Giles Wilkes does a good job of dismissing the idea that the "confidence fairy" is responsible for our economic recovery. I half agree.

I agree that "confidence" is a non-explanation for fluctuations in consumer spending. Such fluctuations can, for the most part, be explained by observable economic variables such as incomes, unemployment and credit availability, as John Muellbauer, for example, has shown. Insofar as spending is forward-looking, it's not because of confidence, but because consumers - in aggregate - have genuine foresight; this is why consumption-wealth ratios help predict equity returns.

So far, I'm with Giles. My chart show why I part with him. It shows that there's a close correlation between investment fluctuations and business confidence, as measured by the European Commission.

Of course, correlation isn't causality. It could be that both change for the same reasons - such as changes in interest rates and profits - or it could be that falling investment causes weaker sentiment.

But this is unlikely to be the whole story. There's a decent body of research which shows that sentiment, or animal spirits, affects investment. Central bankers agree with this. Here is Frederic Mishkin (pdf):

There is strong theoretical support for the management of expectations to stimulate spending when the policy rate hits the zero lower bound.

And here are Bank of England economists (pdf) on QE:

Asset purchases may have broader confidence effects beyond any effects generated through the effect of higher asset prices.

For example, QE might have worked - insofar as it did - by signalling that central banks were willing to do everything possible to ease the crisis, thus preventing an even more catastrophic collapse in in confidence. And the point of forward guidance is to give companies confidence that policy wouldn't tighten. As Mark Carney said in February:

Forward guidance is working. Expected interest rates have remained low even as the economy has recovered strongly. Uncertainty about interest rates has fallen. Most importantly, UK businesses have understood the message. Surveys [show that] virtually all businesses understand guidance, and almost three-quarters of them say it has boosted their confidence in UK economic prospects.

My point here is that one popular idea about the economy is 100% wrong. The media sometimes give the impression that consumers are like PR girlies, swayed by sentiment and "confidence" whereas business "leaders" are hard-headed experts. In fact, the opposite is the case. It is consumers, in aggregate, who are reasonable and bosses who are skittish and sentimental.

However, what we have here is an example of irrationality paying. Business confidence acts like a vengeful and capricious god does to primitive tribespeople; it must be appeased by regular sacrifices. As Michal Kalecki wrote: