Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism

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 requires the steady hand of government--simply allowing markets to work won't do it. In rebuilding the case for a more 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.

"This book is dynamite. It is a powerful, cogent, and convincing call for a fundamental reevaluation of basic economic principles. It presents a refreshingly new understanding of important economic phenomena that standard economic theory has been unable to explain convincingly. Animal Spirits should help set in motion an intellectual revolution that will change the way we think about economic depressions, unemployment, poverty, financial crises, real estate swings, and much more."--Dennis J. Snower, president of the Kiel Institute for the World Economy

"Animal Spirits makes a very timely and significant contribution to the development of a new dominant paradigm for economics that acknowledges the imperfections of human decision making, a need which the panic in financial markets makes all too apparent. I am not aware of any other book like this one."--Diane Coyle, author of The Soulful Science: What Economists Really Do and Why It Matters

"Akerlof and Shiller explore how animal spirits contribute to the performance of the macroeconomy. The range of issues they cover is broad, including the business cycle, inflation and unemployment, the swings in financial markets and real estate, the existence of poverty, and the way monetary policy works. This book is provocative and persuasive."--George L. Perry, Brookings Institution

Preface vii

Acknowledgments xiii

Introduction 1

Part One: Animal Spirits

Chapter One: Confidence and Its Multipliers 11

Chapter Two: Fairness 19

Chapter Three: Corruption and Bad Faith 26

Chapter Four: Money Illusion 41

Chapter Five: Stories 51

Part Two: Eight Questions and Their Answers

Chapter Six: Why Do Economies Fall into Depression? 59

Chapter Seven: Why Do Central Bankers Have Power over the Economy (Insofar as They Do)? 74

Postscript to Chapter Seven: The Current Financial Crisis: What Is to Be Done? 86

Chapter Eight: Why Are There People Who Cannot Find a Job? 97

Chapter Nine: Why Is There a Trade-off between Inflation and Unemployment in the Long Run? 107

Chapter Ten: Why Is Saving for the Future So Arbitrary? 116

Chapter Eleven: Why Are Financial Prices and Corporate Investments So Volatile? 131

Chapter Twelve: Why Do Real Estate Markets Go through Cycles? 149

Chapter Thirteen: Why Is There Special Poverty among Minorities? 157

Chapter Fourteen: Conclusion 167

Notes 177

References 199

Index 219