Book Review Series: #2 Animal Spirits: How Human Psychology Drives The Economy, Why It Matters For Global Capitalism

Reviewed by : Lakshmi Priya

Animal Spirits by the two lionized economists Akerlof and Shiller, comprehensively analyses the need for accounting the ‘animal spirits’ and other tempestuous factors into the economic theory to avert the repetition of older economic fallacies. They challenge the untouched conformist economics which have been promoting the repetition of these fallacies. Instead, they proffer a new intrepid vision to economics by endorsing a behavioural, sociological and rational approach.

Descending from the word ‘Spiritus Animales’ (Keynes , 1935), the animal spirits denotes the animating spirits that drive people to make important decisions. Being a blend of credence, angst and scepticism, animal spirits was first used by JM Keynes in 1936 to depict how intuition and behaviour of the investor were considered even before having a glimpse of the economic analysis. The author expresses concern on animal spirits not being included while framing economic models, and how macroeconomics should evolve in the future. The theme revolves around behavioural economics, with a plea to broaden the scope of learning and understanding macroeconomics by also correlating emotions in the business cycle.

The book discusses the five facets of animal spirits that affect business decisions – confidence, fairness, corruption and bad faith, money illusion, and stories. Confidence, being a self-fulfilling prophecy, places genuine trust and credibility in the economic system. After Donald Trump became the President, the US markets became sanguine indicating the return of animal spirits. It’s hard to predict if his plan to cut tax and increase spending was useful, but this has boosted business and consumer confidence in the US.

With the idea of fairness overriding rational economic motivation and the possibility of punishment reducing selfish behaviour supports, his argument that people care about fairness and justice is thus reinforced. With reference to the third point – concealing tangible information and sale of bad products could abuse the trust and inflate corruption and bad faith in the economy. Money illusions could only magnify the debts disclosing the inability of people in adapting to the changes in the price level. While the stories have narrative power to drive human behaviour to initiate economic decisions, this could even impart damage to the economy as it did in the 1930’s. During the heights of Great Depression, stories of failing businesses spread far and wide leading to closures, downfall and suicides of large number of tradesmen across the country. While considering the better performance of Toyota, Japanese animal spirits were stimulated by stories of identity and confidence. (Akerlof & Shiller, 2009, p. 137)

As the subsequent part of the book flirts with how these five powerful forces of human psychology contribute to framing economic policies and decisions, the requisite of an active government involvement in policymaking is thereby distinctly defined. Both Akerlof and Shiller have espoused a normative perspective to developing economic theories and augmenting a vivid discernment of the background of the crisis which could be an aid in improving the potential of forecasting the bloom of any economic crisis.

Eight versatile economic issues- depression, limited power of central banks, volatility of prices, inflation, unemployment, the problem of saving, the cycle of real estate markets and poverty are debated audibly. Another riveting factor is that the monetary and fiscal policy instigated by the policymakers have a tremendous effect on impulses and emotions or the animal spirits. These deviations from economic rationality could promote the breaking of the myth of rational decision making. It could even pave the path for further developments and contributions in behavioural economics. From this thread, the Nobel prize winner of 2017 in Economics, Richard Thaler re-educated and coined a vocabulary for these animal spirits (Thompson, 2017).

Regarding capitalism, Adam Smith stated that the fact that there is little, or no, need for Government intervention – is also unwarranted (Akerlof & Shiller, 2009, p. 3). Smith stressed on the rational behaviour of agents and presence of ‘invisible hands’ while Keynes emphasised on the existence of animal spirits or a behavioural combination of emotions and impulses which was a deviation from the normal rational behaviour. Moreover, it is indispensable to accommodate these economic, non-economic, rational and irrational motives while analysing the economy as it would enhance the confidence and the trust incorporated in the economic policies. As Akerlof and Shiller focus on the necessity of incorporating these essential features using empirical data, this book becomes a roadmap that possibly could be the solution to most economic conundrums ingrained in society.

The writing style is both high-spirited and engaging. As a sceptic and an economics graduate, I believe this book would be most beneficial to those with a rudimentary understanding of macroeconomics and its psychological approach. The book is hard to digest in one read and is very easy to forget. This could be because the authors have tried to unfold too many intrinsic implications, excerpts and various perspectives altogether. At times Shiller’s and Akerlof’s style tends to be magniloquent, but to an extent, they have successfully balanced their perspectives, which makes the book appealing to any forward-looking economist. The authors have done justice to the book by substantiating relevant illustrations from past to support their arguments, especially in the second part of the book where they have contemplated a lot of efforts in furnishing real motivation and evidence to reinforce passive ubiquity of animal spirits in the economic system. I am strongly enticed by their vivid elucidation of how overconfidence is drastically followed by under confidence in a bubble burst.

The title of the book ‘Animal Spirits: How Human Psychology Drives the Economy, Why It Matters for Global Capitalism’ is apt as the entire book concentrates on how the unpredictability of human emotions or ‘animal spirits’ influences and conditions the consumer and investor confidence. Moreover, this book could be a good start to all economic enthusiast who would want to have a wider perspective on behavioural economics. Their writing style is erudite and displays a sense of lucidity and brevity, which lacks in most academic works in general. This leads to the final comment I wish to make about why it would make a good source of literature in behavioural economics.  

 

REFERENCE

Akerlof, G., & Shiller, G. (2009). Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. New Jersey: Princeton University Press.

Dougherty, P. (2002). Who’s afraid of Adam Smith? Wiley; 1 edition.

Keynes , J. M. (1935). The General Theory of Employment, Interest and Money. UK: Palgrave Macmillan.

Thompson, D. (2017, October 9). Richard Thaler Wins the Nobel in Economics for Killing Homo Economicus.


Lakshmi Priya is a first year masters ‘ student of Diplomacy in Law and Business at Jindal School of International Affairs.

Featured Image Source: Amazon.com

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