Animal Spirits

Animal Spirits is co-authored by George Akerlof, winner of the 2001 Nobel Prize in Economics, and Robert Shiller, winner of the 2013 Nobel Prize in Economics, and is one of the representative works of behavioral macroeconomics. The "animal spirits" of the title is borrowed from Keynes and refers to the non-rational psychological forces that drive human economic decisions—forces hard to model but which largely explain business cycles, unemployment, inflation, and violent swings in financial markets. The book has two parts. Part One, "Animal Spirits: The Roots of the Global Financial Crisis," sets out five elements that make up animal spirits: confidence and its multiplier, a sense of fairness, corruption and bad faith, money illusion, and "stories" as reference points for public action. The authors argue that confidence amplifies economic ups and downs like a multiplier; concerns about fairness deeply shape wage and price setting; corruption and bad faith often surface around recessions; people cannot fully see through the veil of inflation; and circulating stories spread or collapse confidence like an epidemic. Part Two uses these five elements to answer "the eight most important economic questions": Why do economies fall into depression? Why have central banks been able to control the economy? How should financial crises be handled? Why do some people fail to find work? Why do inflation and unemployment trade off in the long run? Why do people save for the future without a plan? Why are financial prices and corporate investment so volatile? Why is the housing market cyclical? Why do disadvantaged groups struggle in poverty for generations? The authors conclude that an economy full of animal spirits is unstable if left alone, and that government's job is to set rules and create conditions in which the creative side of animal spirits can flourish, rather than to believe the market is always rational.