Citizens Keynes

Animal Spirits: How HumanPsychology Drives theEconomy, and Why It Matters for Global CapitalismBy George A. Akerlof andRobert J. ShillerPrinceton University

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

By George A. Akerlof and
Robert J. Shiller
Princeton University Press, 264 pages, $24.95

Get Reagan off our backs!—translated into layman’s terms, that’s how distinguished economists George Akerlof and Robert Shiller begin Animal Spirits, their inquiry into the role of human psychology in the economy. The small-government, laissez-faire outlook that Reagan helped popularize has severely damaged the financial system. “Now, three decades after the elections of Margaret Thatcher and Ronald Reagan, we see the troubles it can spawn. No limits were set to the excesses of Wall Street. It got wildly drunk. And now the world must face the consequences.” The reader sits back, expecting to see bankers, politicians and free-market economists such as Milton Friedman and Alan Greenspan get taken out to the woodshed.

But the authors take an unexpected detour. Mr. Akerlof, who shared the Nobel Prize in 2001, and Mr. Shiller, who accurately predicted both the dot-com and real estate busts, are too interested in the nuances of scholarly debate to write a rip-roaring polemic. And so the book proceeds more like an engaging, if occasionally dense, primer on macroeconomic theory—at a time when many lay readers have lost faith in conventional economic wisdom. The current financial crisis offers only one of many case studies for the real subject of the book: the unjustly neglected legacy of John Maynard Keynes and his theory that non-economic, irrational motives—what he termed “animal spirits”—play a major role in economic events.

Animal Spirits is a welcome addition to our Hannitized national economic debate, in which anyone who advocates government spending risks being labeled a socialist. Messrs. Akerlof and Shiller are hardly Marxists or even anti-capitalists; they’re well aware of the glories of modern economies: “The average North American, European, or Japanese consumer has a higher standard of living than a medieval king. She eats better; she lives in housing that is much less roomy but much more comfortably heated; her television and radio, at the press of a button, give her better and more varied entertainment; the list goes on.” Where they differ from the Reaganite legacy is in pointing out that capitalism is vulnerable to irrationality. People are not so keenly self-interested as free-market conservatives have assumed.


IN THEIR ACCOUNT of the Great Depression, Messrs. Akerlof and Shiller portray Keynes as the true “centrist,” with actual socialists to his left arguing for the government to take over private enterprise and assign jobs to the unemployed. Meanwhile, critics on the right clung to Adam Smith’s hallowed economic model: They insisted that through balanced budgets and limited government regulation—“as if by an invisible hand”—private markets would create a job for any worker willing to get paid less than he produced.

Keynes thought capitalism productive, but fragile, prey to the “animal spirits” that lead to speculative mania and the inevitable consequence, panic, which in turn leads to joblessness, quaintly described as “involuntary unemployment.” The proper role of government is to temper these excesses—and, in a crisis, stimulate demand using deficit spending.

Bucking the conventional view of Herbert Hoover as villainously inept, the authors laud both Franklin Delano Roosevelt and his Republican predecessor as “heroes of ours.” A primitive understanding of macroeconomics and excessive concern for balanced budgets hampered these two presidents, but each imposed at least some financial reforms and tried some deficit spending. In a judgment that echoes worrisomely at the moment, the authors conclude that Depression-era fiscal policy was insufficiently bold. Because of a lack of will and clout, “Their deficit spending was orders of magnitude short.”

Also surprising is the contention that true Keynesianism was never really tried. According to Messrs. Akerlof and Shiller, Keynes’ followers dumbed down his theory of government spending to make it politically palatable and comprehensible. The neo-Keynesians de-emphasized the centrality of “animal spirits,” transforming Keynes’ mercurial and often irrational economic man into a rational, self-interested automaton.

This simplification made it easier for the free-market conservatives of “New Classical Economics” movement to dismiss the Keynesian model in the 1970s. These conservative economists assumed the primacy of rational self-interest, and that government nonintervention is the surest way to prosperity. For Messrs. Akerlof and Shiller, the ’70s consensus about the superiority of private enterprise has remained essentially unchallenged over the past 30 years—after all, even the relatively liberal Bill Clinton assured us that “the era of big government is over.” Only the economic chaos of the past year has shaken these rusty certitudes.


JUST IN TIME FOR a 21st-century crisis, Messrs. Akerlof and Shiller aim to revive the true Keynesian legacy. Drawing broadly from social science, the authors provide their own “behavioral economic” theory of the five key animal spirits that matter: confidence, fairness, corruption, stories we tell about ourselves and “money illusion,” which means the extent to which one is fooled by inflation. The authors then apply these concepts in analyzing a variety of phenomena, from the peaks and troughs of the real estate market to the persistence of black poverty.

In one intriguing section, they explain why Japan was able to start a national car company, while Argentina failed. Toyota benefited from outsize national self-confidence and a cultural story that emphasized self-reliance, willingness to learn from foreigners and self-sacrifice for the good of the organization. In contrast, the Argentine company, IKA, had no unifying story linking its native employees with its American managers, and suffered from a persistent worker perception of unfairness that led to violent labor unrest, production shortfalls and eventual failure.

Animal Spirits is most compelling when the authors summon all the key behavioral patterns to explain vast, complex phenomena such as the Great Depression. In the crash of 1929, when speculative exuberance and the narrative of a “new era” of continually appreciating stocks suddenly evaporated, technical factors such as central bank protection of the gold standard worsened unemployment. But Messrs. Akerlof and Shiller insist that animal spirits were also of “fundamental importance.” A feeling that the American economy was profoundly unfair emerged, leading to intense labor unrest and the specter of communism—whatever the boneheads on Fox might be saying, genuine socialism’s only real chance in the United States came during this crisis. “Money illusion,” the inability to recognize that prices had plunged by 27 percent, made everyone from Hoover to Roosevelt to unions to industry focus counterproductively on raising real wages in hopes of increasing buying power, rather than stimulating demand to reduce unemployment.

As Keynes pointed out, the fundamental problem was that bankers were too scared to loan, because they thought they would lose their money. And some of the more draconian New Deal measures led businesspeople to worry that the market system would be replaced with a dictatorship, which further depressed their willingness to invest. Since none of the deficit spending was on a scale needed to stimulate demand, self-perpetuating hopelessness set in. Only with the emergency mobilization of World War II did the shattered national mood, and narrative, begin to change.

After touring through this grim history, our contemporary problems, as severe as they may be, don’t look quite so bad. Messrs. Akerlof and Shiller end on a reassuring note: “Yet we are currently not really in a crisis for capitalism. We must merely recognize that capitalism must live within certain rules.” And we must take into account that irrational behavior has a real effect on demand, necessitating government intervention.

Animal Spirits touches on some arcane corners that will be of interest primarily to specialists. But mostly it’s aimed squarely at the general reader, and rightly so: Macroeconomics is now everybody’s business—the banks are playing with our money.

Andrew Rosenblum has written for Mother Jones, Popular Science, Slate and Jazz at Lincoln Center Radio. He can be reached at

Citizens Keynes