There is really only one achievement that gives economists public credibility: the ability to reliably explain (and preferably predict) macroeconomic phenomena. The recent economic crisis has left many professional economists shrugging. Standard models and textbook economics don't offer explanations. Even new-fangled behavioral economics research can't explain why an overheated housing sector managed to kneecap the entire world economy. August economists George Akerlof and Robert Shiller propose a theory that they claim will explain recent events in Animal Spirits , which is a term stolen from the theory of none of other than the revived John Maynard Keynes.
Akerlof and Shiller actually enumerate five animal spirits: confidence, fairness, corruption, money illusion, and stories. Keynes simply observed that animal spirits, perhaps a code for irrational behavior, could take hold in financial markets. Akerlof and Shiller explore the effects of their animal spirits in specific economic circumstances. In the process, they try to answer the kinds of questions that give economists panache. Why do economies go into depression (and what could we do about it)? Why can't some people find a job? Why are financial prices volatile when expected earnings are not? Why are minorities poor?
The book is well-written and interesting. It variably connects recent research in behavioral economics (e.g., Ernst Fehr on fehr-ness) and historical economic theory (e.g., Milton Friedman on, well, everything) to current examples of economic questions. It endorses an activist role for government in cases where animal spirits prevent smooth functioning of markets.
Perhaps the least satisfying element is the volume's brevity. Expanding the theory to additional examples would certainly be entertaining. However, the academics surely anticipate that this will happen. Engaging minds will construct and test hypotheses, provided of course that convincing measures of stories and confidence can be found. Reasonably extensive research on corruption, fairness, and money illusion exists.
