Animal spirits.

• Author: Kling, Arnold
• Position: Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism - Book review

George A. Akerlof and Robert J. Shiller are highly creative economists who have spent much of their careers exploring what is now called "behavioral economics," meaning the intersection between psychology and economics. Their new book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism, is a summary of what this approach has accomplished, written to be accessible to an intelligent layman and keyed to the 2008 financial crisis.

The book represents both an assault on mainstream economics and an assault on the disposition toward free markets and minimal government. I am more persuaded by the criticism of mainstream economics than by the criticism of free markets.

Akerlof and Shiller wish to claim John Maynard Keynes for membership in the school of behavioral economists. "Keynes appreciated that most economic activity results from rational economic motivations--but also that much economic activity is governed by animal spirits. People have noneconomic motives. And they are not always rational in pursuit of their economic interests. In Keynes' view, these animal spirits are the main cause for why the economy fluctuates as it does. They are also the main cause of involuntary unemployment" (p. ix, emphasis in original). However, this view was later dropped as "Keynes' followers 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. They ... minimized the intellectual distance between The General Theory and the standard classical economics [in which] people act only for economic motives, and they act only rationally" (p. x, emphasis in original).

Akerlof and Shiller position their work as a revival of the lost Keynesian tradition. "With the advantage of over seventy years of research in the social sciences, we can develop the role of animal spirits in macroeconomics in a way that the early Keynesians could not. And because we acknowledge the importance of animal spirits, and accord them a central place in our theory rather than sweep them under the rug, this theory is not vulnerable to attack" (p. xi).

Readers familiar with Keynes will realize that Akerlof and Shiller have taken poetic license with the term animal spirits. For Keynes, it characterized the entrepreneur's decision to undertake investments in the absence of sufficient information to gauge the probability of success. To me, the term has always carried a connotation of man's attempted grasp for immortality, not unlike rearing children or donating funds to a university for a building that will bear one's name. However, after alluding to the narrower interpretation of the term pertaining to entrepreneurial investment decisions, the authors state, "But in modern economics animal spirits has acquired a somewhat different meaning; it is now an economic term, referring to a restless and inconsistent element in the economy.... Sometimes we are paralyzed by it. Yet at other times it refreshes and energizes us, overcoming our fears and indecisions" (pp. 3-4). I would have preferred that Akerlof and Shiller use a different term for the broader set of irrational influences on economic behavior. Clarity is served by limiting the term animal spirits to entrepreneurial investment under uncertainty.

Under the broader rubric of animal spirits...