Animal Spirits – How Human Psychology Drives The Economy, and Why It Matters for Global Capitalism

Animal Spirits

In their new book, George Akerlof and Robert Shiller suggest that:

The confidence of a nation, or of any large group, tends to revolve around stories. Of particular relevance are new era stories, those that purport to describe historic changes that will propel the economy into a brand new era.” (p.55).

Akerlof and Shiller go on to state: “Confidence is not just the emotional state of an individual. It is a view of other people’s confidence, and of other people’s perceptions of other people’s confidence.” (emphasis is mine p.55) .

Stories, changes, a new era, emotional states, perceptions — confidence — all terms that John Maynard Keynes might point to as sources of explanatory power for economic fluctuations and the instabilities that inhabit capitalism. Keynes, Akerlof and Shiller refer to these influences as animal spirits.

Accordingly, the thesis of this work is captured in the following:

“To understand how economies work and how we can manage them and prosper, we must pay attention to the thought patterns that animate people’s ideas and feelings — We will never really understand important economic events unless we confront the fact that their causes are largely mental in nature.” (p.1)

“The human mind is built to think in terms of narratives, of sequences of events with an integral 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 we tell to ourselves and that creates a framework for motivation. Life could be “just one damn thing after another” if it weren’t for these stories. The same is true for confidence in a nation, a company, or an institution. Great leaders are first and foremost creators of stories.” (p.51).

This is a groundbreaking work in macroeconomics. Macroeconomics, as it has evolved over the last several decades, might lead one to  succumb to the sheer beauty and mystery of the mathematical portrayals and the inter-related interpretations thereof. This book reveals a new frontier that will hopefully spawn solid research and new explanatory tools – inter-disciplinary in nature (psychology, sociology and perhaps neurological) that may form the new theories of macroeconomics and lead us to courageously consider what we think we know about economic behavior, economies, and the motivations of economic beings — from a variety of perspectives.

The dawn of new era stories in macroeconomics is upon us. Read what Akerlof and Shiller have to say. Enjoy! I certainly did.

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