Animal spirits play snakes & ladders

It is nice to be vindicated once in a while by some authority in a technical area of economics, or more specifically about functioning of the stock markets, where one doesn’t possess any formal training. This is especially so if those specialists happen to be like George A. Akerlof (Daniel E. Koshland Sr. Distinguished Professor of Economics at the University of California, Berkeley & Nobel prize awardee in 2001 ) & Robert J. Shiller (Arthur M. Okun Professor of Economics at Yale University & author of Irrational Exuberance and The Subprime Solution). In my post Of Snakes & ladders posted on India’s Republic day of 2008, I had said :

“Related to cycles, there is another & may be deeper phenomenon of perceptions of participants. When economy is growing, both businesses & consumers are on a high. Businesses market & consumers buy in this consumption crazy economy like there is no tomorrow. Optimism, or frankly euphoria, about present & future, is on the roll driving growth & stock markets wild. When downturn comes, businesses panic & consumers freeze as if there is no today. Phase of procrastinating & of hedging decisions begins that is indicative of foreboding & pessimism, which pummels consumption & demand down. One cycle of emotive rollercoaster is complete & a new one begins. The character of business cycle has changed as explained earlier, but nature of this perceptive cycle remains intact so long as human nature remains unchanged. Economic perceptions are often real determinants of economic cycles & especially of stock market behaviour, not economic facts.

The professors argue in their latest book ‘Animal Spirits‘ that correcting hand of government is required to steady the ship of economic cycles & stock market gyrations. “Markets know best” argument cherished by Reaganomics & Thatcherism won’t deliver. Read on.


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

Finalist in the getAbstract International Book Awards 2009


The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, “animal spirits” are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.

Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government–simply allowing markets to work won’t do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life–such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes–and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.

Animal Spirits offers a road map for reversing the financial misfortunes besetting us today. Read it and learn how leaders can channel animal spirits–the powerful forces of human psychology that are afoot in the world economy today.





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