Monday, September 28, 2009


Taming ‘Animal Spirits’
...“Animal spirits” is John Maynard Keynes’s abstraction of all that goes into quotidian economic decision-making beyond the rigorously rational pursuit of self-interest. He wrote, in Chapter 12 of his General Theory, “Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits — of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere.” Conservatives are wrong to deny themselves the clarity of Professor Keynes’s insights, and the pleasures of his lucid prose, only because they object to the policies he advocated and to those that are advocated in his name.

Animal spirits are indeed at play, and mischievously so, both in the marketplace and among those who seek to govern the marketplace. It is characteristic of our academic caste that Professors Shiller and Akerlof attend to the former case but are blind to the latter, and so they have produced an essay that is not so much conventional as convention itself, arguing, in a series of bland metaphors, that economic exorcists in Washington must be deployed against animal spirits in the marketplace...

...The fallacy implicit in the conventional argument for more robust financial regulation is that animal spirits — the whole menagerie of greed, panic, pride, thrill-seeking, irrational exuberance — distort only profit-seeking activity. But they are at least as likely to distort efforts to regulate profit-seeking activity. In truth, the animal spirits of regulators probably are more dangerous than those of Wall Street sharks: Competition and the possibility of economic loss constrain players in the marketplace, but actors in the political realm have the power to compel conformity and uniformity among those under their jurisdiction. The entire economy is yoked to their animal spirits, and the housing bubble was a consequence of that fact. We have bred an especially dangerous hybrid creature in the “too big to fail” private corporation, the bastard offspring of a union between Wall Street’s animal spirits and Washington’s....