• Cocktail and Dinner Party Economics
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  • Dinner Party Economics

Whine or Spirits

The idea that economic crises, like the current financial and housing crisis, are mainly caused by changing thought patterns goes against standard economic thinking.   George A. Akerlof and Robert J. Shiller  Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism    page 4  I think every right-wing thinking person should read this book.  For one thing, it cogently argues left-wing policies in a way that an author like Naomi Klein can only dream about.  In other words, the arguments actually make sense. The title  is an homage to the book The  General Theory of Employment, Interest and Money by John Maynard Keynes (See our guest blogger for more).   In The General Theory, Keynes attributed much of market movements  to the desire to ‘just do something’ rather than the result of rational  thinking on anyone’s part.  This book gives academic form to what those nebulous animal spirits might look like.  Akerlof and Shiller identify 5 psychological concepts which leads to  results that look like decisions were made by animal spirits rather than rational human beings.  They are: 1)  The role confidence (or the lack thereof) plays to amplify market movements. 2)  The concept  of fairness  in setting  wages and prices. 3)  The inevitable corruption and unethical behaviour that plagues society and thus the economy. 4) The difficulty for people to figure out what their money is worth in a world of inflation or deflation which leads to money illusion. 5)  As human beings we tell stories which can unwittingly aggregate into national and international narratives. These human characteristics lead to the inevitable Keynesian conclusion that governments need to be in the economic game if we wish for a kinder, gentler economy. Akerlof and Shiller then apply these ideas to 8 big economic quiestions like “Why do economies fall into depressions?” , “Why do real estate markets go through cycles?” and  “Why is there special poverty among minorities?” You don’t have to agree with Akerlof and Shiller’s arguments in order to appreciate the quality of the conversation.    

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