Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (2009) is a book by George Akerlof and Robert Shiller written to promote the understanding of the role played by emotions in influencing economic decision making.
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- To understand the economy then is to comprehend how it is driven by the animal spirits. Just as Adam Smith’s invisible hand is the keynote of classical economics, Keynes’ animal spirits are the keynote to a different view of the economy—a view that explains the underlying instabilities of capitalism.
- To understand how economies work and how we can manage them and prosper, we must pay attention to the thought patterns that animate people’s ideas and feelings, their animal spirits. We will never really understand important economic events unless we confront the fact that their causes are largely mental in nature.
- The thought experiment of Adam Smith correctly takes into account the fact that people rationally pursue their economic interests. Of course they do. But this thought experiment fails to take into account the extent to which people are also guided by noneconomic motivations. And it fails to take into account the extent to which they are irrational or misguided. It ignores the animal spirits.
- The presence of confidence has a further implication for multipliers. Other multipliers are also highly dependent on the level of confidence. An illustration from the current economy (as of November 2008) indicates why. Low confidence has caused credit markets to freeze up. Lenders do not trust that they will be paid back. Under the circumstances those who want to spend find it difficult to obtain the credit they need; those who supply the goods find it difficult to obtain the working capital they need. As a result the usual fiscal multipliers, from increased government expenditures or from decreased taxes, will be smaller—probably much smaller.
- Chap. 1 : Confidence and Its Multipliers
- The variation through time in the extent of corruption or bad faith is also to some extent a reflection of the fresh opportunities that arise as new financial inventions of one sort or another appear, or as financial regulations allow innovations to be implemented. These innovations may not be understood initially by the public. This variation also occurs because of cultural changes unrelated to fear of punishment or to changes in technology. These changes are clearly within the realm of pure animal spirits. Culture changes over time to facilitate or to hinder aggressively competitive and predatory activities. Because these cultural changes are difficult to quantify, and fall outside the field of economics, they are rarely connected by economists to economic fluctuations. They should be.
- Chap. 3 : Corruption and Bad Faith
- Since most economic contracts and also most accounts are in nominal terms, it would seem easy to know whether this form of contract affects real decisions. But it turns out that such indications are difficult to find. Why? Because the goals of those who make the decisions, hence the contracts, are complex. Even more important, they are not typically observed. We may observe the outcomes of economic decisions all we want, but we need an intervening theory to tell us what must have been the motivations for those decisions.
- Chap. 4 : Money Illusion
- The human mind is built to think in terms of narratives, of sequences of events with an internal logic and dynamic that appear as a unified whole. In turn, much of human motivation comes from living through a story of our lives, a story that we tell to ourselves and that creates a framework for motivation.
- Chap. 5 : Stories
- Our theory of animal spirits provides an answer to a conundrum: Why did most of us utterly fail to foresee the current economic crisis? How can we understand this crisis when it seems to have come out of the blue with no cause? Why have the measures to forestall it fallen short, while the economic authorities publicly express surprise at their ineffectiveness? We need to answer these questions if we are to feel any confidence in economic policy in the months to come.
- Chap. 14 : Conclusion