Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
Encyclopedia
'Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism' (2009) is a book written to promote the understanding of the role played by emotions in influencing economic decision making
. According to the authors, economists have tended to de-emphasize the importance of emotional factors, as the effects of emotions are difficult to model and quantify. The book asserts that a variety of otherwise puzzling questions can be answered once one allows for the effect that emotional drives
, or "animal spirits
," have on economic factors. Akerlof and Shiller began writing the book in 2003. While finishing the work after the Financial crisis of 2007-2008 the authors set themselves the additional aim of promoting a much more aggressive US government
intervention to alleviate the crises than has been seen as of February 2009. They repeatedly stress the need for decisive action to targeted at restoring credit flows, and that the overall stimulus from the government needs to be much larger than would otherwise be the case due to very low levels of confidence about short and medium term economic prospects.
use of the phrase animal spirits, which he used to describe the psychological forces that partly explain why the economy doesn't behave in the manner predicted by classical economics — a system of thought that expects economic actors to behave as unemotional rational
beings. The authors assert that the Keynesian Revolution
was emasculated as Keynesians progressively relegated the importance of animal spirits to accommodate the views of economists who preferred the simpler classical or neo-classical system. The preface goes on to describe how Keynes' ideas suggest the economy will function best with a moderately high level of government intervention, which they compare to a happy home where children thrive with parents that are neither too authoritarian (as in a Marxist economy) nor too permissive (as in a neoliberal economy). The authors state that recent research now supports the concept of animal spirits much more robustly than Keynes was able to, and they express the hope that fellow economists can be convinced of this, thus reducing the internecine disputes that prevent their discipline from providing the clear support that politicians need for the aggressive action required to fix the 2008 - 2009 economic crises.
Chapter 1 the authors discuss confidence, which they say is the most important animal spirit for to know about if one wishes to understand the economy.
Chapter 2 is about the desire for fairness, an emotional drive that can cause people to make decisions that aren’t in their economic best interests.
Chapter 3 discusses corruption and bad faith, and how growing awareness of these practices can contribute to a recession, in addition to the direct harm the practices cause themselves.
Chapter 4 presents evidence that, in contrast to monetarist theory, many people are at least partially under the money illusion, the tendency for people to ignore the effects of inflation. Workers for example will forgo a pay rise even when prices are rising, if they know that their firm is facing challenging conditions – but they are much less willing to accept a pay cut even when prices are falling.
Chapter 5 is about the importance of stories in determining behaviour. Such as the repeatedly told story that house prices will always rise, which caused many additional people to invest in housing following the dot com bust of 2000.
Chapter 6 is about why recessions happen. The authors assert that the business cycle can be explained by rising confidence in the upswing eventually leading investors to make rash decisions and ultimately encouraging corruption, until eventually panic appears and confidence evaporates, triggering a recession. There is a discussion about feedback loops between animal spirits and real returns available, which help explain the intensity of both the up and down swing of the cycle.
Chapter 7 discusses why animal spirits make central banks a necessity, and there is a post script about how they can intervene to help with the current crises.
Chapter 8 tackles the reasons for unemployment, which the authors say is partly due to animal spirits such as concerns for fairness and the money illusion.
Chapter 9 is about why there is a trade off between unemployment and inflation. The authors show how effects of animal spirits refutes the monetarist theory that there is a natural rate of employment which it is not desirable to exceed.
Chapter 10 is about why people don't consider the future rationally in their decisions about savings.
Chapter 11 presents an explanation for why asset prices and investment flows are so volatile.
Chapter 12 discusses why real estate markets go through cycles, with periods of often rapid price increase interspaced by falls.
Chapter 13 suggests that animal spirits can be used to explain the persistence of poverty among ethnic minorities, describing how working class minorities have different stories about how the world works and their place in it, compared to working class white people. The authors argue that the effects of animal spirits make a strong case for affirmative action.
Chapter 14 is a conclusion where the authors state that the cumulative evidence they have presented in the preceding chapters overwhelming shows that the neo classical view of the economy, which allows little or no role for animal spirits, is unreliable. They state that an effective response to the current economic crises must take into account the effects of animal spirits.
, Clive Crook write "it is a fine book at exactly the right time.... Animal Spirits carries its ambition lightly--but is ambitious nonetheless. Economists will see it as a kind of manifesto." Andrew Rosenblum from the New York Observer
says "Animal Spirits is most compelling when the authors summon all the key behavioral patterns to explain vast, complex phenomena such as the Great Depression
.... Animal Spirits...is aimed squarely at the general reader, and rightly so: Macroeconomics is now everybody's business--the banks are playing with our money."
An exception to the numerous glowing reviews the book received was a lengthy critique published in The New Republic
by the Judge Richard Posner
. The authors responded to Posner's criticisms in an article published a few weeks later in the same periodical. And, on the same day and in the same periodical, Posner replied to the authors' response.
Animal Spirits was shortlisted for the 2009 Financial Times and Goldman Sachs Business Book of the Year Award
.
Decision making
Decision making can be regarded as the mental processes resulting in the selection of a course of action among several alternative scenarios. Every decision making process produces a final choice. The output can be an action or an opinion of choice.- Overview :Human performance in decision terms...
. According to the authors, economists have tended to de-emphasize the importance of emotional factors, as the effects of emotions are difficult to model and quantify. The book asserts that a variety of otherwise puzzling questions can be answered once one allows for the effect that emotional drives
Drive theory
The terms drive theory and drive reduction theory refer to a diverse set of motivational theories in psychology. Drive theory is based on the principle that organisms are born with certain physiological needs and that a negative state of tension is created when these needs are not satisfied...
, or "animal spirits
Animal spirits (Keynes)
"Animal spirits" is the term John Maynard Keynes used in his 1936 book The General Theory of Employment, Interest and Money to describe emotions which influence human behavior and can be measured in terms of consumer confidence. Trust is also included or produced by "animal spirits"...
," have on economic factors. Akerlof and Shiller began writing the book in 2003. While finishing the work after the Financial crisis of 2007-2008 the authors set themselves the additional aim of promoting a much more aggressive US government
Federal government of the United States
The federal government of the United States is the national government of the constitutional republic of fifty states that is the United States of America. The federal government comprises three distinct branches of government: a legislative, an executive and a judiciary. These branches and...
intervention to alleviate the crises than has been seen as of February 2009. They repeatedly stress the need for decisive action to targeted at restoring credit flows, and that the overall stimulus from the government needs to be much larger than would otherwise be the case due to very low levels of confidence about short and medium term economic prospects.
Synopsis
The Preface recalls Keynes'John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
use of the phrase animal spirits, which he used to describe the psychological forces that partly explain why the economy doesn't behave in the manner predicted by classical economics — a system of thought that expects economic actors to behave as unemotional rational
Rational
Rational may refer to:* Rationality, a concept of reason* Rational number, a number that can be expressed as a ratio of two integers* Rational function, a mathematical function which can be written as the ratio of two polynomial functions...
beings. The authors assert that the Keynesian Revolution
Keynesian Revolution
The Keynesian Revolution was a fundamental reworking of economic theory concerning the factors determining employment levels in the overall economy. The revolution was set against the then orthodox economic framework: neoclassical economics....
was emasculated as Keynesians progressively relegated the importance of animal spirits to accommodate the views of economists who preferred the simpler classical or neo-classical system. The preface goes on to describe how Keynes' ideas suggest the economy will function best with a moderately high level of government intervention, which they compare to a happy home where children thrive with parents that are neither too authoritarian (as in a Marxist economy) nor too permissive (as in a neoliberal economy). The authors state that recent research now supports the concept of animal spirits much more robustly than Keynes was able to, and they express the hope that fellow economists can be convinced of this, thus reducing the internecine disputes that prevent their discipline from providing the clear support that politicians need for the aggressive action required to fix the 2008 - 2009 economic crises.
Part one
The five key animal spirits are treated here, each assigned their own chapter.Chapter 1 the authors discuss confidence, which they say is the most important animal spirit for to know about if one wishes to understand the economy.
Chapter 2 is about the desire for fairness, an emotional drive that can cause people to make decisions that aren’t in their economic best interests.
Chapter 3 discusses corruption and bad faith, and how growing awareness of these practices can contribute to a recession, in addition to the direct harm the practices cause themselves.
Chapter 4 presents evidence that, in contrast to monetarist theory, many people are at least partially under the money illusion, the tendency for people to ignore the effects of inflation. Workers for example will forgo a pay rise even when prices are rising, if they know that their firm is facing challenging conditions – but they are much less willing to accept a pay cut even when prices are falling.
Chapter 5 is about the importance of stories in determining behaviour. Such as the repeatedly told story that house prices will always rise, which caused many additional people to invest in housing following the dot com bust of 2000.
Part two
Here the authors discuss eight important questions about the economy, which they assert can only be satisfactorily answered by a theory that takes animal spirits into account. Each question has its own chapter.Chapter 6 is about why recessions happen. The authors assert that the business cycle can be explained by rising confidence in the upswing eventually leading investors to make rash decisions and ultimately encouraging corruption, until eventually panic appears and confidence evaporates, triggering a recession. There is a discussion about feedback loops between animal spirits and real returns available, which help explain the intensity of both the up and down swing of the cycle.
Chapter 7 discusses why animal spirits make central banks a necessity, and there is a post script about how they can intervene to help with the current crises.
Chapter 8 tackles the reasons for unemployment, which the authors say is partly due to animal spirits such as concerns for fairness and the money illusion.
Chapter 9 is about why there is a trade off between unemployment and inflation. The authors show how effects of animal spirits refutes the monetarist theory that there is a natural rate of employment which it is not desirable to exceed.
Chapter 10 is about why people don't consider the future rationally in their decisions about savings.
Chapter 11 presents an explanation for why asset prices and investment flows are so volatile.
Chapter 12 discusses why real estate markets go through cycles, with periods of often rapid price increase interspaced by falls.
Chapter 13 suggests that animal spirits can be used to explain the persistence of poverty among ethnic minorities, describing how working class minorities have different stories about how the world works and their place in it, compared to working class white people. The authors argue that the effects of animal spirits make a strong case for affirmative action.
Chapter 14 is a conclusion where the authors state that the cumulative evidence they have presented in the preceding chapters overwhelming shows that the neo classical view of the economy, which allows little or no role for animal spirits, is unreliable. They state that an effective response to the current economic crises must take into account the effects of animal spirits.
Critical reception
Reviewing the book for the Financial TimesFinancial Times
The Financial Times is an international business newspaper. It is a morning daily newspaper published in London and printed in 24 cities around the world. Its primary rival is the Wall Street Journal, published in New York City....
, Clive Crook write "it is a fine book at exactly the right time.... Animal Spirits carries its ambition lightly--but is ambitious nonetheless. Economists will see it as a kind of manifesto." Andrew Rosenblum from the New York Observer
New York Observer
The New York Observer is a weekly newspaper first published in New York City on September 22, 1987, by Arthur L. Carter, a very successful former investment banker with publishing interests. The Observer focuses on the city's culture, real estate, the media, politics and the entertainment and...
says "Animal Spirits is most compelling when the authors summon all the key behavioral patterns to explain vast, complex phenomena such as the Great Depression
Great Depression
The Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
.... Animal Spirits...is aimed squarely at the general reader, and rightly so: Macroeconomics is now everybody's business--the banks are playing with our money."
An exception to the numerous glowing reviews the book received was a lengthy critique published in The New Republic
The New Republic
The magazine has also published two articles concerning income inequality, largely criticizing conservative economists for their attempts to deny the existence or negative effect increasing income inequality is having on the United States...
by the Judge Richard Posner
Richard Posner
Richard Allen Posner is an American jurist, legal theorist, and economist who is currently a judge on the United States Court of Appeals for the Seventh Circuit in Chicago and a Senior Lecturer at the University of Chicago Law School...
. The authors responded to Posner's criticisms in an article published a few weeks later in the same periodical. And, on the same day and in the same periodical, Posner replied to the authors' response.
Animal Spirits was shortlisted for the 2009 Financial Times and Goldman Sachs Business Book of the Year Award
Financial Times and Goldman Sachs Business Book of the Year Award
Financial Times and Goldman Sachs Business Book of the Year Award is an annual award given to the best business book of the year as determined by the Financial Times and Goldman Sachs. It aims to find the book that has ‘the most compelling and enjoyable insight into modern business issues.’ The...
.
Further reading
- The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It by Robert J. Shiller
See also
- Behavioral economics
- Keynesian economicsKeynesian economicsKeynesian economics is a school of macroeconomic thought based on the ideas of 20th-century English economist John Maynard Keynes.Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and, therefore, advocates active policy responses by the...
- John Maynard KeynesJohn Maynard KeynesJohn Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
- Growth FetishGrowth FetishGrowth Fetish is a book about economics and politics by the Australian liberal political theorist Clive Hamilton. Published in 2003 it became a best-seller in Australia, an unusual feat for what is normally considered a dry subject....
- 2008–2009 Keynesian resurgence2008–2009 Keynesian resurgenceIn 2008 and 2009, there was a resurgence of interest in Keynesian economics among policy makers in the world's industrialized economies. This has included discussions and implementation of economic policies in accordance with the recommendations made by John Maynard Keynes in response to the Great...