Animal Spirits Led to this and other Economic Crises

The Economist has another of the good "Economic Focus" columns. This time it focuses on Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof and Robert J. Shiller, a Nobel Prize winner and another economist with a very good track record. The book apparently provides a taxonomy of the ways in which people's behavior departs from the rational "economic man" of the models loved by so many economists.

Blogging is an example of an activity which not only has little or no economic return, which one must assume is done by this author and millions of others because we like doing it. People have lots of motivations other than maximizing income or net worth. Of course, as this blog points out from time to time, we also think with our brains as we emote with our brains, and the amazing thing is that we are as rational as we actually are, not that we mis-estimate probabilities and values and assume that trends will continue indefinitely.

The authors apparently worked for six years on this book, and then rushed it into publication because the current bust of the previous boom needed the explanation that they were providing.

There is a very good video of Robert Shiller (who is also the author of Irrational Exuberance and The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It) describing how Animal Spirits helps to explain the sources of the current economic crisis. He also provides opinions on the U.S. Government's efforts to ameliorate the crisis and put us back on an even economic keel.

Click here to go to the video.