RSS FeedIrrational Exhuberance and the Animal Spirits
This post was created and posted in real-time, before the talk was even concluded. For a more detailed article on the same talk see the UWO Law website.
People will always act rationally, right?
That’s the assumption upon which we rest our economic decisions, and one which Dr. Robert Shiller of Yale University is questioning.
Shiller is one of the world’s most well-known economists, and a bestelling author. Several weeks ago, he received the 2009 Deutsche Bank Prize in Financial Economics.
He predicted the 2000 IT bubble burst in the first edition of his book, Irrational Exuberance.
But he also predicted the 2005 housing crisis in his second edition, and outlined a recover plan in Subprime Solution: How the Global Financial Crisis Happened and What To Do About It.
He has a new book though, co-authored with Nobel Prize winner George Akerlof, on Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.
It was this most recent book that was the topic of his talk at the University of Western Ontario on March 27, 2009. He was working on this book for six years, but decided to released it now given the current economic situation.
John Keynes once said in 1936, in General Theory of Employment Interest and Money,
The outstanding fact is the extreme precarious of the basis of knowledge on whic our estimates of prespective yield have to be made… Most probably, our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be take as a result of animal spirits – of a spontaneous urge to action rather than inaction.
Nobody can predict the future. There are many people who pretend that they can, however.
Most actions are affected by what people anticipate will happen, and it’s in these animal spirits that we see the root of this economic crisis.
Postponing building new factories or laying off people leads to another round of problems; they are unable to spend, they tell others of their experiences, and there are ripple effects.
As a result we get into a period of lost opportunity.
Animal spirits are contrary to the thinking of economics, who always want to look to something concrete like the central bank, but it’s usually the animal spirits that drive things.
Real cycle business theory believes that all the drivers of the economy is technological change. Although there is some validity to this like the railroads, it doesn’t explain things like the changes we see today.
