Media Spotlight: Animal Spirits by George Akerlof and Robert Shiller
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Animal Spirits by George Akerlof and Robert Shiller takes its title from a phrase coined by John Maynard Keynes in his 1936 book The General Theory Of Employment, Interest And Money to describe the impact of psychology on the economy.
Keynes’ contention was that people don’t weigh up principles like inflation when they buy shares or homes.
Like Jack Welch, former boss of General Electric whose title for his management memoir Straight From The Gut summed up the way he made decisions, Keynes argued that the decisions depended more on spontaneous optimism than calculation.
In the 1950s and 1960s Keynes’ ideas fell out of favour along with the concept of animal spirits. The impact of consumer confidence was relegated to second place behind a more
scientific approach.
Akerlof and Shiller’s aim is to reverse this process - to sideline the scientific approach governments have taken and instead get them to look through the lens of Keynes’ animal spirits.
Sounding like a no-fun version of Snow White’s dwarves the authors see the five key motivating animal spirits as confidence, fairness, corruption, money illusion and stories.
“These are real motivations,” they state. “The presumption of mainstream macro-economics that they have no important role strikes us as absurd.”
They argue that by reintroducing the concept of animal spirits into the way economists analyse society they could better understand peoples’ decisions.
To demonstrate their theory the authors use the five spirits to explain recessions from the 19th century onwards, and in particular to provide an analysis of the current credit crunch.
They say the start of this crisis came during Bill Clinton’s presidency in the 1990s when Andrew Cuomo, then in charge of housing and urban development and now New York’s attorney general, mandated Fannie Mae and Freddie Mac to extend credit to minority communities and individuals from all parts of society.
But this political move to make the US social fabric fairer to minorities or those locked out of buying homes led to overconfidence in house values. And as levels and terms of credit were extended, corruption spiralled out of control.
Combined with this was the fact that negative stories about stock markets in the previous decade of investments gone wrong led consumers to believe the housing market was different.
These self-congratulatory tales fuelled worldwide overconfidence in the everlasting bounty of bricks and mortar.
To best describe our broken global economy the authors employ the nursery rhyme Humpty Dumpty. Unfortunately, all the king’s horses and all the king’s men have been unable to put our global economy back together again.
Their conclusion is that central banks should step in to fill the void left by the collapse of global markets as they have done in previous generations.
They propose a number of ideas to ensure that banks bailed out by governments actually lend, terming this the ‘you can lead a horse to water but you can’t make it drink’ dilemma - a situation we know all too well in the UK.
One solution could be to use government directives to compel the horse to drink. Only by doing this, the authors argue, can the stage once again be set for healthy capitalism.
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