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Animal Spirits ☆ [PDF / Epub] ★ Animal Spirits By George A. Akerlof ✩ – 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 confi 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 reuires the steady hand of government simply allowing markets to work won't do it In rebuilding the case for a 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 In a new preface they describe why our economic troubles may linger for some time unless we are prepared to take further decisive action.

  • Kindle Edition
  • 254 pages
  • Animal Spirits
  • George A. Akerlof
  • English
  • 27 April 2014

About the Author: George A. Akerlof

George A Akerlof is a Professor of Economics at the University of California Berkeley and Nobel Laureate in Economics.

10 thoughts on “Animal Spirits

  1. ☘Misericordia☘ ~ The Serendipity Aegis ~ ⚡ϟ⚡ϟ⚡⛈ ✺❂❤❣ ☘Misericordia☘ ~ The Serendipity Aegis ~ ⚡ϟ⚡ϟ⚡⛈ ✺❂❤❣ says:

    An excellent read on how economics gets to be irrationalTakeoutsStoriesConfidence and its multipliersFairnessSpecial poverty of minoritiesCyclingVolatilityArbitrarinessInflation unemployment trade offingDepression of economiesCenral banking and its powersMoney illusionCorruption and bad faithDated at the moment? Yes a bitStill this was a trailblazer at some time and it's still a worthy read since these trends aren't going away any time soon

  2. Trevor Trevor says:

    Part of the reason why I found this book uite so interesting was because I’ve read lots of books about behavioural economics over the years but they are much interested in psychology than they are in economics For instance a book that I am constantly recommending and even buying for people is ‘Predictably Irrational’ – and it proudly refers to itself as being one set in behavioural economics but really you sort of have to suint to see the connection to economics most of the time Now don’t get me wrong – I’ve really enjoyed those books but what this one does is to place behavioural economics suarely in the realm of economics This is also effectively a re introduction to Keynesian economics a view of economics that went out of favour with Milton Freedman and Ronald Reagan – the conseuences of which we are living with todayOne of the authors here has a Nobel prize in economics – that is these aren’t just ‘some guys’ with a ‘new idea’ about economics but people from inside concerned with the overall direction that economics has takenThe book comes in two parts – part one is about the various ‘animal spirits’ that direct the ways in which we think about and act within the economy The reason why we need to think about animal spirits is that economics is too often presented as if everyone was the fabled ‘economically rational human’ – that we are all constantly considering the costs and benefits of our actions and purchases and that we only make a purchase when we know that is the best way to dispose of our money Such an idea is so stupid it is surprising it was ever accepted as the basis of any subject that seeks to describe itself as a ‘science’ The idea that unemployment is working people taking a kind of holiday is eually laughable even if it does mean that believing such allows right wing types can feel justified in cutting unemployment benefits from people so as to give them an incentive to find a jobAnimal spirits relate to some of the predictably irrational if irrational they really are ways humans set about engaging with the economy For example the authors make the point that people want to believe that their wages are ‘fair’ They want to believe that what they are earning reflects their worth – and they don’t want to see some other people be rewarded well beyond what they also deem as being fair This feeds into one of the other animal spirit ideas – that is that we need to trust the system that there will be no corruption undermining the system while we are making investments in that system A uick look back at 2008 and what has happened since shows that our current system runs afoul of both of those precepts People’s wages have stagnated for decades despite massive increases in productivity – and those at the very top have reaped undreamt of rewards often despite their actions rather than because of them An instance are the ‘retention bonuses’ that bankers gave themselves after the GFC often out of the taxpayer funded rescue packages despite these same bankers having nearly crashed the world economy Given all this it does make it hard not to think that the system is riggedThe second part of the book focuses on eight uestions that can’t really be answered with conventional economic theory in ways that don’t sound a little stupid but which make much better sense when animal spirits are evoked I’m just going to list theseWhy Do Economies Fall into Depression? Why Do Central Bankers Have Power over the Economy? Why Are There People Who Cannot Find a Job? Why Is There a Trade off between Inflation and Unemployment in the Long Run? Why Is Saving for the Future So Arbitrary? Why Are Financial Prices and Corporate Investments So Volatile? Why Do Real Estate Markets Go through Cycles? Why Is There Special Poverty among Minorities? One of the things about economics is that it seems impossible to predict the future which is annoying since it does seem that virtually the whole of economics is set up to do exactly that All the same and as a case in point in Australia we appear to be on the cusp of a housing collapse – something we avoided while the rest of the world was engaged in one and which we have been told for a decade is impossible to happen here because unlike elsewhere the fundamentals of our economy are sound and Australia has very special circumstances that made such a collapse imposssible Now that might even be true – but I’ve a feeling it is not One of the main reasons for this feeling of mine is that ‘this is a special time and place and that is why the bubble will not burst this time’ is exactly the logic that has driven EVERY bubble That every bubble that has ever existed has eventually popped is not proof that this one will have to pop of course but I still wouldn’t ‘bet my house on it’ so to speak What drives bubbles to pop has much less to do with the objective conditions that make looking at bubbles encourage you to want to put your hands over your eyes It is much about when people ‘feel it in their waters’ that the rout is on It is these changes in belief and then the difficulty in changing those ‘once bitten twice shy’ feelings back again that relate directly to animal spirits and that have a direct impact on the future growth in the economy It is for this reason that the authors recommend re regulation of the economy – as providing some sense of the system being far and not rigged is an important first step to giving people their belief back in the system and without that belief the system basically collapsesLike I said this is behavioural economics directly related to the economy at large and it makes for fascinating readingThere were a couple of times during this when I was stopped in my tracks out of amusement and that feeling of ‘how can I not of heard of this before?’ For instance I had no idea ‘The Wizard of Oz’ was a kind of allegory on the economy – the authors say “The yellow brick road and Dorothy’s magical silver slippers replaced for the 1939 movie with ruby slippers since these showed up dramatically on color film were metaphors for the intense conflict over the gold standard and the proposed free coinage of silver The little people the munchkins represented the poor working class The wicked witch stood for the selfish business interests The wizard himself was the great deceiver the US president” page64 Or what about this? “The nursery rhyme about Humpty Dumpty originated before children’s illustrated storybooks were common It was a riddle Who was Humpty Dumpty? He was an egg” page 90This was an interesting book – one I suspect I will think about over the next few months

  3. Gordon Gordon says:

    The phrase “animal spirits” comes from John Maynard Keynes the great British economist who saw the role of emotion and irrationality as looming large in economic behavior As Akerlof and Shiller see it Keynes had it right but the neo Keynesians who followed him watered his theories down to conform closely with the “invisible hand” classical economics of Adam Smith So what we were left with was a model of rational economic decision making where every consumer and businessperson carefully and logically analyzed the real value of assets was capable of figuring out how to discount future cash flows and account for both inflation and the cost of capital and never ever succumbed to wild manias or profound despair This is the somewhat caricatured version of economic thinking that Akerlof and Shiller attackAdam Smith too had a theory that was mostly right but could not explain the dysfunctions of economies – such as why unemployment rose to 25% during the Depression and stayed there for years Why didn’t workers simply cut their wage demands to a level that employers were willing to pay? In Smith’s model created in the 18C economies were supposed to naturally find their euilibrium point at or very close to full employment Unlike Smith Keynes had the benefit of the Great Depression staring him in the face when he wrote his book in the mid 1930’s and he knew that model didn’t always work The solution have government step in and use heavy deficit spending to pump up demand and drive down unemployment Then along came Milton Friedman in the 1970’s in the midst of the raging inflation of that decade With his stress on bringing down inflation by controlling the money supply and allowing markets to operate freely and his assertion that “government was the problem” Keynesianism took a back seat Ronald Reagan and his acolytes took Friedman’s view added a dose of supply side “voodoo economics” – cut taxes and deficits will somehow disappear – and became the hero of the Republican party At least he became the hero after the US got over its painful recession in 1981 82 Reagan was a master story teller and his story became the dominant story As Akerlof and Shiller see it “Great leaders are first and foremost tellers of stories” They go further and say that “The stories no longer merely explain the facts; they are the facts” The Reagan Friedman story was so strong it even survived the SL crisis that caused the failure of hundreds of SLs in the 1980’s brought to their knees by the de regulation of that industry combined with a strong dose of executive shenanigansFast forward to the recession of 2008 2009 The authors look at the roots of the recessions and depressions of the previous 120 years or so and identify the factors that they think need to be brought into a deeper understanding of economics to explain the current crisis These are• Stories Stories have great power to drive economies In the 1990’s it was the New Economy created by the Internet that was supposed to re write the rules of business Priceearnings ratios soared to 1001 and beyond The dot coms took a very hard fall most of them never to rise again In the 2000’s it was the “you can’t miss with real estate” story followed by the great housing crash of 2008 which still continues today It’s not clear what the next great story will be – clean tech?• Fairness Economists use too simple a model of how people enter into buying and selling transactions exchanges Fairness is central to how exchanges really work Think of the classic experiment with two people who have to split 100 – with one person defining how much of the pot each of them will get and the other person deciding if the deal is acceptable or not If it’s rejected neither of them gets anything In conventional economic thinking any amount of money is better than nothing and ought to be accepted Yet people will routinely reject offers seen as “unfair” even if it costs them money We are hard wired for a fairness ethic – at least where fair exchange is concerned This appears to be a cultural universal• Corruption and Bad Faith Anytime there is a great mania corruption will come to light when the air starts to come out of the bubble Or as Warren Buffett put it “When the tide goes out you find out who’s been swimming without a bathing suit” It looks like Madoff will be the pre eminent naked swimmer of this recession but he was in good company Failures of government regulation can cause the effect of this kind of behavior to spin wildly out of control so that these acts are no longer simple white collar crimes but threats to the system as a whole Example The behavior of unscrupulous mortgage originators who sold mortgages to people they knew would be unlikely to keep up with the payments once their variable rate adjusted upward was abetted by regulatory failure Not only were mortgage lenders largely unsupervised so were the near banks hedge funds investment banks who took those sub prime mortgages repackaged them as derivatives to miraculously make the risk “disappear” and peddled them to investors around the globe • Confidence Why does the stock market and the real estate market overshoot on the way up and on the way down? Akerlof and Shiller attribute a good part of this to over confidence on the way up when everyone feels like an investing genius and fear on the way down when everyone thinks the Great Depression is upon us Now if only I could figure out how to time it perfectly Ultimately it was a crisis of confidence that caused the entire banking system to teeter on the brink in the fall of 2008• The Money Illusion Give people a choice of on the one hand having their salary rise 10% with prices rising 10% at the same time or on the other hand having their salary and prices both stay the same people will always go for that 10% “raise” It just makes us feel better This same behavior though in even extreme form is one key factor that prevents workers and job seekers from lowering their wage demands during deflationary recessions Overall this is the best and most comprehensive book I’ve read so far on the sea change in economics that has been taking place during and in the wake of the two great economic boom busts of the past dozen years Shiller’s 2008 book The Sub Prime Solution is also a great read though narrowly focused

  4. Sagar Jethani Sagar Jethani says:

    It was with great anticipation that I looked forward to reading Animal Spirits If ever there were a time for a sobering analysis of how macroeconomic events actually occur that time was surely now Instead what I found was a volume which took great pains to destroy a carefully crafted straw man that species of academic economist who in defiance of common sense insists that people behave according to the universal dictates of rational self interest in every situation no matter what the exogenous circumstances happen to be In other words the straw man is a stand in for Milton Friedman or possibly Alan GreenspanI expected from the authors given their sterling credentials George Akerlof won the Nobel Prize in economics in 2001 and Robert Shiller has long been an astute observer of the madness of crowds Instead of a penetrating analysis which yields up new findings the reader is left with conclusions that are obvious to anyone familiar with the way economic decisions are made in the real world Akerlof and Shiller remind me of George Soros who similarly exults in destroying a straw man which only the most extreme worshiper of untrammeled free market capitalism approximatesDo we really need another missive which forcefully argues that people often act in irrational ways that harm their own self interest? Have we not seen overwhelming evidence in the past three years that unfettered capitalism can destroy the very basis of wealth accumulation and that there is a proper and appropriate role for government regulation to minimize the swings in consumer confidence? The authors appear to be writing for an extreme skeptic who even after witnessing the dynamics involved in the housing meltdown and credit crunch remain unconvinced of these precepts But which intelligent observers continue to need persuading?Insofar as Animal Spirits takes the reader on a guided tour through some of the financial cataclysms of the 20th century it is useful as a historical narrative The outcome of this narrative however is disappointing The book's agenda is initially described as being fairly ambitious setting about to do no less than change the way we interpret and understand economic events By the end however the reader is left scratching his head wondering why he is left with a set of recommendations that amount to little than the warning that people will sometimes behave irrationally and that this behavior can often have a disproportionate effect upon macroeconomic patterns

  5. Ed Ed says:

    As someone who trained as an economist and who has been digesting the implications of behavioural economics for economic theory this book takes the story further into macro economics or how the whole economy works Like the original work of Keynes not the subseuent simplification these authors it is actually by Akerlof who won the Nobel prize for economics AND Shiller who wrote Irrational Exuberancetransform how we should see markets operating effectively This means with intelligent government regulation to curb the effects of mass irrationality of booms and busts and consumer insight into their own irrationality house prices will go up for ever and always have everywhere NOT They never go down NOT Like Keynes they are passionate believers in what markets can achieve as well as advocates of the need to regulate markets to preserve them and the whole system Free markets need saving from themselvesThis book provides a convincing and deeper explanation of the recent credit crisis than any I have read It does not reuire much prior economics study but it still has much to teach the economics specialistIf you want to better understand the economy for the rest of your lifetime read it early on in your career

  6. Graeme Newell Graeme Newell says:

    I ended up abandoning this book after the first few chapters I agree with much of what Akerlof asserts but the author's continual tone of the other side is a bunch of idiots just got tiring The worlds of psychology and economics both deal with the volatile world of human judgments and are therefore notoriously inexact sciences I prefer authors who approach both of these topics with a collegial spirit and the humility to understand there is much work still to be done

  7. John John says:

    In The General Theory John Maynard Keynes wrote that the switches between optimism and pessimism which drive risesfalls in investment spending which in turn cause risesfalls in output were driven by 'animal spirits This was always one of the weaker points of Keynes' analysis essentially a big shrug of the shoulders removing any notion of economic actors rational responses to changing circumstances This book is simply a longer restatement of that argument People are crazy so the authors say their behaviour is irrational and in the Keynesian way this can cause economies to crash and stay crashed Only the wise hand of government on economic the tiller can save us This leaves several uestions unanswered Why do people make the same mistake over and over? There is no learning in the model Why is empirical evidence used so sparingly? In cases such as 1929 and 2008 2009 there were identifiable proximate causes for people's actions which we can turn to without invoking animal spirits Why is it assumed that the politicians who will save us from our irrationality are any rational than we are? Psychology in economics is a fascinating and emerging field but you'd never know it from this shallow and reductive book

  8. Ryan Melena Ryan Melena says:

    I found this book to be a significant disappointment The only point of interest for me was the in depth discussion of money illusion and its affects on our economy Outside of that the booked felt jumbled Despite my natural proclivity to the authors' point of view I felt their arguments were poorly made Additionally the book seemed to stray into apologia and misinformation regarding the events that led to the current recession It perpetuated the Fannie Freddie caused the crisis because politicians made them loan to poor people myth and wall papered over the fact that most of the major financial players were perpetrating rampant fraud as apposed to just acting in a morally uestionable way They also failed to follow their animal spirits idea to its logical conclusion that the unpredictable nature of human behavior severely limits the utility of economics as a science They seem to imply that given study animal spirits could be understood and incorporated into economic formulas and models This idea seems to fly in the face of the illogical nature of animal spirits thesis that the book spends so much effort explaining

  9. Rhys McKendry Rhys McKendry says:

    The book sets out to discuss animal spirits yet I still feel I’ve barely been given any information Economics as a discipline needs to move away from ergodicity but the vagueness of the book leads me to believe that many will think there is no valuable alternative when there is The authors’ explanations have little substance and it heavily undermines their argumentsThe theory of animal spirits which is underpinned by fundamental uncertainty has been developed heavily by Post Keynesian economists and yet this isn’t mentioned once in the book There is a fleeting mention of Knight’s thoughts on uncertainty vs risk but no theory of animal spirits can claim to be rigorous without properly laying out the insights of scholars on uncertainty I’m also gobsmacked at how Alerlof Shiller have taken the main tenants of Hyman Minsky’s Financial Instability hypothesis and not referenced him? Uncertainty and animal spirits are what drive cycles in Minsky’s model and yet they argue that they are on new territory Further they talk about fairness in wage demands and put forward their perception that this is an under appreciated topicif only this wasn’t a main pillar of Post Keynesian theory of wage demandsinflationThe criticisms of Friedman’s use of rational agents and varying inflation expectations are poor and unsurprisingly vague especially when Keynesian economics has much rigorous criticisms A short book but I’m not inclined to recommend it

  10. Joel Joel says:

    This book is a ualitativenon technical discussion about what is currently being debated in Macroeconomic theory There have been several posts on different boards about this book taking a liberal position If you're interested in Economics as a science ignore them If you're looking for a book that will bring redemption to Reagan era supply side economics this is not the book for youAkerlof and Shiller are notorious advocates of Keynesian thought Not because of some underhanded desire to allow government to intrude in our lives but because Keynes believed in taking account of the ualitative and intangible aspects of human behavior Admittedly as a side note they do refer to some of Milton Friedman's conclusions as naive This can be irritating if you're a strict monetarist But they also don't go easy on some of Keynes' assumptionsCurrent Economic thought is a science of optimization Akerlof and Shiller are not suggesting an abandonment of mathematics in Economics but advocate the inclusion of psychological probabilities What they suggest is that humans do not have access to perfect information nor do they act in an entirely rational matterAnyone who has taken a single class in sociology or psychology will instantly realize the no duh factor from this concept But in Economics the technology to uantify these probabilities on a Macroeconomic scale is relatively new Akerlof and Shiller have stumbled upon a premise that has haunted mainstream economists for forty years and has been a driving force in Austrian Economics for even longer Humans are not entirely rational creatures with solely economic motivationsa devastating shock to macroeconomists everywhereIn the end their conclusions are modern and well thought out Behavioral and Experimental economics appears to be the next evolution in Economic theory You may not like their conclusions as it relates to policy yet the premise of expanding theory to include those factors once deemed as intangible or irrational cannot be understated

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