Sunday, October 15, 2023

Review of Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

This book review was written by Eugene Kernes   

Book can be found in: 
Intriguing Connections = 1) Learning Economics: Basic to Advanced

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“The multiplier theory explained that a small dip in expenditure could have greatly magnified effects.  If there were a small but substantial decline in consumption expenditures because people overreacted in fear to a stock market crash, such as the one in 1929, then this would act just like a negative government stimulus.  For each dollar that people cut their consumption, there would be another round of expenditure cuts, then another and then another, resulting in a much larger decline in economic activity than would be attributable to the initial shock.” – George A. Akerlof, and Robert J. Shiller, Chapter One: Confidence and Its Multipliers, Page 44

“The need for consumer protection is always a cause of some importance, but for a variety of reasons it is not the Achilles heel of capitalism.  Consumers are sufficiently knowledgeable that, for the most part, they do not buy things frivolously.  Most of their purchases are recurring, and they learn quickly if a product does not produce results.  Retail stores also certify, at least to some extent, what they sell.  In addition there are government safeguards.  These are particularly important in cases in which the consumer cannot easily assess a product’s attributes.  Many products are subject to safety requirements that are a matter of law.  For example, building codes protect homeowners from shoddy workmanship hidden behind the walls.” – George A. Akerlof, and Robert J. Shiller, Chapter Three: Corruption and Bad Faith, Page 57

“The human mind is built to think in terms of narratives, of sequences of events with an internal logic and dynamic that appear as a unified whole.  In turn, much of human motivation comes from living through a story of our lives, a story that we tell ourselves and that creates a framework for motivation.” – George A. Akerlof, and Robert J. Shiller, Chapter Five: Stories, Page 82


Is This An Overview?

Animal spirits are thoughts and feelings of animate people.  The psychological causes of economic activity.  Animal spirits are the noneconomic motives of decision making.  Decisions chosen by more than just rational actors wanting mutual economic benefits.  Economists tended to dismiss individual variations in the aggregate, but it is the variations produced by animal spirits that cause economic fluctuates.  There are consequences to animal spirits, which leads to a role for government, to prevent the consequences from escalating. 

The elements of animal spirits include confidence, fairness, corruption, money illusion, and stories.  People make decisions based on the confidence they have in an option, rather than considering all possible outcomes of all options.  Confidence in economic activity leads people to participate more, while a dip in confidence can prevent participation that escalates into an economic crisis.  People care for fairness, and are willing to punish those who they deem are acting selfishly.  Purchasing products and services risks corruption, as the claims about what was purchased can be misleading.  Consumer protection is needed for purchases whose quality is difficult to verify, while consumers tend to know the effectiveness of frequently repeated purchases.  People tend to think that the value of money is static, which is the money illusion, for in practice money purchases different amounts of the same product over time.  Stories build the narrative of events, which defines and motivates human behavior. 



The authors bring back the psychological aspects of Keynesian economics, with John Maynard Keynes being the originator of the term, animal spirits.  While they propagate an underrepresented idea of Keynes, to rectify the misunderstanding, they also propagate misunderstanding about Adam Smith’s ideas.  Smith’s work contained many noneconomic motivations for behavior.  The authors recognize how Keynes’s views were stripped of their psychological values, but do not recognize that the same was done to Smith.   

Questions to Consider while Reading the Book

•What is the raison d’etre of the book?  For what purpose did the author write the book?  Why do people read this book?
•What are some limitations of the book?
•To whom would you suggest this book?
•What are animal spirits?
•What are the elements of animal spirits? 
•What is the role of the government? 
•How do animal spirits explain economic activity?
•How do animal spirits explain economic crisis?
•What is confidence?
•Do people care about fairness?
•How does corruption effect economics?
•What is the money illusion?
•Why do people tell stories?
•What is Keynesian economics?
•What is the Invisible Hand? 

Book Details
Publisher:               Princeton University Press
Edition ISBN:         9781400834723
Pages to read:          204
Publication:             2010
1st Edition:              2009
Format:                    eBook 

Ratings out of 5:
Readability    4
Content          2
Overall          2