Tuesday, January 05, 2010

Holiday occupations... Animal Spirits 1

I made mention (if I recollect in a comment to ATOW) that the Christmas break was going to include the absorption of "Animal Spirits", a comparatively short summary of "human psychology and the economy and why it matters for global capitalism", written by George Akerlof and Robert Schiller.

The title originally comes from "spiritus animalis" which in its old (mediaeval) useage meant "of the mind" or "animating force"; the fundamental life force of man. In its modern use it has attached to economics - blame Keynes for that - as a reference to a restless or inconsistent element in the economy.

A & S summarise those animal spirits as -

Confidence. A&S use that specific term as it directly and intentionally connects with Keynes' "multiplier effect". I personally think that given some of the twists used by A&S to mould "confidence" to their extension of Keynes' useage it might have been better to use "belief" rather than "confidence". The essence is the propensity for humans to follow a persistent line of thought irrespective of its truth and irrespective of positive (optimistic or growth) or negative (pessimistic or recession) trend.

Fairness. In NZ the last statutory attempts (by Auntie Helen) at resolving relationships between employers and employees required of both sides that they engage in negotiations in "good faith". As a legal codification it agrees fairly well with A&S's thoughts on the setting of wages. Essentially it leads to the discussion of the relationship between unemployment, wage levels, and inflation.

Corruption. Actually A&S include "and anti-social behaviour". I do not think that is neccessary; it is a redundancy. That it is very quickly reduced to the single word might indicate that they thought so as well. I occurs to me that the meaning of "corruption" can also be extended. There is the neo-classic meaning of "bad dealings" connecting to the "antisocial" idea. There is a second, older, and perhaps even a more appropriate meaning as well; in terms of "corruption of the flesh". Those with older heads will make the direct connection to death, but there is also the "corruptions" that are self-inflicted - the moral corruptions of the flesh.

Money illusion. This is an interesting one. It is the ability of humans to relate "value" to monetary numeration, but at the same time being unable to comprehend the impacts of inflation and deflation on the value of the monetary unit. So, the quantum of $1 million can be understood, but the impact of monetary inflation (or deflation) at 3% per annum for 5 years on that sum is not. (As it happens, that would make the "value" of the monetary unit reduce by about 17% or prices would have increased by some 20% over the five years).

Stories. The one word term is used by A&S as a shorthand for "sense of reality, who we are and what we are doing". Personally I think it is a very powerful and concise term and especially since it links with the first of "belief". Also in that context it gives rise to an extension into many other (than economics) facets of human existence that warrant further examination; at the very least by this old and somewhat rejuvenated probligo brain.

Interesting things discussed along the way -

The multiplier effect originally proposed by Keynes became the "Hick's multiplier" and as a result of the latter's (further) analysis became attached almost exclusively to monetary and GDP effects within the economy rather than Keynes' intended "confidence multiplier".

Samuelson thought that Keynes (in some instances) went too far and in others not far enough. That the two were "opposed" is not as significant as how much they were actually in agreement.

The classical Adam Smith view of the invisible hand creates a useful mechanism for examining the fundamentals. However it is only useful in the explanation of those fundamentals. Samuelson I recall wound his way through this minefield by using the "reasonable man acting in a reasonable manner" as an essential of the prim misses required to reach a delusion. That any man acts reasonably at all times may be so, but reason is not always perfectly logical. "Reason" is not part of the definition; instead "reasonable" is the mean of human behaviour.

The main discussion in the book centres on the reasons why "conservative" economics does not accurately predict either the occurence or the progress of "bubbles"; primarily because the impact of the spiritus animalis on the real economy is ignored.

All in all it is a thought-provoking read. Worth the effort and providing a somewhat different light on recent macro-economic events.

UPDATE - to add after-thoughts under the heading of "corruption"; to add the closing paragraph.

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