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Summary
Summary
From acclaimed economists George Akerlof and Robert Shiller, the case for why government is needed to restore confidence in the economy
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.
Author Notes
George Arthur Akerlof is an American economist and Koshland Professor of Economics at the University of California, Berkeley. Akerlof received his Bachelor's degree from Yale University in 1962, and his Ph.D. from MIT in 1966, and has taught at the London School of Economics.
Akerlof won the 2001 Nobel Prize in Economics (shared with Michael Spence and Joseph E. Stiglitz). and is perhaps best known for his article, "The Market for Lemons: Quality Uncertainty and the Market Mechanism", published in Quarterly Journal of Economics in 1970.
Akerlof's authored book titles include: An Economic Theorist's Book of Tales (Cambridge University Press, 1984), Explorations in Pragmatic Economics (Oxford University Press, 2005), and Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (Princeton University Press, 2009).
(Bowker Author Biography)
Reviews (2)
New York Review of Books Review
LOOK around you, George A. Akerlof and Robert J. Shiller say. The second coming of the Great Depression is, like the original, a direct result of animal spirits. If only we had factored those turbulent emotions into economic theory, we might not be repeating the earlier tragedy. Akerlof, a Nobel laureate, and Shiller, a good bet to become one, are prominent mainstream economists. They don't deviate easily from orthodox theory, with its allegiance to the proposition that people are essentially rational, well informed and unemotional in the numerous transactions that shape the economy. But in "Animal Spirits," they have deviated - and they have done so just as mainstream theory self-destructs. There was nothing rational, well informed or unemotional about the behavior that has all but collapsed the economy. That leaves most of America's economists without a believable framework for explaining how we got into this mess. Akerlof and Shiller are the first to try to rework economic theory for our times. The effort itself makes their book a milestone. Keynes performed a similar service in the 1930s - mainly by making the point that market economies could suffer long periods of high unemployment and low output unless government stepped in to supply the necessary demand. Barack Obama's $787 billion stimulus program reflects his insight. But another aspect of Keynes's thinking did not fare well. He also introduced the world to "animal spirits," coining that phrase to describe a range of emotions, human impulses, enthusiasms and misperceptions that drive economies and ultimately unwind them. The economists who interpreted Keynes "rooted out almost all of the animal spirits - the noneconomic motives and irrational behaviors - that lay at the heart of his explanation for the Great Depression," Akerlof and Shiller declare. Addressing this wrong, the authors attempt to restore animal spirits to economic theory. They do this by drawing on the greater understanding of human psychology that exists today, and which Akerlof and Shiller, along with other economists, have incorporated into the relatively new field of behavioral economics. Until now, behavioral economics has focused mainly on a variety of disparate traits that chip away at the assumption of rationality embedded in mainstream theory. A young person, for example, fails to join a 401(k) plan, even one subsidized by his employer, although if he were rational and fully informed, he would certainly sign up. What Akerlof and Shiller do is to highlight this sort of finding, packaging it with numerous other psychological insights into a half-dozen broad maxims that permanently alter the concept of rational behavior. And their book takes their case not just to economists, but also to the general reader. It is short (176 pages of text) and easy enough for laymen to understand (most of the time). Above all, they challenge the reigning free-market ideology of the past 30 years or so, from the rise of Margaret Thatcher and Ronald Reagan to the abrupt arrival of the present crisis late last year. That ideology held that markets should operate free of government because they were rational. But if animal spirits influence behavior, then government must play a broad, disciplinary role, and do so permanently. Akerlof and Shiller spent five years writing "Animal Spirits" and honing that conviction. They are concerned that once we enter a revival, pressure will inevitably build - just as it did in the late 1970s, more than a generation after the Great Depression - to give the markets free rein again. Akerlof and Shiller intend their book as an obstacle to that ever happening. "The system of safeguards developed from the experience of the Great Depression has been eroded," they write. "It is therefore necessary for us to renew our understanding of how capitalist economies - in which people have not only rational economic motives but also all kinds of animal spirits - really work." Both men are old hands at prodding their fellow economists into recognizing exceptions to mainstream theory. Akerlof, a professor at the University of California, Berkeley, shared a Nobel Prize in 2001 for his work on "asymmetric information," which means that some parties to a transaction know more about the deal than others, like the used-car salesman who knows more about the shortcomings of the vehicle he is trying to sell than the customer he is pitching. Lemon laws, protecting consumers, grew out of such findings. Akerlof has long believed that in most market situations a government role can improve the outcome. "Animal Spirits" brings that view to a high boil. Shiller, a Yale professor, originated the phrase "irrational exuberance" before Alan Greenspan made it famous, and in his research he has documented the rise and fall of home prices going back decades, to demonstrate that the latest surge was far and away the greatest in American history. The bubble will burst with very unpleasant results, Shiller warned, well before that actually happened. What are these animal spirits that drive the American economy? Confidence is one. Far from dispassionately weighing and analyzing all the options, people act on the confidence, or overconfidence, that a home they are about to buy will be worth more a year later. Confidence drove up stock prices in the 1920s and again in this decade, far more than corporate balance sheets and pure reason would justify, and now lack of confidence, spreading like a contagious disease, is exacerbating the sell-off. Fairness also shows up as an animal spirit, influencing thousands of decisions in ways that part company with standard theory. Out of a sense of fairness, for example, bosses often pay their employees more than the market demands. "Considerations of fairness are a major motivator in many economic decisions," Akerlof and Shiller write, "and are related to our sense of confidence and our ability to work effectively together." Corruption, too, is an animal spirit. This includes the propensity to produce not just what people really need but what they think they need, like the mortgage-backed securities, "a modern form of snake oil," the authors declare. In their list of animal spirits, the two economists pay special attention to the tendency of people to think in terms of narratives or stories. "High confidence tends to be associated with inspirational stories, stories about new business initiatives, tales of how others are getting rich," the authors write. On the other hand, stories about the Great Depression shape our narrative of what is happening now, and our behavior. SO what is to be done? Animal spirits are human emotions; they can't be turned off. Unchecked, they drive the economy into misbegotten booms and disastrous busts. Tempered by government, on the other hand, they are a great source of entrepreneurial energy, safely channeled into a healthy capitalism. Keynes came to that conclusion, and Akerlof and Shiller, in "Animal Spirits," push hard in the same direction - prodding their colleagues to follow their lead in revamping economic theory to deal with a market system that, quite irrationally, failed to govern itself. Louis Uchitelle is an economics writer for The Times.
Choice Review
Behavioral economics--the intersection of psychology and economics, and a frontier research field for those two disciplines--introduces human frailties and proclivities (such as inconsistency and feelings about fairness) to microeconomic decision making. In Animal Spirits, a term borrowed from the writings of John Maynard Keynes, Akerloff (Univ. of California, Berkeley) and Shiller (Yale Univ.), well-known and respected economists, apply behavioral economics to macroeconomic problems such as business cycles, recessions, and instabilities in financial markets. The chapters in part one treat concepts such as confidence, fairness, and money illusion; part two presents eight questions--and the authors' answers. Far too often they use straw men to create Hatfield-and-McCoy-type duels between classical economics and the newer behavioral forays. But the book is obviously a timely, valuable complement to the more traditional approaches to macroeconomic thought and teaching. Forty pages of footnotes and references in a volume of only 180 pages of prose will dampen interest among intelligent lay readers; however, the book's target audience is academics. Chapter 13 on the special case of African American poverty is a superficial and likely erroneous sop to their political leanings and should have been omitted. See related, Behavioral Economics and Its Applications (CH, Sep'07, 45-0372). Summing Up: Recommended. General readers, upper-division undergraduates, and above. A. R. Sanderson University of Chicago
Table of Contents
Preface | p. vii |
Acknowledgments | p. xiii |
Introduction | p. I |
Part 1 Animal Spirits | |
1 Confidence and Its Multipliers | p. 11 |
2 Fairness | p. 19 |
3 Corruption and Bad Faith | p. 26 |
4 Money Illusion | p. 41 |
5 Stories | p. 51 |
Part 2 Eight Questions and Their Answers | |
6 Why Do Economies Fall into Depression? | p. 59 |
7 Why Do Central Bankers Have Power over the Economy (Insofar as They Do)? | p. 74 |
Postscript To Chapter Seven The Current Financial Crisis: What Is to Be Done? | p. 86 |
8 Why Are There People Who Cannot Find a Job? | p. 97 |
9 Why Is There a Trade-off between Inflation and Unemployment in the Long Run? | p. 107 |
10 Why Is Saving for the Future So Arbitrary? | p. 116 |
11 Why Are Financial Prices and Corporate Investments So Volatile? | p. 131 |
12 Why Do Real Estate Markets Go through Cycles? | p. 149 |
13 Why Is There Special Poverty among Minorities? | p. 157 |
14 Conclusion | p. 167 |
Notes | p. 177 |
References | p. 199 |
Index | p. 219 |