A very exciting arrival in the post today – 'Animal Spirits', the new book by George Akerlof and Robert Shiller. Akerlof is of course best known for his 'Market for Lemons' model about how asymmetric information can shut down markets, so apt in the financial crisis. Shiller is the friendly public face of behavioral finance, and warned us all so clearly about 'Irrational Exuberance' that we (and the financial regulators) should really have known better.
The title of their new book refers to the famous phrase Keynes applied to investment decisions, which is another timely reminder as we economists contemplate how to extract our respective countries from this mess. The chapters in the first part of the book take a broader sweep, however, over the range of psychological characteristics which affect decisions. This includes, for example, fairness and greed as well as over-confidence and the absence of calculating rationality in financial markets. The second part applies psychological insight to eight specific economic questions. Several cover issues relevant to the financial crisis including averting depression, tackling unemployment and real estate cycles. Akerlof and Shiller include policy recommendations. For example, they support Keynesian fiscal policies to target a return to full employment but argue that this needs to be supplemented with a second target, for credit growth.
There are also subjects not connected to financial markets and today's conjuncture. One chapter explores the psychological and emotional reasons, embedded in economics and social structures, for persistent poverty in minority groups; and draws policy conclusions. One is that although the contracting out of lower-level government jobs has saved some taxpayer dollars, it has also removed a source of non-discriminatory job opportunities which provided African Americans with a ladder into the middle and professional classes.
I read the book in proof so can assert confidently that it's a good read – and another in the growing array of titles which are revealing modern economics in all its humanity and depth to a wider audience. Love the cover too! 