BOOK REVIEW -- Animal Spirits by George Akerlof & Robert Shiller
This book reminds me of Tolstoy and his view of what caused the Napoleonic Wars: simply that the men of the West decided it was time to slay the men of the East. In the language of the great J.M. Keynes, Animal Spirits overtook them.
Akerlof and Shiller assert: “Just as Adam Smith’s invisible hand is the keynote of classical economics, Keynes’ animal spirits are the keynote to a different view of the economy–a view that explains the underlying instabilities of capitalism…”
A surprise for me was learning that most economists do not incorporate Animal Spirits into their analysis. “In their attempt to clean up macroeconomics and make it more scientific, the standard macroeconomists have imposed research structure and discipline by focusing on how the economy would behave if people only had economic motives and if they were also fully rational.”
The authors say the Animal Spirits ignored are confidence, fairness, corruption, money illusion and stories. “These are real motivations for real people. They are ubiquitous. The presumption of mainstream macroeconomics that they have no important role strikes us as absurd.”
The first part of the book gives a detailed explanation of each animal spirit. The second half answers economic questions using animal spirits as a guide. For example: most economic ups and downs are caused by “overconfidence followed by under confidence.” True but not exactly an earth shattering insight.
A nice quote that is related to the question of fairness: “We have shown that a great deal of what makes people happy is living up to what they think they should be doing.”
I’m glad I read this book but it’s not in the same league as Shiller’s masterpiece, Irrational Exuberance.