ANIMAL SPIRIT

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. Animal Spirits makes a very timely and significant contribution to the development of a new dominant paradigm for economics that acknowledges the imperfections of human decision making, a need which the panic in financial markets makes all too apparent. What Akerlof and Shiller do is to highlight this sort of finding, packaging it with numerous other psychological insights into a half-dozen broad maxims that permanently alter the concept of rational behavior. And their book takes their case not just to economists, but also to the general reader.

The second half is much better, though I think it overstates its case. The book also suffers from being written in the teeth of the financial crisis, so its triumphalist claims to understand its exact causes are a little hubristic. I’d argue on the psychology side that it is missing a few key explanatory factors, loss aversion, optimism bias, acclimatisation. On the economics side, it lacks awareness of Richard Koo’s concept of the balance sheet recession and a more nuanced understanding of complexity economics, non-linearity and the disequilibrium they imply. Still the book serves as a valuable brick in the wall of modern economics, I’m just not sure it’s load bearing. The book comes in two parts – part one is about the various ‘animal spirits’ that direct the ways in which we think about and act within the economy.

Death’s lasting power echoes back through the stories, but Marciano’s closing lines offer hard-won hope. That being said, the text stands as a skilful takedown of macroeconomic hubris and overreach, and on that basis it merits a read for any readers interested in improving macroeconomics — if for no other reason than to know what its blind spots are. I have read a lot of these types of books recently and this is the most accessible. The universe, by contrast, does not appear to be made of stories.

In Animal Spirits, the distinguished historian Jackson Lears explores an alternative American cultural history by tracking the thinkers who championed the individual’s spontaneous energies and the idea of a living universe against the strictures of conventional religion, business, and politics. From Puritan times to today, Lears traces ideas and fads such as hypnosis and faith healing from the pulpit and stock exchange to the streets and the betting table. We meet the great prophets of American vitality, from Walt Whitman and William James to Andrew Jackson Davis (the “Poughkeepsie Seer”) and the “New Thought” pioneer Helen Wilmans, who spoke of the “god within—rendering us diseaseless incarnations of the great I Am.” But if you assume we are irrational and you can see how that may impact the economy, then you already know more than an average economist. There is also a more serious undercurrent in this book, about how the “rational” economists ignore how we really feel.

Please select an existing bookshelf

You may not like their conclusions as it relates to policy, yet the premise of expanding theory to include those factors once deemed as “intangible” or “irrational” cannot be understated. One of the authors here has a Nobel prize in economics – that is, these aren’t just ‘some guys’ with a ‘new idea’ about economics, but people from inside concerned with the overall direction that economics has taken. Chapter 12 discusses why real estate markets go through cycles, with periods of often rapid price increase interspaced by falls. Chapter 1 the authors discuss confidence, which they say is the most important animal spirit to know about if one wishes to understand the economy.

Money illusion, feedback loops, subjective societal concerns over ‘fairness’, and ‘stories’ are all part of the “Animal Spirits” investigated here. I also really liked the chapter on the asymmetrical behaviour of compensation in economic down-turns vs. up-turns, again because the subject wasn’t given significant text in other books. The employer would promise employees numerical unit contributions of those funds per year rather than be locked into dollar amounts, accomplishing the desired effect of reducing compensation in recessions without worker antagonism.

Tempered by government, on the other hand, they are a great source of entrepreneurial energy, safely channeled into a healthy capitalism. Keynes came to that conclusion, and Akerlof and Shiller, in “Animal Spirits,” push hard in the same direction — prodding their colleagues to follow their lead in revamping economic theory to deal with a market system that, quite irrationally, failed to govern itself. Above all, they challenge the reigning free-market ideology of the past 30 years or so, from the rise of Margaret Thatcher and Ronald Reagan to the abrupt arrival of the present crisis late last year. That ideology held that markets should operate free of government because they were rational. But if animal spirits influence behavior, then government must play a broad, disciplinary role, and do so permanently.

What to Read

The authors then blame what they call irresponsible deregulation policies of the 1980s in the US and UK, inspired by the laissez-faire-rational-based-mainstream economic thought, for the most recent economic crises. They further claim that by ignoring “animal spirits” in human actions, mainstream economics will continue to fail in predicting such crises. In The General Theory, John Maynard Keynes wrote that the switches between optimism and pessimism which drive rises/falls in investment spending which, in turn, cause rises/falls in output, were driven by ‘”animal spirits”. This was always one of the weaker points of Keynes’ analysis, essentially a big shrug of the shoulders, removing any notion of economic actors rational responses to changing circumstances.

Chapter 14 is a conclusion where the authors state that the cumulative evidence they have presented in the preceding chapters overwhelmingly 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. 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.

Book review: Animal Spirits by Akerlof and Shiller

This book doesn’t contain any prescriptions for regulatory reform and policy responses to the Great Recession. Rather, it exposes the shortcomings of classical economics and urges policy makers to consider the world we live in rather than the world their false assumptions describe. Indeed, it could be argued that Keynes himself was a cognitive macroeconomist; after all, he was the one who coined the term “animal spirits” from which the book draws its title. But the paradigm shift didn’t happen then, because Hicks distorted Keynes’s vision into something quasi-neoclassical, making what could have been a fundamental advance into a incremental improvement. It is as if we shoehorned Newtonian physics onto Ptolemy’s epicycles, or told Darwin that his theory was useful for other animals, but God still made human beings in his own image.

• How to manipulate them for policy purposes, and when it might be right to try, are separate questions.
• Even more than Akerlof and Shiller could have hoped, therefore, it is a fine book at exactly the right time.
• Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government—simply allowing markets to work won’t do it.
• All-in-all, an interesting book for those curious about the subject of behavioral economics, and along the lines of other books by Dan Ariely, Richard Thaler and Daniel Kahneman.
• The book though is a powerful shot taken by two of the most prominent economists nowadays in support of more regulation of the economy in the old-never-ending dispute between free-market supporters and interventionists.

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. There was nothing rational, well ­informed or unemotional about the behavior that has all but collapsed the economy. That leaves most of America’s economists without a believable framework for explaining how we got into this mess. Akerlof and Shiller are the first to try to rework economic theory for our times.

Economists create impressively complex formulas attempting to accurately describe the state of the economy and predict future trends. However, there are just too many unquantifiable variables – feelings, emotions, intuition, and confidence– to accurately incorporate all available information into a simple neat equation. Incorporating psychology into economics may not sound like much of a breakthrough. But Akerlof and Shiller have stepped outside of current economic thought to gently nudge animal spirits back to the discipline. Alas animal spirits are hard to quantify, thus the fierce opposition by economists. But the book is definitely a fundamental work in the development of economics as a science as opposed to economics as a doctrine.

Through reading Animal Spirits, one will walk away with a better understanding of how human psychology plays a major role in the functioning of the economy. It serves as necessary reading for students looking to learn beyond the clean-and-precise models presented in the classroom and looking to understand how the ‘real economy’ works. This is especially necessary for business school students who too frequently put their blind faith in unimpeded free-market capitalism; ‘animal spirits’ make such faith misplaced. Addressing this wrong, the authors attempt to restore animal spirits to economic theory.

The authors’ criticisms of the standard model are well taken and not that controversial. The orthodoxy assumes rational optimising behaviour, and is reluctant to contemplate more than minor deviations from that principle; as a result, it often goes astray. Ad hoc modifications, such as those the authors suggest, may get better results. This is a good moment to propose a re-examination of orthodox economics. The current breakdown, possibly the worst since the Great Depression, was a shock to all but a handful of economists.

Akerlof has long believed that in most market situations a government role can improve the outcome. Until now, behavioral economics has focused mainly on a variety of disparate traits that chip away at the assumption of rationality embedded in mainstream ­theory. A young person, for example, fails to join a 401 plan, even one subsidized by his employer, although if he were ra­tional and fully informed, he would certainly sign up. Though it calls for a reworking of economic theory, Animal Spirits is not a difficult book. Good notes and a bibliography are a guide to the literature that the book aims to tie together. Animal Spirits carries its ambition lightly – but is ambitious nonetheless.

Further reading

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. 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. What are these animal spirits that drive the American economy? Far from dispassionately weighing and analyzing all https://forexarena.net/ the options, people act on the confidence, or overconfidence, that a home they are about to buy will be worth more a year later. Confidence drove up stock ­prices in the 1920s and again in this decade, far more than corporate balance sheets and pure reason would justify, and now lack of confidence, spreading like a contagious disease, is exacerbating the sell-off. To be brought to them from either a fancy hotel or a run-down supermarket.

Unfortunately, while Animal Spirits does a fine job of identifying problems with current models, it does not perform particularly well at explaining how its conclusions could be incorporated into existing models. Unlike many quantitative measures, it isn’t even necessarily clear how one would go about rebutting the validity of “stories” or “perceptions of fairness”. The authors perhaps would have done well to devote some time to showing how one could implement their suggestions. If you took a macroeconomics class in college, you will know all the theory in great detail. You will also become frustrated with how your professor may have mentioned animal spirits once, brushing them off quickly. I know it may seem not scientific or rational to include psychology in the study of economics.

Keynes performed a similar service in the 1930s — mainly by making the point that market economies could suffer long periods of high unemployment and low output unless government stepped in to supply the necessary demand. Barack Obama’s $787 billion stimulus program reflects his insight. Stay connected for the latest books, Ideas, and special offers. Given the coming end of yer another business cycle, I’d be curious to read a vol 2 focusing on lessons learned and case studies of these insights being applied in the past decade.

Talk to Your Kids About …

There have been several posts on different boards about this book taking a “liberal” position. If you’re looking for a book that will bring redemption animal spirits to Reagan-era supply side economics, this is not the book for you. I expected more from the authors, given their sterling credentials.

The book was written in response to the financial crisis and the authors are economics rockstars. Robert Shiller and George Akerlof are Nobel laureates and Keynsians who believe that government has an active role to play in macroeconomic management. The investment community will recognize Shiller as the prescient economist who predicted the collapse of the tech bubble in 2001 and the housing bust in 2008 and who developed the Case Shiller Home Price index. Akerlof introduced important theories showing the impact of asymmetric information, moral hazard and adverse selection.