Analysis of the Animal Spirits - Book Report/Review Example

Book Report: Animal Spirits Table of Contents Table of Contents 2 Introduction 3 Thesis ment 4 Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism – The Review 4 Conclusion 13 Work Cited 14 Introduction John Maynard Keynes, the very famous British economist in the year 1963 first introduced the world with his remarkable economic term of the era ‘Animal Spirits’ in his book “ The General Theory of Employment, Interest and Money” to explain the human emotions which guide their behavior. It can be measured on the basis of confidence shown by consumer. Since then, in the world of macroeconomics, the term ‘animal spirits’ have gained a very important position as regards to the understanding of concepts related with trust which has been argued by many economists as produced and influenced by the concept of ‘animal spirits’. Economists have been greatly inspired by the term and coinage of many articles and that of the book named “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism” by George A. Akerlof and Robert J. Shiller published in the year 2008 which created considerable impact in the world of economics and its relation to mankind (Akerlof and Shiller 1-11). When the global economy indicates a considerable low yield indicating almost towards the phase of global depression in the recent past, a very powerful psychological force of the mass was feeling insecure regarding the national wealth. Starting from the eternal rise in the price of property to a considerable and notified fall in the confidence of the consumer as regards to the investment in capital markets, it is worth mentioning that “animal spirits” are influencing financial events across the globe. Respected economists George Akerlof and Robert Shiller actually came into forefront as veteran guides trying to safeguard the financial insecurity in the mind of the common mass by bringing forth and suggesting the new vision of economics that would actually help the sinking boat of finance across the globe and will enable it to come back to its prior healthy form once more. A new route map was suggested by these eminent personalities towards the restoration of prosperity and transformation of economy world-wide. The book, “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism” challenges the means and the wisdom suggested by different economists so far. According to Akerlof and Shiller these conventional, age-old thinking and way of viewing the consumer behavior actually has put the world into a financial mess. Thesis Statement This essay intends to explain minutely and state the different theories and concepts written in the book, “Animal Sprits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism” with a vision of changing the present state of the financial crisis which is swallowing the global economy gradually. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism – The Review A full one hundred and seventy six pages of power-packed factual details dealing with the rise and fall, crisis and ways of saving the ways of sinking economy world-wide gets space as its insightful content within the book “Animal Spirits”. At the same plane, it deserves a credible mention that this book can be claimed as the bible of regeneration and restoration of present financial crisis world-wide. Devoid of too many of technical terms and jargons, the book is easy to understand and any layman can actually go through the pages of the book to find out many interesting facts and new theories leading to a healthy economy across the globe. Before analyzing the contents of the book that are locked within the individual chapters inside the book, it is very essential to get a clear idea about the structure of the book, “Animal Spirits”. The book is clearly fragmented into two parts bearing the two titles respectively, ‘Part One: Animal Spirits’ and ‘Part Two: Eight Questions and Their Answers’. Apart from this, there is a very rich and compact Introduction and an excellent Conclusion that comes as chapter fourteen in the book along with Preface, Acknowledgements, Notes, References and Index. Part One contains five chapters with the following titles, ‘Confidence and Its Multipliers’, ‘Fairness’, ‘Corruption and Bad Faith’ , ‘Money Illusion’, ‘Stories’. And Part Two contains ten chapters with the titles, ‘Why do Economies Fall into Depression?’, ‘Why Do Central Bankers Have Power Over The Economy (Insofar as They Do)?’And then comes a postscript to chapter seven with the title ‘The Current Financial Crisis: What Is to Be Done?’ Chapter eight bears the title; ‘Why Are There People Who Cannot Find a Job?’ chapter nine appears with the title, ‘Why Is There a Trade-off between Inflation and Unemployment in the Long Run?’ Chapter ten, eleven, twelve and thirteen bears the following titles respectively: ‘Why Is Saving for the Future So Arbitrary?’, ‘Why Are Financial Prices and Corporate Investments So Volatile?’, ‘Why Do Real Estate Markets Go through Cycles?’ and ‘Why Is There Special Poverty among Minorities?’ (Akerlof and Shiller 1-170). Recent theories indicate a vital role of human emotions and psychology in every walk of life. And in this regard, economic activities are not at all spared. “Animal Spirits” is a book that upholds the recent theories related with the role of human psychology in decision making also in the economic arena of man. Author Akerlof and Shiller put forward theories which negate the present theories of economists where a minimum space is given to the emotional factors while plunging on the economic decisions since ages. The less emphasis of the psychological or emotional aspect of man in determining any economic activity is completely proven wrong by the authors in this insightful book. Mostly, the psychological aspect of human beings in determining any economic activity has been undermined because it is quite difficult to make a model or quantify human emotions in the arena of economic decisions. Standing at a position which is completely against the existing theories in the field of economics, this book focuses on a wide range of answers whose questions seemed to be very puzzling till date owing to the fact that economic theories did not have enough space for the emotional factors in humans. Moreover, the authors of this insightful book formulated conclusions which were easily reached when impact of “animal spirits” on economic decisions were scaled from a close quarter. It is very worthwhile to mention at this point that the book, “Animal Spirits” was started in the year 2003 and by the time it got finished, financial crisis of 2007-2008 already came to surface. At this point of time, the authors took extra plunge, almost a sort of responsibility upon themselves to promote the intervention of the United States government at a more aggressive scale to pacify and boost up the crisis which was again noticed in the month of February in 2009. The book “Animal Spirits” at this level asserted repeated stress on the requirement of decisive action regarding the restoration of the credit flow. At the same time, they laid emphasis on the larger and more intense motivation from government on overall economic scenario as the prevailing status was displaying a very low level of confidence amid the mass. Special areas such as economic prospects that would run for short and medium tenure were suggested in the book for special attention. As the book is designed for every man everywhere so right from the Preface of the book, it has been written in a way that builds a complete and clear vision of understanding economics before its readers. The Preface of the book takes back the readers to the evolution of the term ‘animal spirits’ and a brief history associated with the term. From the Keynesian use of the term to its present significance and usage in the book, “animal spirits” has been effectively discussed and exercised in understanding the consumer behavior related with any economic activity. Keynes used it as a psychological phenomenon which resulted in understanding the partial reason for the non-behavioral aspect of the economy as mostly taken into consideration by the classical economics. Classical school of economics considers economic actors to behave in an unemotional way as they consider them as a complete rational being. The authors of the book “Animal Spirits” lay emphasis on a point where the Keynesian Revolution was weakened as the Keynesian economists moved fast towards the demotions related to the thought process associated with animal spirits in order to collect different views of economists who made a preference for the simpler classical or neo-classical system. On a simpler note, the Preface of the book, “Animal Spirits” describes the way Keynesian school of thought suggests the way economy shall operate best when the government shall intervene in the economic policies of the nation with a moderate spirit. This situation has been compared to the children who sustain within a protective custody of their parents into their happy homes. However, the real happiness comes only then when the parents are not too authoritative as in the case of Marxist economy or are too liberal as in the case of neo-liberal economy. Authors Akerlof and Shiller argue next that contemporary research shore up the concept of ‘animal spirit’ more heartily than even Keynes’ support to the concept. The Preface of the book, “Animal Spirits” then end on a hopeful note that the contemporary fellow economists shall be convinced properly through the assertions and the arguments presented in the book which will slowly rub the difference of thought regarding the need for the politicians to be more aggressive to settle the economic crisis of 2008-2009. In the ‘Introduction’ part of the book, it has been stated in a very detailed way that traditional economic theories and culture provide a minimum space for the interaction of psychological factors guiding the economic policies across the world in different cultures and societies. This leads to a serious devastation of the economic conditions world-wide. Akerlof and Shiller in this regard suggest that it is very important to consider the basic psychological factors operating within human beings who guide consumer behavior and at a greater extent do guide the policy decisions of economy within a nation. Akerlof and Shiller deal with these aspects thoroughly in their book “Animal Spirits”. The book “Animal Spirits” is divided into two sections. Part one of the book explains the five aspects of animal spirits that influence economic policies and decisions. The aspects of human psychology that influence economic decisions have been sorted out by Akerlof and Shiller as: confidence, fairness, corruption, money illusion, antisocial behavior and stories (Akerlof and Shiller 1-170). And, part two of the book has been introduced as an additional portion to the part one. In part one of the book titled “Animal Spirits”, five aspects relating to human psychology have been pointed out that guide and influence economic decisions. Furthermore, part two of the book explains the way these five aspects affect the economic decisions by raising eight basic questions and by the application of the animal spirits in seeking the answers to those questions. The answers to those eight questions have been sorted more easily. At the same time, after going through the series of these eight questions and answers, one can easily conclude into the fact that if those eight questions are ever tried to be answered with only economic motivation and rational persuasion without any intervention of the animal spirits into finding the answers then none of the vital questions aroused in the book will ever reach a solution. The five key animal spirits guiding any economic policy or decision according to Shiller and Akerlof are separately discussed in individual chapters. In chapter one of the book, bearing the tile, ‘Confidence and Its Multipliers’ authors describe the way confidence of an individual affects the economic policies. In accordance with the authors, confidence is the most vital among all the other five animal spirits to understand the economy (Akerlof and Shiller 11-18). Chapter two bears the title, ‘Fairness’ and discusses the urge of human mind to attain and live within a fair ambience. This tendency of human mind according to the authors can affect their policy decisions and influence their economic interest by not allowing them to choose the best deals available around at times. The chapter discusses with examples and upholds the case study of the people who rather prefer unemployment than to choose unfair wages. On the other hand, Akerlof and Shiller argue that employers are best aware of the concept of fair pay-scales as it helps to retain employee goodwill in the market (Akerlof and Shiller 19-25). Chapter three bears the title, ‘Corruption and Bad Faith’ which throw light on the fact that increasing awareness on corruption and bad faiths can actually lead to recession. The chapter upholds rightfully the fact that market supplies commodities according to the demand and the desire of the consumers. It can be even snake oil vended by hucksters. This area is quite valid for the protection laws of the consumers. Nevertheless, most of the personal wealth at present times are not been transformed into concrete physical assets. Perfect valuation of these assets can be only framed from an honest and truthful accounting of the capital positions and cash flow in the current time. At the same time, the theory gets implemented equally on the proper display and projection of the future earnings. Like the case of the Enron Scandal in 2001. It allowed many investors to move away from the stock markets and to invest into the real estate which resulted in the recent excessive growth at the real estate sector (Akerlof and Shiller 26-40). Chapter four, ‘Money Illusion’ explains the content of the chapter with hardcore evidences back to back directly contrasting the theories of Phillips and Friedman. Akerlof and Shiller argue that most of the populace are under the money illusion partially which arise from the tendency of ignoring the effects of inflation. They provide the example where there are general tendency of the workers to give up their rise in pay even when there are price rise. Again, contrarily, when their firm faces any economic threat or conditions those are quite challenging, they refuse or are very less willing to accept a fall in their wage when the prices are unfavorable and decreasing (Akerlof and Shiller 41-50). The fifth chapter ‘Stories’ is related with the role of stories in determining human behavior. Repetition of the stories regarding price rise in the housing property in market resulted into a heavy rush on the investment in the housing sector following the dot com bust of 2000. This according to Akerlof and Shiller is very much apparent for all the stories that have floated into the market from time to time (Akerlof and Shiller 51-58). Part two of the book “Animal Spirits” deals with eight questions related to economy whose answers can be secured only with the involvement of the animal spirits in framing them. Each question has been separately assigned chapters with considerable solutions included within the respective chapters only. Chapter six bears the tile, “Why do Economies fall into Depression’ and tries to seek out the reason for recession. The authors put thrust that the business cycle can be explained in the terms of rising confidence towards upswing phenomena which provoked the investors to formulate rash decisions which finally provoke corruption till the time people are panic stricken and their level of confidence decreases putting a thrust onto an eventual recession (Akerlof and Shiller 59-73). Chapter seven discusses the role of central banks in operating and framing economic policies. The authors assert that the presence of central bank is mandatory and there is a detailed post script mentioned which enable the readers to understand the way central banks can help to save the financial crisis around with their proper interference (Akerlof and Shiller 74-85). The concepts of money illusion and extreme concerns for fairness have been already discussed at length in the first section of the book. In chapter eight of the book, “Animal Spirits” the reason for unemployment is attempted to seek out, where the potential reasons for unemployment is regarded as the animal spirits like money illusion or disquiet for fairness have been well revised in the chapter eight of the book (Akerlof and Shiller 97-106). Chapter nine of the book “Animal Spirits” focuses on the reason for the relation between unemployment and inflation. To discuss this, the authors negate the theories given by different monetarists who lay emphasis and set a bar on the certain natural rate of employment which they feel should not get exceeded. Authors Akerlof and Shiller on the other hand argue that through the impact of animal spirit on the employers and the employees, the theory does not sustain in the contemporary economic scenario at all (Akerlof and Shiller 107-115). Chapter ten regards a concept useful for common man. It deals with the reason why people do not think about their future savings rationally. In chapter eleven the extreme volatile nature for the prices of assets and the flow of investments are being discussed. Chapter twelve discusses the reason for the cyclic behavior of price rise in the real estate market. The price often increases very fast and within a short span of time it can fall drastically even. Chapter thirteen throws light on how animal spirits can be implemented to understand the persistent situation of poverty amid the minorities belonging to various ethnic groups. The authors at this point argue that amid these minor groups, there are different stories regarding the place of these ethnic minorities in the working world along with the entire operations of it. These stories inhibit their mind and also influence their mindset regarding the work culture across the globe. Contrastingly, these inhibitions are found less amid the white working class. The authors assert that through the implementation of the animal spirits in this case a strong and affirmative action can be taken to cure the inhibitions of these minorities (Akerlof and Shiller 116-166). Chapter fourteen stands to out to be the conclusion of the book. Through case studies, examples and other culminations of facts, authors present a theory based on the evidences offered in the preceding chapters that the theories presented by different neo-classical economists at times regarding the complete rational bent of mind can be negated. On the contrary, the use of animal spirits can effectively sort out the economic crisis taking place in the contemporary world more skillfully (Akerlof and Shiller 167-176). Conclusion Modern economies suggest a concrete intrusion of human psychology into the framing of economic policies for the development of mankind. The book “Animal Spirits” envisages the modern concept of economy where the humane factor is given due respect and optimum space for negotiation of various terms. The theories of the neo-classical economists cannot be followed blindly in today’s world. Moreover, economics cannot be treated only as a rational faculty. It involves a good amount of psychological and emotional factors which were explicitly stated in the book, “Animal Spirits”. The book “Animal Spirits” is universal, comprehensive and coherent completely. It develops a clear insight about modern economy and helps to understand its ways. “Animal Spirits” is a book meant for all with simplicity and cohesiveness. It is factual and culminates a deep and sensible comprehension of economies and allied operations. Work Cited Akerlof, George, A. and Robert J. Shiller. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism (New in Paper). New Jersey: Princeton University Press, 2010. Print. Read More