A failure to

control the
animal spirits
Contemporary Economics
08/03/2017
Author
 Robert Shiller:
 Professor of Economics at Yale University.
 Co-founder and chief economist at
MacroMarkets.
 Nobel Prize in Economic Sciences in 2013.
 President of the American Economic
Association.
History and Theory
 Keynes:
 Married to Lydia Lopokova.
 British Depression 1920s-1930s.
 Strove to find a middle way.
 Theory:
 The General Theory of Employment, Interest and
Money (1936).
 When unemployment is high, expand demand
by deficit and repay the debt when
unemployment is low.
 Regulated capitalism.
Practice over ideas
 The General Theory:
 Deeper message usually ignored.
 Capitalism left on its own is unstable.
 Government serves as counterbalance.
 Animal Spirits:
 People’s willingness to take risks.
 Estimations based on little knowledge.
 Upswings of the business cycles.
 Based on faith in the future.
Psychological aspect of
animal spirits
 Stories and storytelling:
 Motivates human behaviour
 People’s economic mood is based on them.
 Beliefs about other people, the economy
itself.
 Trust in others.
 Examples:
 Dotcom bubble.
 Flipping properties.
Economic theory (1)
 Classical theory:
 Wrong economic theory.
 Denies the role the animal spirit.
 Adam Smith and his Wealth of Nations (1776).
 The economy is stable, including financial
markets.
 Individuals are rational and pursue their
economic interest.
 Assume that they do due diligence in getting
informed.
 Unemployment caused by searching for a job or
high expectations.
Economic theory (2)
 Downsides:
 Sometimes people are too trusting.
 Capitalism can profitably produce what they
think they want.
 Snake oil.
 Buyers and sellers not taking due diligence.
 Insurance sold inadequate for the risks related to
complex securities.
Moral and government.
 Nature of capitalism:
 In general, the products produced is what is
really wanted.
 When confidence is high and financial assets
are hard to evaluate, people will buy snake oil.
 Confidence disappears once
 Government’s role:
 Regulate the asset markets to avoid snake oil.
 Compared to food or medicine.
 Maintain full unemployment.
Conclusion
 Return of the government:
 Ensure a “wise laisser faire”.
 Regulated, unlike the current main theory.
 Middle ground between those that are
worried about unfettered capitalism and
those that oppose government
intervention.