The comic on the book cover shows a horde of funny apes climbing up and sliding down a stock price curve, excited when it goes up, being horrified when going down, being depressed in the valleys, cheering on the tops. The animal spirits are riding and driving the ups and downs of economy - that is the message of the book in a nutshell.
Being a psychologist with some understanding of the struggle of economics between beauty and elegance of a dominant theory and a never ending stream of empirical anomalies, I was wondering in how far such a book could inform us (modelers) about the workings of those animal spirits. What are the phenomena that can be better explained in psych terms, and what are the processes that drive them? It is useful to know that the authors are highly distinguished people: the one (Akerlof) a Nobel prize laureate, the other (Shiller) creator of the Standard & Poor's/Case-Shiller Home Price Index and best-selling textbook author. Furthermore, this very book seems to be one of the "must-reads" in the Obama administration.
The authors identify five cognitive and social psychological core phenomena as the "animal spirits" (a term coined by Keynes): Confidence, corruption, money illusion, fairness, and stories. While this list by itself does not seem to impress much, it is the way the working of these psychological mechanisms is knitted into the economic fabric. This is explained in detail and very convincingly in the book, driven by a number of questions that have proven tricky for classical economic theory. Among these are: Why do economies fall into depression? Why are there people who cannot find a job? Why are financial prices and corporate investments so volatile? Why is there special poverty among minorities?
Confidence is shown to be the basis of economic behavior. It is the expectation of a positive development in the future. That is also where phenomena of social amplification come into play. There are times where confidence can abound and, with no reliable basis, go beyond the rational. These are usually hype times, where a second factor comes in: corruption and bad faith. There are incentives to profit from the trustful people that are overly enthusiastic from the hype and believe in an everlasting growth. People are, concerning large parts of the economy, unaware of what is good or bad for them, and there are cases where they are intentionally misinformed about what they buy (this is snake-oil, supposed to cure everything, but actually ineffective). This is exactly what happened with the re-packaged subprime mortgages. The authors analyze the cases of the last three big recessions in the United States, where each time corruption played a major role in ending the economic growth. This explains how positive developments are being perverted and stopped.
Money illusion is the cognitive failure to account for inflation or deflation in prices or wages. Nominal sums of money thus seem to matter much too much to us. This is the origin for, e.g., the unions resisting to cuts in pay or even to ask for raises in pay in times of recession and price decline. As a consequence, wage contracts are not indexed for economic variability, or, if so, only in one direction, i.e., growth. This might, according to the authors, add to the problems in a recession. Furthermore, wages are seen to be fair only when they are slightly above the market clearing wage. That is why we find (involuntary) unemployment.
People want to make sense of what they see, even if or especially if their understanding is not dictated by evidence. Here social psychology comes in: People start telling each other stories, and the story that "wins" is not necessarily the one that comes closest to reality. Each economic bubble has such a story of success, of a quasi-infinite growth of some economic sector. This social amplification process is identified as the core of the irrational exuberance of economic hypes. Another important story relates to spending someone's money: It is good and normal to consume, it is good and normal to use your credit card, and it is much less comprehensible to bring your money to a savings account (the US currently have a negative savings rate).
As a conclusion, Akerlof and Shiller would like no less than to replace the fallen economy, i.e., devise a new system of stronger supervision and install new mechanisms which take into account the power of animal spirits and thus protect people from being fooled by others offering them snake oil, from false beliefs, or exaggerated stories.
The authors make the point that and where animal spirits matter, but do not give many hints to how they do. The first might be a matter of course to most of us, and only the second would have been helpful to modelers. So this remains a book for the yet-to-be-convinced hard core neo-classical addict to be converted, for the more enlightened economist to be confirmed in her views, or for the rest of us that just like to be given an insightful and competent catalogue of social phenomena that drive the economy.
FAQs
"Animal spirits" refers to the tendency for investment prices to rise and fall based on human emotion rather than intrinsic value. This theory, however, has been critiqued by some economists who argue that markets are nonetheless efficient and that individual irrationality washes out in the aggregate.
What are animal spirits psychology? ›
Animal spirits encompass a range of human emotions, including optimism, pessimism, confidence, fear, and uncertainty, which influence individuals' willingness to take risks and make economic decisions.
What are the five animal spirits explained? ›
The authors identify five cognitive and social psychological core phenomena as the "animal spirits" (a term coined by Keynes): Confidence, corruption, money illusion, fairness, and stories.
What is the animal spirit in humans? ›
Animal spirits is a term used by John Maynard Keynes in his 1936 book The General Theory of Employment, Interest and Money to describe the instincts, proclivities and emotions that seemingly influence human behavior, which can be measured in terms of consumer confidence.
What is the animal spirit in the economy? ›
The 'animal spirit' is a term coined by the famous British economist, John Maynard Keynes, to describe how people arrive at financial decisions, including buying and selling securities, in times of economic stress or uncertainty.
What is an example of an animal spirit in economics? ›
For example, profits may be high, but, if businessmen fear a recession then investment is likely to dry up. Animal spirits may also refer to the risk involved in taking investment decisions which invariably have an element of risk attached. If people expect a recession, then confidence will be low and saving rise.
Are animal spirits back in the market? ›
"Animal spirits" have returned to the stock market after hopes of a monetary-policy pivot by the Federal Reserve fueled a stunning late-2023 rally, according to Blackstone CEO Steve Schwarzman.
How does the paradox of thrift affect the economy? ›
The paradox of thrift refers to a situation in which people tend to save more money, thereby leading to a fall in aggregate savings of the economy as a whole. In other words, when everyone increases their saving-income proportion, MPS, then aggregate demand falls as consumption reduces.
What are animal spirit beliefs? ›
Some people believe that their spirit animal can change as they go through different life stages or their personality or beliefs change. Spirit animals are not limited to one per person. Some people believe they can have multiple spirit animals, each representing different aspects of their personality or life journey.
How do animal spirits affect investment? ›
When animal spirits are high, investors and consumers are more willing to take risks and spend money, which can lead to higher levels of economic growth. However, when animal spirits are low, investors and consumers may become more cautious and conservative, which can lead to a decrease in economic activity and growth.
Liam and Mikaela work together to understand the meaning of 'animal spirits' in a literary context through analysis, discussion, and research. They scrutinize the text, consider the inherent traits of the 'animal', and apply this understanding to the story and characters.
What is the economic study of animals called? ›
The science of applying zoological aspects for the welfare of mankind is economic zoology. The practices involved in this are inclusive of culturing animals to mass-produce them for the consumption of humans and also to exterminate those animals that are harmful to mankind either indirectly or directly.
What animal symbolizes depression? ›
They also developed metaphors and similes to express how the condition made them feel. As early as 65 B.C., the Roman poet Horace wrote of “black dog” depression — essentially having a black dog trailing behind a person as a symbol of depression.
What is your animal spirit called? ›
A “Totem Animal” is an animal spirit that you call upon or invoke.
What is the animal theory of economics? ›
The conception of man as an economic animal is implied by the view that econo- mic production is the determining "factor" or "sphere" of man or society. Against this conception can be put another, that of man as praxis.
What is the concept of a spirit animal? ›
What does spirit animal mean? In certain spiritual traditions or cultures, spirit animal refers to a spirit which helps guide or protect a person on a journey and whose characteristics that person shares or embodies. It is also metaphor, often humorous, for someone or something a person relates to or admires.
Which famous economist first used the phrase animal spirits? ›
However, economic decision makers are often intuitive, emotional and irrational. John Maynard Keynes coined the term “animal spirits” to refer to emotional mindsets. Confidence or lack of it can drive or hamper economic growth.
What was Keynes's view on animal spirits quizlet? ›
According to Keynes's view on animal spirits: The economy could fluctate beyond the level that could be explained by the underlying economic fundamentals. Keynes's theory of multipliers involved an element of the self-fulfilling prophecy.
The comic on the book cover shows a horde of funny apes climbing up and sliding down a stock price curve, excited when it goes up, being horrified when going down, being depressed in the valleys, cheering on the tops. The animal spirits are riding and driving the ups and downs of economy - that is the message of the book in a nutshell. 