November 16, 2013
George A. Akerlof
Robert J. Shiller
Princeton University Press (2009)
Review by Emanuele Corso
I turned the last page of this book and, as is my habit with books just finished, put it on the arm of my rocking chair and considered what I had just read. The consideration found me puzzled, as do most books on or about economics. I am NOT an economist, you understand (and so do I,) but a mathematician by training and education. My sense of what makes sense is, I realize, vastly different from that of economists. Mathematicians do what they do to understand the “why” of things, and, it seems to me, economists do their magic to describe the obvious. What economists prove, in my opinion, is generally not profound except to each other perhaps, nor is it immutable. What is true this year about the influence of quantitative easing will most assuredly not be true next year, making it not much of a help but rather a palliative with an out-date for some given moment; a patch applied but never a cure. Moreover, you can be assured the next economic crisis will caused by the same factors that have caused previous crises. It is forever and always the same deja vu over and over again.
Economists like Akerlof and Shiller, both Nobel Prize laureates, write profoundly but with no real effect on economic behavior or even public policy for that matter. People continue to do the same stupid things over and over again. The economy plunges from one new height to the bottom of the next trough, up and down, calm and crisis. Is it because, as with other economic pundits, something is missing from their equations? When I saw the title, Animal Spirits, I thought, “Ahaaa, these guys are going to nail it.” But, in the end, they didn’t. Every manifestation of animal spirit was mentioned and detailed except the one that causes and has caused most, if not all, economic crises. I wholeheartedly agree with their assessment, “Failing to incorporate animal spirits into the model can blind us to the real sources of trouble.” The authors go on to enumerate the animal spirits as: confidence, fairness, corruption, money illusion and stories. The “big one,” the biggest, in fact, has gone missing in this taxonomy. In fact the “big one” is gone missing from nearly every discussion of economics I have read. However I have to give Alan (Mr. Irrational Exuberance) Greenspan credit for taking a swing at it. In a November 4, 2013, TIME Magazine fluff piece he mentions, “… what we now call animal spirits,” promoting “fear” as being “far more potent” than euphoria or greed. Close, but no kewpie doll for Alan, ever the apologist for the world as he knows it.
So how is it that economists can’t get to first base with this issue? One has to wonder what planet these folks occupy when they can make such a statement as: “Since wages are determined largely by considerations of fairness, …” Apparently they haven’t heard about the McDonalds’ McPay scale and how their employees have to apply for public assistance to feed their families. That is not, in my estimation, “fairness.” In fact, it doesn’t even approach “fairness.” And McDonalds is not an isolated instance by any means or measure. It is as though Akerlof, Shiller, Greenspan and other notables have some conception of “workers” as being from another planet—extraterrestrials seldom encountered.
I would also point out that in spite of the authors’ assessment, Harvard is NOT the pinnacle of world universities. Sorry, boys, that just doesn’t work. Another point of amusing contention is their evaluation of Larry Summers’ “excellence” as an economic thinker for his observation that: “… when workers move from industries with high pay to industries with low pay, they tend to take a wage cut; when they go in the opposite direction they tend to get a raise.” No, I’m not making that up—it appears on page 103 and the kudos on page 188. Really!
The bottom line (this is, after all, about economics so bottom lines are appropriate fashion statements) is that the book provides clear explanations and definitions of the terms used by economists such as money illusion, lending at the discount window, and so forth. In that sense it is a good book and one I am glad to have read for the information it provides as much as for the insight it gives into the thinking of two world-class, Nobel-laureate economists. What you will not get from Akerlof and Shiller is a discussion of the number-one cause of irrational exuberance, property and stock-flipping, political ambition, ad nauseum’—the dominant animal spirit with credentials reaching to the dawn of civilization: greed.