Animal Spirits - Human Choice Trips Economic Theory

A couple of economists, George Akerlof and Robert Shiller co-wrote a timely book, published early this year, called 'Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism' The title nods to John Maynard Keynes' comment that the behaviour which led America into, and out of, the Great Depression was the product of social factors (attitudes, beliefs and norms) rather than 'raw' economics.

"...Though it calls for a reworking of economic theory, Animal Spirits is not a difficult book. It is short, chatty and anecdotal. The general reader will be engaged and drawn in. But the book is serious, too. 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. Economists will see it as a kind of manifesto.

The first quarter divides animal spirits into five categories. They are confidence, whose role is pervasive and which stars throughout the rest of the narrative; fairness, which influences wage-setting and the working of the labour market; corruption and bad faith, which can especially affect financial markets; money illusion, the propensity to be fooled by inflation; and “stories”, which they could have called “culture”, a catch-all for economically significant ideas about the world and one’s place in it.

The rest of the book shows how thinking about these animal spirits yields answers to big questions that perplex orthodox economics – or force it to make bizarre and implausible assumptions. Why do economies fall into depression? Why is there unemployment? Why are financial prices so volatile? Why does the property market go through cycles? Why are minorities often especially poor? The answer in each case is partly, and sometimes mainly, animal spirits..."

The full Financial Times review is at: FT.com | Clive Crook's blog | Book review: Animal Spirits by Akerlof and Shiller