Animal Spirits

Animal Spirits

How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism

Book - 2009
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Blackwell North Amer

The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.

Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. 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. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life--such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes--and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.

Animal Spirits offers a road map for reversing the financial misfortunes besetting us today. Read it and learn how leaders can channel animal spirits--the powerful forces of human psychology that are afoot in the world economy today.

Publisher: Princeton : Princeton University Press, c2009
ISBN: 9780691142333
Characteristics: xiv, 230 p. ; 25 cm
Additional Contributors: Shiller, Robert J.


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Nov 06, 2013

Considering that this book was written by a pair of winners of the Nobel prize for economics, it should have been much better. You don’t expect to see sentences like this in such a book: “Most academic economists, if asked to define the term overheated, would say that it describes a period in which inflation, as measured by the consumer price index, has been increasing”. In Canada, positive consumer price inflation is the norm, and is meant to be so. Deflation or zero inflation is rare, and unintended. The authors surely don’t mean that the Canadian economy is constantly overheated except when the Bank of Canada gets it wrong, but that’s what they say.
Milton Friedman’s belief that the long-run Philips curve is vertical or nearly so is given short shrift, although the authors themselves note that it seemed to explain quite well the stagflation of the 1970s. They note that the fragility of the econometric equations relating unemployment and inflation mean that Friedman’s hypothesis has never been firmly confirmed, but surely this is an argument that cuts both ways. Why would a central bank not then concentrate on fighting inflation, which it knows it can control, rather than unemployment, if the long-term trade-off is at best difficult to measure and changeable and at worst non-existent?
The chapter on the Great Depression lays the blame squarely on the animal spirits of Wall Street investors and largely ignores the policy blunders of both the Hoover and Roosevelt administrations, detailed in Amity Shlaes’ The Forgotten Man and in earlier books. Perhaps the authors don’t accept the critique of Ms. Shlaes and other American conservatives, but it is disturbing that they simply talk past them as if they weren’t there. Animal spirits are also blamed for the Great Recession of 2008 and the dysfunctional housing and mortgage policies of the Clinton and Bush administrations, so well documented in Thomas Sowell’s The Housing Boom and Bust, get only a cursory mention.
The Bank of Canada’s inflation targeting regime comes in for harsh criticism in a couple of pages of the book, noting the high unemployment in the first years of the regime. Although this book was written only four years ago these pages already have an antiquated feel, now that Canadian unemployment rates are substantially lower than US rates and likely to remain so, while our inflation rate remains below target. The authors blame the 11.2% unemployment rate in 1992 entirely on the alleged unfavourable trade-off between inflation and unemployment. They seem quite unaware of the introduction of the Goods and Services Tax (GST) in January 1991 and changes in retirement savings plans, both of which tended to raise the unemployment rate in the short term.
Perhaps most disappointing of all is that the book should ignore the impact of a dysfunctional inflation indicator on the Great Recession. The US Fed monitored the personal consumption expenditure (PCE) deflator ex food and energy, a measure completely insensitive to the surge in house prices in the United States from 2000 to 2006. This is discussed in detail in Andrew Baldwin’s paper “A Better Inflation Indicator”. It is strange that Robert Shiller, one of the creators of the Case-Shiller house price index for the United States, would be responsible for such an oversight. US monetary policy will not be on a sound footing until the US Fed replaces the PCE deflator as its inflation indicator with a consumer price index that takes a net acquisitions approach to owner-occupied housing. Robert Shiller, of all people, should have seen that, and written about it in this book.

Sep 12, 2011

An interesting read. However, for those of us who have only taken introductory level economics courses (or none at all), the first half of the book can be a bit confusing. I did enjoy the history lessons the book provided, and the second half of the book was more intuitive but overall I still think this is a book written mainly for economists and not the general lay-person.

Jan 05, 2011

A really interesting read. The author discusses how "animal spirits" aka psychology need to take a hold over mathematical calculations within the economic profession. Interesting chapters on why the author thinks we need the federal reserve and some interesting thoughts on the property bubbles and the economics of ethnicity as well. It was a really enjoyable read.

Sep 12, 2009

economic theories have limitations because they assume we act rationally, human psychology is far from rational; but the suggestion of more government and regulatory involvement may not be the better solution either


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