Book Review: Animal Spirits

Often when I read a book I look at the preface or introduction.  Notice I didn’t say “read” the preface.  I look at it to see if it is just a bunch of thank yous and self-praises hidden in there.  If I see any of that I don’t bother reading it.  Not so with Animal Spirits, by Akerlof and Shiller.  My copy is the paperback edition published in 2010, there are two prefaces, one for the paperback and one for the original hardback from the year before.  They were interesting and informative.  These prefaces tell you straight out that they believe in Keynesian economics, that most people don’t understand Keynes because it has been watered down and used inappropriately, and that they might not know sarcasm when they hear it.  For the latter I refer to the remark about Milton Friedman.  Read the book if you want to know.  The authors also explain what the book is about and what information you can expect from each of its parts.

The authors of Animal Spirits liken the government to The Cat in the Hat, and to the owners of an amusement park where economics are concerned.  In the first case, readers are to believe that since the cat in the hat tried plan a, b, c and so on, to get the job done, so should the government until the economy is repaired and running smoothly.   As for the amusement park owner, the government is the absent minded owner and, like in The Cat in the Hat, we are all powerless children who don’t know they are on a roller coaster ride with no brakes and no ambulance.  According to Akerlof and Shiller, we don’t know what is in our best interest and the government should be mindful to take steps to protect us from our own irrational thoughts.

The next part of the book, chapters 1 through 5, consists of history lessons and reviews of economic theory, theorists, and policies.  The next chapters discuss their own questions to which they provide their own answers.  The last chapter is the conclusion in which they restate some of their questions and statements from the book.  In particular, they wrote, “How can we understand this crisis when it seems to have come out of the blue with no cause?”  Their own response to this is, “Failing to incorporate animal spirits into the model can blind us to the real sources of trouble.”  In short, this book basically says that the economy is held hostage to the whims of a public who may or may not be angry at the government, who may or may not have confidence in the banking system or in corporations.  It assumes the people are innately childlike and don’t see trouble when it is headed down the pike.  It seems to forget that the mortgage loan crisis was not unforeseen.  Indeed, many people warned congress not to allow the changes in regulation that started the ball rolling.  Congress chose to do it anyway.  We all knew it was coming.   We were just those child like people Akerlof and Shiller talked about, and still we knew decades ago when the A.R.M.s were being made popular and income requirements were lowered, that people would lose their homes.  We were just surprised it took so long.  My final thought on this book is that it is yet another justification of Keynes economic theory.  It’s about how to use tax and spend economics to temporarily control the economic cycles that have been going on since the beginning of recorded economic history.   They did after all, in my interpretation, state it in the preface to the paperback edition.