"Animal Spirits" de George Akerlof et Robert Shiller.

“Animal Spirits

How Human Psychology Drives the Economy and Why It Matters for Global Capitalism”

- George Akerlof, Robert Shiller-

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George Akerlof’s and Robert Shiller’s 2009 book engages upon macroeconomic theory and comprises 300 years of history of economic thought and theory. The main attraction of the book is the title itself “Animal Spirits” which is a term first introduced to economics by famous John M. Keynes in his widely known masterpiece “The General Theory of Employment, Interest and Money”. Animal spirits describe the ever-lasting “error term” from econometric regressions. Any economist who relies upon quantitative analysis to describe economic phenomena will revert to the unknown factor for events he cannot fully comprehend or measure exactly. The book attempts to place on a high pedestal the very thing that economists confess to being ignorant about.

Economists, in pursuit of mathematical precision, seem to have forgotten that not everything can be easily counted. Traditional economic theory centers on the premise that people make perfectly rational decisions. People, however, are not so rational. Despite many attempts, not every variable that goes into our decision-making process can be easily quantified, weighted, and put into a formula. By exploringthe intersection of economics and psychology, George Akerlof and Robert Shiller propose a new macroeconomic framework, one that incorporates real human behavior, with all its quirks and irrationalities. Accurately taking into consideration all available information, including unquantifiable variables such as emotions, intuition, and confidence one might be able to discovervaluable insights into a variety of important economic policy issues.

The book itself is divided into two sections: the first part comprises “animal spirits” and attacks human psychology and its influence to macroeconomics, while the second part of the bookillustrates how these irrational “animal spirits” affect economic decisions byanswering eight of the most important questionsof our present economy still dealing with the recent financial crisis.

The first part of the book identifies five elements of human psychology that may lead to contradictory assumptions of mainstream economic theory. The “animal spirits” analyzed are the following:

 Confidence - whose role is pervasive and which appears 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;

 Stories - which encompassesall economic significant ideas about the world and one’s place in it.

The authors’ descriptions of animal spirits are vast, but they question whether or not such feelings could be quantified. Given such difficulties, the behavioral attributes of the general public provided as examples (such as confidence, good behavior, greed, fear, fairness or corruption) tend to lead economic cycles and they affect the population’s general confidence. Such lack of confidence cannot be fully measured, nor can it return viable or statistically relevant results. Therefore, Akerlof and Shiller do not attribute such feelings to “science”. And, economics has become more mathematical than ever in describing phenomena. But does this exacerbated quantitative approach to economics really encompass reality? To quote Nobel Prize laureate, Paul Krugman: “The economics profession went astray because economists as a group mistook beauty, clad in impressive looking mathematics for truth.”

The second part of the book shows how thinking about these “animal spirits” yields answers to big questions that perplex economics and 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.”

While debating the above questions, Akerlof and Shiller raise another problem: whether or not governments can be relied upon to conduct macroeconomic policies and guide market actors so as negative economic cycles not to incur. The authors question whether or not free markets or government intervention should be more important in conducting economic policies. They offer examples, such as the United States’ capitalism versus China’s socialism and they undergo several delicate issues such as people’s tendency to under-save, given the privatization process which has developed enormously over the past decades. Statistical observation leads to curiousfindings. For example, the socialism in China does not oblige the population to be part of a health saving system,

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