Maclean’s Interview: Robert Shiller

From Macleans.ca:

Robert Shiller is a professor of economics at Yale and the bestselling author of Irrational Exuberance, in which he predicted the collapse of the stock market. He was also one of the first economists to accurately foresee the devastation that would follow the subprime mortgage crisis. In Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism, written with George Akerlof, he argues that today’s markets are as much driven by human psychology as by finance. Shiller uses the idea of “animal spirits,” a term invented by revolutionary economist John Maynard Keynes, to describe the powerful effect of human emotion and confidence on the economy, and to push for more government intervention and bigger stimulus packages in the U.S. and Canada.

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Emotions key to economic recovery

From CNN.com:

President Obama's National Economic Council head Lawrence Summers noted in his speech March 13 that the economic crisis has led to an "excess of fear" that must be reversed.

To understand the role fear plays in the current crisis, we must understand the role of human psychology.

John Maynard Keynes thought psychology was the major cause of economic booms as well as busts, though this aspect of his work is now largely forgotten. He said people's economic decisions, in both good times and bad times, are largely, ultimately, if indirectly, driven by animal spirits, primitive psychological tendencies.

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Winning the Confidence Game

In the Business Standard:

Developed nations must invest in confidence-renewing measures like the Marshall Plan.

On April 2, the G-20 will hold a summit in London to discuss what we may hope will be an internationally coordinated plan to address the world economic crisis. But can such a plan really work?

The basic problem, of course, is confidence. People everywhere, consumers and investors alike, are cancelling spending plans, because the world economy seems very risky right now. The same thing happened during the Great Depression of the 1930s. A contemporary observer, Winthrop Case, explained it all in 1938: economic revival depended “on the willingness of individual and corporate buyers to make purchases that necessarily tie up their resources for a considerable length of time. For the individual, this implies confidence in the job, and in the end comes equally back to the confidence of industry leaders.” Unfortunately, confidence did not return until World War II ended the depression.

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A Failure to Control the Animal Spirits

In the Financial Times:

Lydia Lopokova, wife of the economist John Maynard Keynes, was a famous ballerina. She was also a Russian émigré. Thus Keynes knew from the experience of his in-laws the horrors of living in the worst of socialist economies. But he also knew first-hand the great difficulties that come from unregulated, unfettered capitalism. He lived through the British depression of the 1920s and 1930s. Thus Keynes was inspired to find a middle way for modern economies.

We are seeing, in this financial crisis, a rebirth of Keynesian economics. We are talking again of his 1936 book The General Theory of Employment, Interest and Money, which was written during the Great Depression. This era, like the present, saw many calls to end capitalism as we know it. The 1930s have been called the heyday of communism in western countries. Keynes’s middle way would avoid the unemployment and the panics and manias of capitalism. But it would also avoid the economic and political controls of communism. The General Theory became the most important economics book of the 20th century because of its sensible balanced message.

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Animal Spirits Depend on Trust

From the Wall Street Journal:

President Obama is urging Congress to pass an $825 billion stimulus package as soon as possible. But even that may not be enough to stabilize the economy, since it fails to take into account the downward spiral of animal spirits that is underway and may continue to worsen.

The term "animal spirits," popularized by John Maynard Keynes in his 1936 book "The General Theory of Employment, Interest and Money," is related to consumer or business confidence, but it means more than that. It refers also to the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.

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