get your animal spirits here

animal-spirits1George Akerlof and Robert Shiller understand a lot about psychology, and in their recent book, Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism, they try to show how pscyhological mechanisms explain market dynamics that defy a neoclassical understanding of how markets should work.  The book, which is not very technical and is therefore more geared to a lay audience than an economics audience, is an attempt to behavioralize economics even more than it already has been. Akerlof and Shiller take psychological research seriously, and it’s refreshing to see that they’re not trying to reinvent the wheel.

The term “animal spirits” refers to something Keynes wrote about the economic forecasting of business, which “can only be taken as a result of animal spirits.” A&S explain that animal in this sense refers “to a basic mental energy and life force” but that in modern economics animal spirits has come to refer to ” a restless and inconsistent element in the economy” (3-4). Animal spirits is a term that soaks up the residual of economic behavior that fails to conform with rational economic decision-making and market outcomes. In today’s economy, animal spirits should account for a lot. A&S want to do more than just treat animal spirits as a residual though and instead develop a more systematic explanation for why people deal with uncertainty or ambiguity in particular ways. They turn to the science of the mind, psychology, in search for cognitive or social pscyhological mechanisms. The book focuses on five of those mechanisms or concepts: confidence, fairness, corruption and antisocial behavior, money illusion, and stories. Many of the chapters that follow take an economic phenomenon that defies explanation from an orthodox economic perspective and then show how these five concepts can help shed light on it. For example, there are chapters that deal with unemployment, inflation, and economic cycles.

The book is an interesting read and would probably be very useful for an undergrad class that needs an introduction to behavioral economics.  A&S do a nice job of moving between the theoretical and the practical, the empirical and the implied. The writing is accessible and the topic is more than relevant to our current economic situation. A couple of problems with the book gnawed at me though. First, it’s not clear why they chose these particular concepts. The concepts don’t exactly gel and it’s not clear that they’re all psychological mechanisms or if they even work at the same level of analysis. Fairness is a norm that certainly has its basis in our psychological makeup (remember the capuchin monkey experiments!) but money illusion is a phenomenon peculiar to the modern market insitution that cries out for a deeper psychological explanation. Stories doesn’t seem like a mechanism at all, and I wondered why they simply didn’t decide to focus on framing instead. I was explaining the book to a psychologist colleague of mine who studies the psychology of decision-making. When I told him about the five orienting concepts, his bored reaction was, “Hmph, seems arbitrary to me.” Exactly.

The other problem I have with the book (and I know I’m getting picky here) is that A&S move between levels of analysis without every really connecting all the dots. They’re trying to develop an explanation for macroeconomic phenomena by focusing on micro-dynamics but they don’t build a conceptual bridge between the two.  I agree with the notion that any theory of macro-institutions should have a corresponding micro-theory of cognition, but shouldn’t there be something in between the two levels that allows you to get from point A to point Z? I realize I’m asking a lot, especially from a book that was written primarily for a non-specialist audience, but I can dream big right?  They should get one of their grad students on it pronto.

Written by brayden king

April 7, 2009 at 2:47 pm

5 Responses

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  1. See also the book reviewed by Richard Posner here.

    Posner’s review rehabilitates the rational hypothesis from the attack that the book makes on it by pointing out that it provides just the link between micro and macro that you’re asking for. It’s not a perfect link, but it works as an approximation, and A&S don’t show what we could replace it with.

    Posner works with an implicitly dynamic view of the rational hypothesis, however. Occasionally he articulates this in his works. See, for example, Law, Pragmatism & Democracy.

    I think I agree with Posner’s point in this review that Keynes had the right picture in mind, but that Keynsianism (as promoted by A&S) doesn’t necessarily follow. Another way to tackle the problem of “animal spirits” would be to assume the role of an observer and simply measure how often people choose to start cooperating rather than hoarding. We can be agnostic about cause and see dynamics, and perhaps with the dynamics measured in terms of something other than price, we might also understand cause better.


    Michael F. Martin

    April 7, 2009 at 4:31 pm

  2. Thanks for the word on the Akerloff-Schiller book. To me, this book is important less for its own theory than as a marking point for future theory and analysis.

    Sociologists took a good turn with bringing networks/social relations into the picture in the 1980s. But to my eye, the social-psychological view of the economy — a la Bourdieu’s habitus — that sociology can potentially bring to the table is what the study of economics needs above all.

    Are there American sociologists using Bourdieu to bring out a social-psychological reading of economic structure? Linking macro and micro in that way?

    Would be interested if you all had any names.

    Thanks, this is one of the best pages I regularly turn to! Been reading for about two months.



    April 13, 2009 at 12:00 am

  3. Addendum to that last post: I don’t mean ‘culture.’ I mean social-psychology — the economy as a field of thinking minds interpreting knowledge. Can you all think of and pass on any who study economics in this way? Just wondering. Again, thanks for the great site.



    April 13, 2009 at 12:12 am

  4. This is highly conjectural, but I thought it might interest a few readers here:

    Keeping statistics on the periodicity of biological rhythms might form the foundation for an alternative quantitative analysis of individual and group behavior: see <a href=””here.


    Michael F. Martin

    April 13, 2009 at 4:53 pm

  5. Michael F. Martin

    April 13, 2009 at 4:54 pm

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