George Ackerlof and Bob Shiller have a new book which has been getting a lot of attention, Animal Spirits: How human psychology drives the economy, and why it matters for global capitalism. In fact, there is a lot of attention being given to behavioral or psychological aspects of economics. The pendulum has swung from the very mathematical to a new paradigm of less rational behavior, the behavioral revolution. This has been a positive development but there still has t be a lot of of work to solve some of the problems of business cycles.
Capitalism or markets are messy. Anyone who has gone to a bazaar or stood looking down from the visitor's gallery of an exchange to the pit below will know that markets are not easy to explain. There will be winners and losers and there will be emotions. There will also be many examples of behavior that will not fit into a box as rational. Ackerlof and Shiller provide some brad themes where behavior does not fit the test of rationality. These are all well-know problems in economics. Unfortunately, they do not fit the definition of what Keynes was discussing when he described Animal Spirits. This is an important book of interesting issues but this is not the ascent of Keynesian economics during a crisis.
Capitalism or markets are messy. Anyone who has gone to a bazaar or stood looking down from the visitor's gallery of an exchange to the pit below will know that markets are not easy to explain. There will be winners and losers and there will be emotions. There will also be many examples of behavior that will not fit into a box as rational. Ackerlof and Shiller provide some brad themes where behavior does not fit the test of rationality. These are all well-know problems in economics. Unfortunately, they do not fit the definition of what Keynes was discussing when he described Animal Spirits. This is an important book of interesting issues but this is not the ascent of Keynesian economics during a crisis.
Animal spirits was a concept to try and explain the changes in business confidence that can occur in order to rid an economy of a deep recession. The change in confidence is what drives investment decisions in the long-run when there is not a clear idea of what will happen in the future. The authors broaden this theme to include all behavior that seems to be irrational. This was not the intent of Keynes.
They argue that animal spirits leads to issues of confidence but also corruption, money illusion, and fairness and is all encompassing many of the issues of irrational behavior that have been gripping economics. They analyze a set of key questions concerning the intersect between economics and psychology which provides for some interesting reading but many of these are off point with respect to the overall issue of animal spirits. I may be being too much of literalist, but the issue of consumer and business confidence in a downturn is still a foundational issue for business cycles. When and how will economic agents turn there views on a economy is still very complex and left unanswered.
They argue that animal spirits leads to issues of confidence but also corruption, money illusion, and fairness and is all encompassing many of the issues of irrational behavior that have been gripping economics. They analyze a set of key questions concerning the intersect between economics and psychology which provides for some interesting reading but many of these are off point with respect to the overall issue of animal spirits. I may be being too much of literalist, but the issue of consumer and business confidence in a downturn is still a foundational issue for business cycles. When and how will economic agents turn there views on a economy is still very complex and left unanswered.
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