School of Information News

Here’s an interesting take on what’s been pushing national economies over the edge: animal spirits. More precisely, Nobel Laureate George Akerlof suggests that from blind faith in ever-rising housing prices to plummeting confidence in capital markets, “animal spirits” are driving financial events worldwide. He and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity. And fortunately for you, you can hear for youself from Akerlof at the next STIET/Incentive-Centered Design Seminar from 4-5:30 p.m. Thursday, April 9. The talk, “Animal Spirits and the Economy,” will be in the Ehrlicher Room, 411 West Hall (with a videocast to both 1202 SI North and 313 State Hall at Wayne State University).

Akerlof is the Koshland Professor of Economics at the University of California at Berkeley. In 2001 he was co-recipient of the Prize in Economic Sciences in honor of Alfred Nobel. The Nobel Committee cited Akerlof’s 1970 paper, “The Market for ‘Lemons,’” which for the first time described the role of asymmetric information in causing market perversity.

A vicious circle in used car markets illustrates the phenomenon. Potential sellers of used cars, with their superior information, withhold good cars from the market; buyers react by reducing the price they are willing to pay; and in turn sellers further reduce the quality of cars put up for sale.

Akerlof has also pioneered in the application of sociology and psychology to the workings of the macroeconomy. He has been senior economist at the President’s Council of Economic Advisers, and past president, vice president, and a member of the executive committee of the American Economics Association, and a member of the Council of the Econometric Society. From 1978-80 he was Cassel Professor of Money and Banking at the London School of Economics. He is also the author, with Shiller, of a new book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism.

Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government — simply allowing markets to work won’t do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life — such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes — and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.

Animal Spirits offers a road map for reversing the financial misfortunes besetting us today: how leaders can channel animal spirits — the powerful forces of human psychology that are afoot in the world economy today.