Animal Spirits explains why economists are so wrong, so often...
I continue my personal search for some glimmer of light at the end of our dark economic tunnel, or at least an answer a question that has been troubling me lately. If it was so obvious in the past years and months that the world economy was heading for disaster, why were economists and business leaders so passive and incapable of turning the ship around? Hundreds of years of compounded economic history, the best minds in the world applied to making the best use of scarce resources; more computer power deployed and more data available in every second of every hour than in the whole history of humanity, and nobody saw it coming?
Well, in all truth some economists did see it coming, but the whistle blowers remained at the margins of the economic mainstream. The whole economic profession has been shown, again, incapable of predicting, even of understanding, the consequences and the complexity of the economy.
And I believe this new book by Shiller and Akerlof shows a fundamental flaw to much of our current economic thinking: by assuming rational economic behavior in the economic agents, economic theory became as elegant in its structure as mistaken in its results. People do not always behave in rational economic ways, sometimes we do, but not always. We are moved by passion, fear, greed, over confidence,
pessimism, and all these feelings are easily transmitted from individuals to society. A real estate bubble emerges right after the dot.com bubble seemed to have taught everyone a lesson. We should know better, but we often don´t.
This book is an absolute MUST READ. I believe it will have profound repercussions in the economic profession, both at the research and applied levels.
As the authors put it bluntly in page 167: "Failing to incorporate animal spirits into the model can blind us to the real sources of trouble".
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