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. |
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 Including the Irrational in Macroeconomics |
| Review Date: March 26, 2009 |
| Reviewer: Timothy J. Bartik, Kalamazoo, MI USA |
"Animal Spirits" is an important contribution to rethinking economic theory, particularly macroeconomic theory, so that it better takes account of human irrationality.
The central argument of the book is that various human emotions - overconfidence, unwarranted pessimism, a sense of fairness, and stigma effects - can have important aggregate effects on the economy. Economists have often tended to overlook these factors, for several reasons: the irrational is difficult to model, and it has sometimes been assumed that these "irrationalities" will average out or be weeded out by the market. But Akerlof and Shiller argue that frequently such "animal spirits" can result in self-reinforcing cycles of either boom or bust. Irrationality is not only not tamed by the market, but can even be reinforced.
Akerlof and Shiller consider varied topics in this book, including determinants of savings rates and wages, and high African-American poverty. However, most of the book focuses on how "animal spirits" might help better explain the business cycle. Their book is opportune, as the current downturn is plausibly explained as the result of the excesses of an unregulated speculative fever in housing and related investments. Their book includes a valuable postscript to one of the chapters that analyzes possible responses to the current financial crisis.
I think this book is best suited to an audience that is reasonably well-aware of economic ideas about markets and the macroeconomy. This of course includes professional economists as well as many policy wonks interested in macroeconomic policy. It would also be a valuable corrective for a wider audience that holds the belief that the market is always in the aggregate efficient. This book supplies one more valuable argument for some government intervention in the market: the need for regulation to discourage various sorts of speculative bubbles.
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Animal Spirits Explained
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| Review Date: June 6, 2009 |
| Reviewer: Daniel, Tucson, Arizona United States |
| Animal Spirits is a excellent book on what drives the economy and why. Fairness,corruption,money illusion and storytelling are the Animal Spirits that the authors believe lead to lack of confidence or over-confidence, which in turn leads to depressions or recoveries. Areas covered----the Federal Reserve. How and why the Fed raises or lowers interst rates and controls the money supply. Why Americans under-save for retirement. What caused the current credit crunch and housing problems. What causes the real estate markets to go through cycles. Animal Spirits is a good start for anyone wanting to understand the economy. The Secrets of Economic Indicators is another fine book that is a little more in-depth about the economy. |
Macroeconomics vs snake oil
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| Review Date: July 25, 2009 |
| Reviewer: B.Sudhakar Shenoy, India |
This book boldly challenges the basic assumptions of macroeconomics, that rational expectations and efficient markets alone drive the economy. These theories fail to factor in "Animal spirits" in human beings. Fundamentally as a biological species, we are not programmed machines and our thoughts and emotions determine our actions. Human motives are not always driven by economic gains and similarly not all responses are rational.
The combination of the two states of our motives, namely economic and noneconomic and the two types of our responses, namely rational and irrational leads to a framework of four situations of human activity in economies:
- Economic motives and rational responses
- Economic motives and irrational responses
- Non economic motives and Irrational responses
- Non economic motives and rational responses
The authors assert that macroeconomics driven by mathematical models at best describes the first situation in the above list. Three of the other situations are completely are missed out in conventional macroeconomics argue the authors. Animal spirits is about the human factors of Confidence, Fairness, Corruption, Money illusion and Stories that are the key influencing factors that guide human actions in these three situations.
What proportion of economic activity occurs in each of the four is not quantified. Suffice it to say that the three situations are significant and completely ignored in conventional frameworks.
There is a chapter each to explain each of the five factors that describe animal spirits in the economic context. That explains wide swings in markets. In a way this book is a logical extension of Prof Shiller's "Irrational Exuberance" that correctly forecast the collapse of Dot coms and the housing bubble. This book further exposes the myth that housing and real estate prices are always bound to go up since there is not enough land and shelter on this planet for a growing population.
I am inclined to link the concepts in Malcolm Gladwell's path breaking book "The Tipping Point" to the sudden growth in buying interest in a certain sector, housing for example, just as the phenomenon by which some fashions become suddenly popular, and then slowly die down. There is a peak for fashions and a peak for market madness when "snake oil" sells briskly. Tulip manias are a repeating phenomenon, causing wild swings in markets, never explained by classical economic theory based on rational expectations.
The chapter that discusses tradeoff between inflation and unemployment is extremely interesting. Workers do not accept reduction in wages during a downward economic cycle due to "Money Illusion". Even employers consider that such a move would be considered "unfair" by employees. This "wage stickiness" leads to the inevitable job cuts that further depress the economy. Phillip's curve that attempts to explain trade-off between inflation and unemployment comes under close and critical examination.
The role of the Government and the Central bank in stabilizing economies is convincing and concretely explained in the book. The Fed's role in monetary policy is remarkable. Money supply is compared to common salt in our diet. Lack of it or too much of it affects the whole meal. Interest rates and money supply can affect asset valuations of the whole economy on the same note. This is an excellent analogy on a complex topic from the two experts.
The government's role in priming up confidence in the economy through fiscal expansion based on sound principles of Keynesian economics is amply explained.
A prudent and focused fiscal expansion, coupled with a proactive role from the Fed is at the core of the prescription to revive the US economy in the current situation.
National savings play a key role in long term nation building. America's relentless spending spree based on a consumerist culture is not sustainable.
The government's role as a referee in regulating the game of national economics comes out clearly. Else the innocent citizens will be the silent spectators and sufferers at the mercy of unscrupulous elements that sell snake oil. Government intervention is necessary to protect the economy from massive swings in employment and chaos in financial markets.
The final chapter that concludes the book is an excellent summary of all the topics covered in previous chapters.
Highly informative and at times entertaining, the authors do a great job in explaining complex economic theories in very simple language.
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Interesting view that questions traditional thinking
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| Review Date: August 15, 2009 |
| Reviewer: Mariusz Skonieczny, ClassicValueInvestors . com |
The authors of this book argue that traditional philosophies of economics are flawed because they assume that people rationally pursue their economic interests, which results in perfect and stable free market capitalism. The traditional views fail to address that people are also guided by noneconomic motivations and they might be irrational and misinformed. In other words, they ignore the animal spirits.
The authors believe that our animal spirits affect economic decisions and help us answer questions such as why economies fall into depression, why people cannot find jobs, why real estate markets go through cycles, and why poverty persists for generations among disadvantaged minorities. I found this book interesting to read.
- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market |
This is a "must read" book
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| Review Date: July 5, 2009 |
| Reviewer: Bouhari AROUNA, Manhattan, NY USA |
| "Animal Spirit: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism" is a wonderful book that calls for a different approach of economy. The authors argue that the old economic paradigm (In a self-regulating free market people make rational decisions) doesn't consider the powerful psychological factor that J. M. Keynes called "animal spirits." The books itself offers few details about policy. However its does argue that government should give citizens a sens of confidence in the future through market regulation, which should ultimately get them to start spending and investing again. |
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