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Transcript
The ANIMAL SPIRITS: conditioning
Macroeconomics
From Keynes to Akerlof and Schiller
G. AKERLOF-R. SHILLER,
Animals Spirits.
How Human Psychology Drives the Economy, and Why
It Matters for Global Capitalism,
Princeton University Press (2009)
Prof. Carles Manera, based on the reading
of the book and the contributions of
ESADEgeo-CENTER for Global Economy and
Geopolitics, under the supervision of Profs.
Javier Solana and Javier Santiso
1
THE “ANIMAL SPIRITS” IN JOHN
MAYNARD KEYNES…
• John M Keynes, General Theory of Employment, Interest
and Money:
“Even apart from the instability due to speculation, there is
the instability due to the characteristic of human nature that a
large proportion of our positive activities depend on
spontaneous optimism rather than on mathematical
expectation, whether moral or hedonistic or economic. Most,
probably, of our decisions to do something positive, the full
consequences of which will be drawn out over many days to
come, can only be taken as a result of animal spirits — of a
spontaneous urge to action rather than inaction, and not as
the outcome of a weighted average of quantitative benefits
multiplied by quantitative probabilities."
Prof. Carles Manera
2
…affect all the economic agents
• Keynes continues:
“If the animal spirits are dimmed and the spontaneous optimism falters, leaving us to
depend on nothing but a mathematical expectation, enterprise will fade and die”.
For Keynes, the only thing that motivates investors are conjectures drawn up on the
basis of psychological states that have little to do with economic rationality. Keynes
referred to these motivations using the term animal spirits, and believed that they
were the reason for the volatility of investment, which in turn translated into
fluctuations in production and employment, via the multiplier mechanism. However,
this idea practically disappears during the reworking process of Keynseian theories
that began almost immediately after the publication of the General Theory, and which
led to the development of IS-LM analysis and the “great Neoclassical-Keynesian
synthesis” of the ‘fifties and ‘sixties.
(Source: http://www.librosdeeconomiayempresa.com/r014/articulo3.aspx; and John M Keynes, General Theory of Employment, Interest and Money).
Prof. Carles Manera
3
Exception:
Charles Kindleberger, Hyman Minsky
• The essence of Kindleberger’s argument, based in turn on Hyman Minsky’s
model, could be summed up as follows: the main cause (although not the
only possible one) of economic cycles should be sought in certain
psychological moments de – Keynes’ animal spirits – which generate
unforeseeable fluctuations in the prices of assets. The beginning of the
process may lie in some exogenous disturbance (a technical or financial
innovation, for example, or a political change) which causes great
expectations of profit in a sector. This optimism sets off an expansion
wave which propagates easily thanks to the increase in bank credit
(endogenous money supply). The expansion wave leads to what Adam
Smith called overtrading, that is a situation of excessive “financial joy”:
over-estimation of future yields from investments, reduction of the
guarantees demanded by banks for granting loans and plain and simple
speculation. In short, a financial bubble is created which ultimately ends
up bursting.
(Source: http://www.librosdeeconomiayempresa.com/r014/articulo3.aspx)
Prof. Carles Manera
4
After Kindlerberger and Minsky…
• On the crest of the expansion wave, certain individuals
(generally those who have some kind of privileged
information) withdraw from the market, but not without
first selling their overvalued assets in order to make the
corresponding gains. This creates problems for some
financial institutions, which may go bankrupt, which ends
up causing panic: investment contracts brusquely and the
economy leaves the mania phase to enter the depression
phase. The end of this situation comes when the prices of
the assets have fallen enough and investors once again feel
motivated to make long-term investments.
(Source: http://www.librosdeeconomiayempresa.com/r014/articulo3.aspx; and Charles Kindlerberger:
Manias, Panics and Crashes, Palgrave Macmillan, 2011; Hyman Minsky, Stabilizing an Unstable
Economy, MacGraw-Hill, 2008).
Prof. Carles Manera
5
BASIS OF THE MAINSTREAM
ECONOMIC THEORY
• That everybody who intervenes in the
economy does so for economic reasons, and
their behaviour is RATIONAL.
• THIS IS WRONG.
• Let us remember John Maynard Keynes:
Animal Spirits govern many economic
activities, with clear premises: the stimuli are
not always economical, and the decisions
made are not invariably rational.
Prof. Carles Manera
6
HOW CAN WE UNDERSTAND
ECONOMICS?
• Bearing in mind how the economy is affected by
these “animal spirits”: this is the only way we can
comprehend the instabilities of capitalism.
• The “animal spirits” cannot be reduced to
mathematical formulae or econometric models:
which is why economics has ignored them.
• But Economic History shows that these “spirits”
form part of reality and that if they are not taken
into account, the interpretation of the economy
with mainstream theories is insufficient in the
end.
Prof. Carles Manera
7
THE FIVE
“ANIMAL SPIRITS”
for Akerlof-Shiller
•
•
•
•
•
1. Fairness.
2. Confidence.
3. Corruption, fraud and bad faith.
4. Money illusion.
5. Stories.
Prof. Carles Manera
8
1. FAIRNESS
•
•
•
•
•
Wages: in the Neo-classical theory, a wage is just another price that adapts to a
market deemed symmetrical and perfect.
But one determining factor is the perception people have of fairness: the huge
wage disparity (which increases in times of crisis) is seen by the population as an
element of inequality. Of unfairness
A correct socio-psychological theory of fairness can explain facts as important as
unemployment.
[The Akerlof-Shiller approach is reminiscent – although not necessarily exactly – of the contributions of
economist Michael Kalecki and his theory of exploitation; and from another perspective, of the works of
Daniel Kahneman, winner of the Nobel Prize in Economics in 2002. To discover Kalecki, see Manera
(Capitalisme desfermat pp. 88-92). The main contribution made by Kahneman to economic science
consists of the development of the prospect theory, according to which individuals make decisions in
uncertain environments, which diverge from the principles of probability. This is what is known as
“heuristic shortcuts”. One manifestation of heuristic shortcuts is loss aversion. In this way, an individual
prefers not to lose 100 dollars rather than to gain 100 dollars, which makes for asymmetry in decisionmaking.
The importance of Kahneman’s research lies in its utility for moulding non-rational behaviour, which
diverges from the Neo-classical conception of the homo economicus and comes closer to the Keynesian
theory and certain theories of the economic cycle. His latest book, “Thinking, fast and slow”, has been
translated into Spanish: Pensar rápido, pensar despacio, Debate, Madrid 2012].
Prof. Carles Manera
9
2. CONFIDENCE
• This is the most important of all the “animal
spirits” for the economy. Confidence is irrational:
it means that people act according to what they
believe is right.
• The current financial crisis is to a large extent a
consequence of the low level of confidence.
• Which is why the State must intervene to
compensate for that deficit of confidence and
return the credit necessary for recovering jobs.
Prof. Carles Manera
10
3. CORRUPTION, FRAUD AND BAD
FAITH
• Some fluctuations can be attributed to the
acceptance of shameless corruption. E.g.: Enron
and the fraudulent abuse of accounting
principles, relationship to the 2001 recession (see
Joseph Stiglitz: “The Roaring Nineties: Seeds of
Destruction” [Los felices 90. La semilla de la
destrucción, Taurus, Madrid 2003]). Subprime
mortgages are at the base of the recession that
started in 2007 (see Carles Manera: Capitalisme
desfermat, Lleonard Muntaner Editor, Palma
2012).
Prof. Carles Manera
11
4. MONEY ILLUSION
• Money illusion is when economic decisions are based
on the nominal value of money. It is the impression
individuals and companies have of having increased or
decreased their purchasing power after a change takes
place in their nominal incomes or prices. INFLATION IS
NOT TAKEN INTO ACCOUNT, leading to loss of real
purchasing power.
• The presumption of mainstream macroeconomics is
that the economic agents (in particular workers) are
not affected by money illusion. Examples to the
contrary: some contracts that do not index salaries to
real inflation; or the fact that public debt bonds have
an interest rate that does not vary as inflation evolves.
Prof. Carles Manera
12
5. STORIES
• Individual and collective stories: the
human mind thinks in terms of
narratives.
• “Stories” move markets: they have a real
economic effect. They are an important
source of confidence, or lack thereof.
They can infect or demotivate it.
Prof. Carles Manera
13
OTHER KEY ELEMENTS:
CENTRAL BANKS
• 1. CENTRAL BANKS AND
THEIR INFLUENCE ON THE ECONOMY
A central bank can influence the amount of money
in circulation by means of:
a) Open market operations: they affect interest
rates and total volume of credit.
b) Direct loans to private banks, generating
confidence.
Akerlof-Shiller
recommend
stimulating b) in the current (although the
results are not very solid in Europe).
Prof. Carles Manera
14
OTHER KEY ELEMENTS :
INFLATION AND UNEMPLOYMENT
2. INVERSE RELATIONSHIP BETWEEN INFLATION AND
UNEMPLOYMENT
• When there is full employment, workers ask for wage
increases.
• There is high inflation when unemployment is low
(Phillips curve).
• But economic policy may be more concerned with
securing the lowest possible inflation, neglecting the
level of unemployment, which will reach what the Neoclassical theorists call the “natural rate of
unemployment”.
Prof. Carles Manera
15
OTHER KEY ELEMENTS :
THE CURRENT CRISIS
• Another important aspect of Akerlof and Shiller’s book is the analysis of
the current financial crisis, which is basically interpreted as a crisis of
confidence: The collapse of confidence in certain financial products and a
certain modus operandi of the banking institutions. Although, along with
the confidence factor, the authors also highlight the importance of
corporate corruption in the development of the crisis. They do not use the
term “corporate corruption”, but they do highlight the role of corruption in
the sense of “bad faith” – yet another manifestation of the animal spirits –
, especially in relation to the practices of “creative accounting”, the
processes of creation and diffusion of a series of financial products that
are increasingly opaque and risky, the behaviour of the rating agencies,
etc. With regard to the question of how to exit the crisis, the authors
support the measures to rescue the financial institutions that were
affected the most by it, and stress the need to regulate the financial
system in such a way that similar situations can be prevented in the
future.
(Source: http://www.librosdeeconomiayempresa.com/r014/articulo3.aspx)
Prof. Carles Manera
16