Animal spirits and regime uncertainty.

• Author: Subrick, J. Robert
• Position: Etceteras ...

Can John Maynard Keynes's ideas explain why expansionary fiscal policy does not in some cases spur economic recovery? The surprising answer is yes. In a famous passage in The General Theory of Employment, Interest, and Money, Keynes explains the importance of irrational action in overcoming rational indifference. I refer, of course, to his well-known notion of "animal spirits." He writes:

Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits--of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. ([1936] 1953, 161) Animal spirits are spontaneous urges to act that have no basis in rational calculation. People act on "whim or sentiment or chance"; they do not calculate expected values (Keynes [193611953, 163). Rationality alone would prevent action from taking place in some instances. People sometimes do not know the likelihood of various outcomes. There are unknown unknowns. If one has no probabilities to assign to alternative courses of action, how does one make a decision? In these cases, rational calculation would lead to the plight of Buridan's Ass, which died rather than make a decision with no clear rational basis. Animal spirits overcome the dilemma. They cause people to act in the presence of uncertainty. When animal spirits disappear, however, actions cease, and problems arise. Keynes explains: "Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die;--though fears of loss may have a basis no more reasonable than hopes of profit had before" ([1936] 1953, 162).

The demise of animal spirits leads to economic contraction. Without "spontaneous optimism," people stop spending. They hoard money. Consumption and investment decline. People lose their jobs, and unemployment rises. Gross domestic product decreases, and recession ensues. In extreme cases, depression occurs and persists.

Keynesian policymakers advocate...