In their book Animal Spirits: Why Human Psychology Drives the Economy and Why It Matters for Global Capitalism, authors George Akerlof and Robert Shiller resurrect an interesting concept that was first observed by John Maynard Keynes--that people have "animal spirits" that cause them to act in abnormal, non-economic ways.
The concept of animal spirits is a valuable contribution to the understanding of economics, because people sometimes do not act rationally. Although they may often act in ways that
Akerlof and Shiller's Animal Spirits makes an important contribution to the economic debate. Unfortunately, they spend the entirety of the book's 176 pages avoiding the fact that central banks have consistently been the fuel that have turned the flames of mass mania and panic into bonfires of destruction.resemble "an invisible hand" that works toward the mutual benefit of society, as Adam Smith observed, sometimes they do not. Classical economists don't seem to take these episodes of irrational behavior into account as often as they should.
"People are not always rational in pursuit of their economic interests," say Akerlof and Shiller. That is a true statement.
"In Keynes' view," the authors say, "these animal spirits are the main cause why the economy fluctuates as it does." Oops! That is, inconveniently to Akerlof, Shiller, and all other Keynesians, a demonstrably false statement.
In his book, Meltdown, Thomas Woods, Jr. points out that manias and panics don't just happen on their own.
...describing something as a "mania" is no explanation at all, and that only expansionary monetary policy by the central bank can account for these phenomena:Akerlof and Shiller's Animal Spirits makes an important contribution to the economic debate. Unfortunately, they spend the entirety of the book's 176 pages avoiding the fact that central banks have consistently been the fuel that have turned the flames of mass mania and panic into bonfires of economic destruction.
If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it's so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses.
In order for a mania-driven boom to persist, there would have to be an increasing supply of credit to fund it.
Yes, people do have animal spirits. But only government can give license to the collective animal spirit to such an extent that manias can turn into economic bubbles and subsequent full-fledged panics. The economic meltdown of 2008-09 is only the latest evidence of that.
Keynesian economics is not a complete waste of time. But it's important to understand that his theories have their certain limits.