The global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.
Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government--simply allowing markets to work won't do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life--such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes--and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.
Animal Spirits offers a road map for reversing the financial misfortunes besetting us today. Read it and learn how leaders can channel animal spirits--the powerful forces of human psychology that are afoot in the world economy today. In a new preface, they describe why our economic troubles may linger for some time--unless we are prepared to take further, decisive action.
George A. Akerlof is the Daniel E. Koshland Sr. Distinguished Professor of Economics at the University of California, Berkeley. He was awarded the 2001 Nobel Prize in economics. Robert J. Shiller is the best-selling author of Irrational Exuberance and The Subprime Solution (both Princeton). He is the Arthur M. Okun Professor of Economics at Yale University.
Table of Contents
Preface to the Paperback Edition vii
Part 1 Animal Spirits
1 Confidence and Its Multipliers 2
2 Fairness 19
3 Corruption and Bad Faith 26
4 Money Illusion 41
5 Stories 51
Part 2 Eight Questions and Their Answers
6 Why Do Economies Fall into Depression? 59
7 Why Do Central Bankers Have Power over the Economy (Insofar as They Do)? 74
Postscript to Chapter seven The Current Financial Crisis: What Is to Be Done? 86
8 Why Are There People Who Cannot Find a Job? 97
9 Why Is There a Trade-off between Inflation and Unemployment in the Long Run? 107
10 Why Is Saving for the Future So Arbitrary? 116
11 Why Are Financial Prices and Corporate Investments So Volatile? 131
12 Why Do Real Estate Markets Go through Cycles? 149
13 Why Is There Special Poverty among Minorities? 157
14 Conclusion 167
What People are Saying About This
Animal Spirits makes a very timely and significant contribution to the development of a new dominant paradigm for economics that acknowledges the imperfections of human decision making, a need which the panic in financial markets makes all too apparent. I am not aware of any other book like this one. Diane Coyle, author of "The Soulful Science: What Economists Really Do and Why It Matters"
Akerlof and Shiller explore how animal spirits contribute to the performance of the macroeconomy. The range of issues they cover is broad, including the business cycle, inflation and unemployment, the swings in financial markets and real estate, the existence of poverty, and the way monetary policy works. This book is provocative and persuasive. George L. Perry, Brookings Institution
From the Publisher
"Akerlof and Shiller explore how animal spirits contribute to the performance of the macroeconomy. The range of issues they cover is broad, including the business cycle, inflation and unemployment, the swings in financial markets and real estate, the existence of poverty, and the way monetary policy works. This book is provocative and persuasive."George L. Perry, Brookings Institution
This book is dynamite. It is a powerful, cogent, and convincing call for a fundamental reevaluation of basic economic principles. It presents a refreshingly new understanding of important economic phenomena that standard economic theory has been unable to explain convincingly. Animal Spirits should help set in motion an intellectual revolution that will change the way we think about economic depressions, unemployment, poverty, financial crises, real estate swings, and much more. Dennis J. Snower, president of the Kiel Institute for the World Economy
This book is a sorely needed corrective. Animal Spirits is an importantmaybe even a decisivecontribution at a difficult juncture in macroeconomic theory. Robert M. Solow, Nobel Prize-winning economist
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