Introduction
The American economy heavily relies on the free market. However, many individuals think it can only function with help from the government. They believe that since rational self-interest drives the free market, there is no need for rules. On the other hand, some contend that the free market is frequently controlled by forces. Other than self-interest and isn’t always predictable or sensible. These enigmatic entities, the animal spirits book, cause a free market economy to need further laws.
The Influence of Animal Spirits
Economic theory has long held that the free market will always be steady and logical. It s believed that the market can correct itself and that government should not get involved. This idea originates from Adam Smith’s book The Wealth of Nations. Where he makes the case that if everyone pursued their self-interests, they would all act in their best interests.
Smith contends that because prices reveal how much people are prepared to pay for a product, everyone in a free market can access the same information. It means that manufacturers can determine whether they are producing enough of the desired good at the desired price. Customers can evaluate the product’s effectiveness and value for money. By doing this, everyone engaged can decide what they want and need.
Free market optimism is fundamentally predicated on several assumptions about human nature. These presumptions include the notion that people can apply logic to obtain information and reach informed conclusions. The Age of Enlightenment and free market economics both assume that this capacity for reason is the defining characteristic of humans. Though humans are occasionally capable of acting sensibly, it’s equally important to remember that this isn’t always the case. Human behavior is very prone to prejudice, unfounded fears, naive optimism, and emotionally charged speech.
Economic theories should be based on the reality that human nature is not only intellectual but also emotionally and psychologically complex. They shouldn’t downplay the role of psychology and emotions in making decisions.
While free market theories may explain many phenomena, they struggle to explain some tendencies. For instance, using those arguments is challenging to explain long-term unemployment and racial prejudice. Acknowledging that other factors are at play in markets outside human reason is crucial to properly comprehend their different aspects.
Economists refer to the non-economic variables that affect economic activity as “animal spirits.” Emotions, perceptions, histories, and human psychologies are some of these outside forces. They have the potential to be just as influential as logical self-interest in shaping how people behave in the marketplace. By examining these animal spirits, we may develop an interpretive framework for understanding why people make particular decisions and comprehend some of the bizarre turns the economy has taken.
Confidence
People weigh a variety of considerations and possibilities while making decisions. But in the end, factors other than reason and logic might impact their choice. For instance, before making a final decision, a homeowner who wishes to rebuild after a catastrophe might discuss it with his family or consult financial specialists.
At the same time, homeowners could let their neighbors’ decisions affect them. For instance, a homeowner’s neighbor can opt not to rebuild her home after a hurricane despite having lived there for 20 years. Even if the individual thinks rebuilding is worthwhile, she might do so if most of her neighbors decide against doing so.
The Authors of “Animal Spirits
George Akerlof and Robert J. Shiller, two well-known economists, collaborated on the book “Animal Spirits.” Akerlof is a macroeconomist and Nobel Prize winner who has made significant advances in behavioral and macroeconomics. Shiller is another well-known economist who received the Economics Nobel Prize for his research on the valuation of financial assets.
In “Animal Spirits,” Akerlof and Shiller worked together to explore how emotions and psychology play a part in economic decision-making. The phrase “animal spirits,” created by renowned economist John Maynard Keynes to characterize investors’ erratic and illogical behavior, serves as the book’s subtitle.
Akerlof and Shiller explain why people and companies occasionally make financial decisions that are not in their best interests using the idea of animal spirits. They contend that animal spirits influence economic cycles and the commercial environment.
In “Animal Spirits,” Akerlof and Shiller use a variety of academic fields. Such as sociology, psychology, and economics, to support their claims. They cite actual events, such as the 2008 housing market crash and the dot-com bubble of the late 1990s, to demonstrate the effects of animal spirits on the economy.
Overall, “Animal Spirits” by Akerlof and Shiller has significantly contributed to the growth of behavioral economics. And underlined the significance of integrating psychology and emotions into economic analysis. Their partnership resulted in intelligent and thought-provoking work that has impacted economic thinking and policy-making.
