I posted this on the Lew Rockwell blog earlier today, but want to post here as well. Lest anyone think that the “elite” economists have not gone mad, read the following from Robert J. Shiller of Yale University:
President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen.
The term “animal spirits,” popularized by John Maynard Keynes in his 1936 book “The General Theory of Employment, Interest and Money,” is related to consumer or business confidence, but it means more than that. It refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.
Fiscal policy adjustments are what almost all the pundits and the economic policy advisers have in mind when they say now is the time to pursue Keynesian policies. Especially now, when conventional monetary policy is ineffective, since short-term interest rates on safe assets are close to zero, Keynesian theory would argue that the government should have a fiscal target. If spending would otherwise be less than full employment GDP, the government should put more money into people’s pockets.
But lost in the economics textbooks, and all but lost in the thousands of pages of the technical economics literature, is this other message of Keynes regarding why the economy fluctuates as much as it does. Animal spirits offer an explanation for why we get into recessions in the first place — for why the economy fluctuates as it does. It also gives some hints regarding what we need to do now to get out of the current crisis.
I must admit that this one floors me. Now, here is an economist who loves to give us all of the latest in mathematical mumbo-jumbo in the “elite” journals, yet in the end, it is all about “animal spirits.” It is enough to make me want to partake of other spirits.
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I wonder: does government intervention count as animal spirit? Because that is what happened.
it is a good concept, and while it may be easy to mock the term, it seems to me that trust, as a category, really needs some sharp analysis … we have lost cohesion, in ways that cannot be quantified, but can certainly be felt … animalistically (as good a term as any)
It’s all mysticism. Remove the -er from Shiller and the name becomes more or less apposite…
gregorylent,
The concept behind Keynes’ “animal spirits” are insane. You obviously have no clue about Austrian economics if you think it offers no answers for the psychological state of people involved in the markets. I won’t elaborate here but try clicking that big link that says “literature.”
Saying that “waning animal spirits” explains recessions is an insane idea. It is not an explanation and no concept is offered to explain it – quite the reverse, Keynes’ uses the concept to explain other things and justify his clearly flawed theory. Keynes’ basically uses “animal spirits” as an evasion to avoid a logical outcome. His entire life he wanted involvement in Government, so of course the man is going to direct his theory towards the Government as our saviors.
There is an inherent flaw in your own logic that “it seems to me that trust, as a category, really needs some sharp analysis” yet “we have lost cohesion, in ways that cannot be quantified” – wait? We need to analyze what CANT be quantified? That makes no sense!
This Shiller guy doesn’t even have a clue on Keynes’ “animal spirits”.
He just describes “panic” in people which is an “after effect” of the bust phase.
Since he had no clue and since he was more of a charlatan than an economist, Keynes tried to use “animal spirits” as the cause of the bust not an after effect.
gregorylent: “…it is a good concept, and while it may be easy to mock the term, it seems to me that trust, as a category, really needs some sharp analysis … ”
The “animal spirits†cliché is not an explanation; it is merely a description of the human condition. Keynes invented the term because he didn’t want to think about the reasons businessmen do what they do. It was his way of just dismissing the whole topic as unworthy of his time and attention. And if unworthy of his time, then by implication unworthy of anyone else’s effort.
Animal spirits are no different as an explanation than is greed. Both may describe human behavior at the moment, but they don’t explain anything. Especially they don’t explain why animal spirits and greed only cause problems roughly every eight to ten years. Otherwise, those common human traits seem to be under control.
Someone has said that it’s like blaming gravity for airplane crashes. Yes, gravity played a role, but the real question is why gravity was more effective just before the crash that it was during take off or normal flight. In the same way, proponents of animal spirits, greed, etc., must explain why those normal human traits were more effective just before the current depression than during the former 6 or 7 years of growth. The answer is in the Austrian Business Cycle Theory.
yep. so we’re all agreed that keynes was as much showman as economist. “animal spirits” is cobblers in macroeconomics, but at a micro level, psychology plays a part. markets always fall faster that they rise, reflecting the strength of the emotions (fear stronger than greed).
technical analysis is the art of trying to decipher these spirits.
Yeah well Keynes has a dream where the ideal human being never changes their preferences, never moves to new things, and when they do that is an animal spirit waning apparently. More simply: Keynes’ is an arsehole.
Modern culture, especially following Kantian nihilism, is basically an attack on reason, an attack on the mind’s contact with reality. Keynes’ claim that businessmen are guided by “animal spirits,” rather than reason, is merely one more instance of the increasing irrationalism that is destroying the rational West and its political part, capitalism. Dogs and fleas have animal spirits but don’t, curiously, build factories and computers. Only man does, because only man has a mind. Economics is the study of man as a rational producer of material wealth. There are no stock markets or banks in hunting-gathering cultures because they haven’t discovered their own minds nor how to use them.
Claiming businessmen are guided by “animal spirits” is the context for claiming that only the allegedly rational authorities in govt should rule the non-rational brutes called businessmen. This is merely Plato’s mystical philosopher-kings. Liberals properly condemn people who claim that blacks are animals but liberals are pleased to say that businessmen are animals. This justifies socialism. On the other hand, animal-rights liberals say that animals have rights that should be legally defended. What if they applied that to businessmen?!
I dunno…it seems fitting that the patron saint of the cannibal pot (I believe a gentleman named Billy Beck, see two–four.net, originated the notion of cannibal-pot economics) should be guided by animal spirits.
“…consumers do not want to spend and businesses do not want to make capital expenditures or hire people.”
This is a point blank fallacy. This is not a problem, only a reaction. Of course consumers will consume, and entrepreneurs will produce. It doesn’t take fiscal policies to create economies. This is like saying that our animal spirits prevented us form trusting our fellow men, and it took a government to guide our feeble minds into understanding the importance of exchange.
January 27, 2009
Keynesian ‘Animal Spirits’ Is Unscientific, To Say The Least!
In contrast to the Keynesian concern about ‘animal spirits’ we subjectivists are focused on the human spirit and its purposeful action.
This explains why Keynesianism devolves into socialism and communism and the characteristics of bare subsistence common in the animal kingdom. Of course the ego-driven interventionists in charge live large off of the flock.
The empiricists have abandoned the human sciences for the sake of an erroneous methodology and it shows!
Keynes and his ‘animal spirits’ are a disgrace. There is nothing scientific about it. That is obvious to anyone with any knowledge of the words in our language and any knowledge of what science means! And it is obvious to those of us who are scientifically trained.
This is an ethics issue. Those who claim to be scientists but incorporate ‘animal spirits’ into their work are unethical. It is as simple as that!
There is some room for references from the animal world in economic analysis — specifically, herding behavior. As someone who has traded for many years, I am certain that there are price patterns on both small and large scales (spanning many years). This can not be explained by the ABCT.
Bob Prechter, who has authored an article or two for mises.org, makes the distinction between rational and irrational (emotional) economic decisions. The “irrational” decisions are, of course, made in the financial markets, where emotions run high. I highly recommend his websites.
fred mann,
i totally agree. abct doesn’t explain all the short-term/emotional trading that you see in all sorts of commodities, many of which usually have low correlation with stock indices (though, exceptionally, not in the recent deleveraging).
This discussion is fairly simple and straightforward
and it is a “litmus test” to distinguish those of the Austrian School from others.
There is no place in Economics for the “irrational” simply because it’s a field about which we know nothing and therefore, should be silent (or at least acknowledge that anything said about it is nothing more than speculation). We deal with definable terms and concepts, each bearing definite logical (and, therefore, discoverable) relationships with others in the same category. The fact that men can speak nonsense is not remarkable; nor is the fact that nonsense heard has often the power to influence and persuade; it is simply not the way of the Austrians.
Keynes’ “animal spirits” is simply of a piece with the other, similar term with which his name is associated: “barbarous relic.” It is well to keep these in mind when trying to “place” the man and his purposes (as noted by prior coomentors).
Mr. Mann: It doesn’t make any difference what Prechter has written: Austrians eschew the word “irrational” to make such distinction. We distinguish between decisions, which at all times are rational (because that’s what the word means in any other than a demonstrably “loose” connotation) and such behavior as reflexes, automatisms, etc. Whether or not “emotions are high” has absolutely nothing to do with whether a man has chosen between alternatives or not; if he has, Austrian theory will comprehend.
Fred Mann: “There is some room for references from the animal world in economic analysis — specifically, herding behavior.”
As Newson wrote, the ABCT doesn’t explain the day-to-day price movements, or necessarily those over months. But Austrian econ emphasizes the subjective nature of prices, which would encompass the psychological elements such as herd behavior. The ABCT attempts to explain the large, regularly occurring shifts in the economy and finds the explanation in the rational response of market participants to relative prices. Even those who want to emphasize the psych element in economics have to admit that those elements fluctuate around the longer term trends in the fundamentals.
I call it “vaugery” and obfuscation.
The purpose of the term “Animal Spirits” isn’t to explain, but rather to muddy the understanding of the human experience. It is to remove humanity, the rational and emotional, from the equation by smearing it accross the landscape and rendering it useless as a subject of analysis. It divorces the actions of the actors from their mindful accounting of their own situations, reducing them to whim and fancy.
My cat has more rationality than that. All the people I know make rational decisions based upon their interpretation of events and their own initial conditions. The only time they make “Animal Spirit” decisions is in the bedroom or in front of the refrigerator!
As for the general trust, trust is not lost between players without some REASON. Hence, the loss of trust must then have a CAUSE.
To say, “The Animal Spirits are ebbing” is ridiculous! Where dose one begin an analysis of such things? Did an “evil wind” blow across the nation? Did the entire populace suddenly get indigestion and fart an economic bubble? Is it that the gaseous cloud of “Animal Spirits” is dissipating and so the credit market collapsed from lack of oxygen? We may never know, no matter how many headlines we read in the Enquirer.
The Canadian band Rush has a song for this. The lyrics chorus is thus:
“You can choose a ready guide
in some celestial voice,
But if you choose not to decide,
You still have made a choice
You can choose from phantom fears,
And kindness that can kill.
I will choose a path that’s clear,
I will choose Free Will.”
(Free Will, Rush, Neal Peart)
Animal Spirits my arse! I got your “Animal Spirits” right here pal!
/rant
I call it “vaugery” and obfuscation.
The purpose of the term “Animal Spirits” isn’t to explain, but rather to muddy the understanding of the human experience. It is to remove humanity, the rational and emotional, from the equation by smearing it accross the landscape and rendering it useless as a subject of analysis. It divorces the actions of the actors from their mindful accounting of their own situations, reducing them to whim and fancy.
My cat has more rationality than that. All the people I know make rational decisions based upon their interpretation of events and their own initial conditions. The only time they make “Animal Spirit” decisions is in the bedroom or in front of the refrigerator!
As for the general trust, trust is not lost between players without some REASON. Hence, the loss of trust must then have a CAUSE.
To say, “The Animal Spirits are ebbing” is ridiculous! Where dose one begin an analysis of such things? Did an “evil wind” blow across the nation? Did the entire populace suddenly get indigestion and fart an economic bubble? Is it that the gaseous cloud of “Animal Spirits” is dissipating and so the credit market collapsed from lack of oxygen? We may never know, no matter how many headlines we read in the Enquirer.
The Canadian band Rush has a song for this. The lyrics chorus is thus:
“You can choose a ready guide
in some celestial voice,
But if you choose not to decide,
You still have made a choice
You can choose from phantom fears,
And kindness that can kill.
I will choose a path that’s clear,
I will choose Free Will.”
(Free Will, Rush, Neal Peart)
Animal Spirits my arse! I got your “Animal Spirits” right here pal!
/rant
OH OH! the “Animal Spirits” have invaded the website and posted me twice!
Grab your lucky charms people, this may mean were in for another round of bailouts or some other bad wind!
(Let us pray)
“Animal spirits”? Cool! This can replace the Twinky Defense.
“…yes, Your Honor, I knew that I was supposed to pay federal taxes. But my Animal Spirits were on the ebb…”
fundamentalist: “But Austrian econ emphasizes the subjective nature of prices, which would encompass the psychological elements such as herd behavior.”
True. I never said ABCT was wrong … just incomplete. I believe that the mass psychology element is very important and should not be dismissed. The fact that there are price patterns in the speculative markets which span many years is a testament to this.
And, correct me if I’m wrong, but I believe Rothbard used ABCT to predict a massive recession in 1982 or 1983. That didn’t pan out too well.
fundamentalist: ” Even those who want to emphasize the psych element in economics have to admit that those elements fluctuate around the longer term trends in the fundamentals.”
For the most part this seems to be true. But I could give you all the fundamentals for crude oil over the last ten years, and I doubt anyone could use that info to plot a chart of what actually happened in oil prices. In fact it would be a challenge to even get the direction right half the time.
I am reminded of something that occured many years back, I believe it was the the Oct 89 crash. I was working at the time with a systems consultant who maintained some of the big iron for the NYSE.
The Crash was initiated by a typical swing. But what followed had nothing to do whatsoever with human emotion. The quick movement and the rising volume set off triggers in numerous automated trading systems. The result was a cascade of sell orders that the system could not keep up with.
No animal spirits necessary. Just math and programming acumen. There is now a delay system in place that prevents automated triggers from being pulled too fast and too frequently because nearly all trades now are automated.
I agree with the notion that human emotion plays a part in the movement of the markets. However, rational outcomes, or at least material gain or the prevention of loss are still the prime motivating factors, no matter how you “feel” about it at the time.
Those who trade on feelings will invariably fail. Yes, feelings play a part, but no, they are not the driving force behind peoples decisions, generally. There is always a reason for the decisions that are made.
People know that when they act on their feelings in spite of their reasons to the contrary, that they will likely lose rather than win.
When we shop, we are bombarded by advertiser’s efforts to appeal to our emotions, but in the end, the product still needs a good reason to be bought. Even chocolate.
What emotional content there may be in any collection of market data is a wash when the day is over. All of the decisions made that made the data what it is have some rational behind them that made sense to those who made the decision. If we do not assume that the majority of the decisions were reason based, then we cannot ever really know what any of the data means.
So, fundamentally, the data swings are based on gain or loss, and emotions are just “noise”, the barking of “Animal Spirits”.
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