came because of personal attributes, ignoring the cyclical trends that, naturally, would be reversed. Unfortunately optimists assumed past gains could be extrapolated into the future, even though understanding history should dispel that illusion. It is said good markets make many think they are geniuses.
Banks have been complicit in that unfounded optimism and have encouraged borrowers to incur debt far in excess of their financial resources. That notably took place in the United States and Western Europe, but recent data reveals that Canadian consumers now are carrying debts in excess of 150 per cent of GDP, a level close to that in the United States and parts of Europe. Hence, pessimism, particularly at the present time, is both useful and justified. Governments everywhere should take heed of that and refrain from excessive government spending and borrowing.