Saturday, March 21, 2009

Animal Spirits

George A. Akerlof and Robert J Shiller, Animal Spirits: How Human Psychology Drives the Economy and Why it Matters to Global Capitalism. Princeton University Press, 2009.

Freakonomics redefined the popular economics book genre. This runaway best-seller created a niche for an economics book that could speak seriously to the masses (the serious mass, if that isn't some sort of oxymoron) and get them to rethink both economics (particularly microeconomics) and their view of the world. It was a great if uneven read, I said in my review, but kinda pointless. I thought the authors missed a good opportunity to criticize policymakers and pundits for their uncritical acceptance of conventional wisdom and the harm this has caused. Instead they just let the many and varied examples and case studies speak for themselves. Too bad.

Animal Spirits is a sort of macroeconomic Freakonomics but with one difference. It has a point. Many points, in fact. More about this later.

Ackerlof and Schiller are as distinguised as you can get in economics. Ackerloff won the 2001 Nobel Prize in Economics for his work on how economies actually work in the messy, inconvenient real world (think "The Market for Lemons"). Schiller is famous for Irrational Exuberance and his studies of unstable financial markets. Smart guys.

Animal Spirits is a book about how individual feelings and attitudes, which are not always strictly rational, matter in macroeconomics and how ignoring them has helped put us in the current financial and economic hole. Most people associate the term "animal spirits" with Keynes (animal spirits, he said, are what drive the stock markets) and sure enough Keynes and his ideas make frequent appearance here.

The organization of the book is clear enough. The authors begin with short chapters about five flavors of animal spirits -- confidence, fairness, dishonesty, money illusion and the particular power of stories to shape human attitudes and behavior) and then apply these concepts to eight questions, including why do economies fall into depression, how can the current financial crisis be solved and why are there booms and busts in real estate markets? As you can see, this is a book that asks a lot of big questions and promises a lot of big answers.

There are several problems, not least of which is that it is difficult to answer all these questions in a slim volume like this one and especially hard to make all of the answers depend critically and specifically on animal spirits (although this main point is well argued, especially concerning the importance of fairness in economic decisions). Animal Spirits makes lots of points along the way -- maybe too many of them? -- and in doing so seems to sometimes lose track of its audience.

Who is this book for? Is it for professional economists who will be interested in rethinking longstanding intellectual debates within the profession? Is it for investors who need to understand how markets really work? Is it for ordinary citizens who just want a better idea of how we got into this mess and where we can go from here? The answer is that the authors seem to address many different potential audiences and therefore risk losing some or all of them. A pity.

If you can judge a book by its cover (I know, I know) then this book is for New Yorker readers -- serious readers who will recognize the distinctive Edward Koren cartoons that decorate the wrapper. I suppose that's as good a target audience as any.

Is this the macroeconomic Freakonomics? No, but it's a good book for befuddled economics-literate people like me. And maybe you, too.

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