Robert Shiller is a professor of economics at Yale and the bestselling author of Irrational Exuberance, in which he predicted the collapse of the stock market. He was also one of the first economists to accurately foresee the devastation that would follow the subprime mortgage crisis. In Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism, written with George Akerlof, he argues that today’s markets are as much driven by human psychology as by finance. Shiller uses the idea of “animal spirits,” a term invented by revolutionary economist John Maynard Keynes, to describe the powerful effect of human emotion and confidence on the economy, and to push for more government intervention and bigger stimulus packages in the U.S. and Canada.
Q: Looking at what’s going on out in the world right now, with all the greed giving way to fear, are we surprised at the notion that the economy’s being driven by “animal spirits”? We can see it all around us, can’t we?
A: Depends on who you talk to. There is definitely an element of human thinking that’s resistant to that idea, especially in the economics profession, because the history of economic thought has tended to emphasize the rational side of human behaviour and it tends not to be aware of or even think about social psychology and culture. Economists’ favourite thing is to talk about the central bank and that’s it, that’s what they’re expert on, so that’s what they think about. The idea that there’s ever some sociological change, a shift in the culture that’s driving the market, is just foreign to economists’ thinking, so they miss it.
Q: Why is that?
A: People who go into economics, in modern times, tend to be people who are good at math but didn’t want to be engineers or physicists, and so if you have that talent, what do you do? You go into economics. You can’t get a Ph.D. without going through an intensively mathematical program. That’s the hurdle you have to pass. It’s kind of like a hazing to get into the profession. I think there are different mental faculties, there’s a math—quantitative—faculty, and then there’s a human judgment faculty, and some people are good at one and some people are good at the other, but the economics profession is designed to attract the quantitative. It’s not to say that these quantitative skills aren’t important, it’s just that we tend to emphasize that a little bit more than is healthy.
Q: Tell me more about the particular animal spirits, it’s not just one sort of vague, amorphous force—you’ve dissected the individual spirits quite thoroughly in this book.
A: Well, one thing that really drives the economy is the sense of opportunity that people get at certain times, the sense that this is a good time to start a business, the sense that I can take a long shot now, and I have to move fast because otherwise I’ll be overtaken by other people who are more on the spot, and that drives the economy to a fervent degree, and it’s exactly that sense that has disappeared now. It changes slowly, through a diffusion of ideas, like a social epidemic. Ideas spread the way jokes do. You know, someone invents a joke and it just spreads through millions of people by word of mouth. In the same way we have changes in ideas about what the economy means to us and how we fit in to it.
Q: What role did animal spirits play in leading us into this mess we’re in now?
A: Certain ideas, the idea that stock market investing is a road to riches, and then later the idea that investing in housing is a road to riches. These things infect our thinking on not only decisions about which investment to make but decisions about our lives. The last decade or so has been a time when we’re re-evaluating who we are and what is our purpose. The idea that we are smart investors in a capitalist world has been taking hold. The idea that, say, labour solidarity is important and that we want to be a good, dedicated teacher or nurse or something like that is somewhat diminished. We imagine ourselves to be capitalists on some level, even though recently it’s challenged by a sense of anger at capitalists who are making big profits when the economy is going down the tubes, but we did have kind of a gold rush mindset.
Q: This decade began with a tech bubble, yet we’d barely recovered from that before we were in the midst of a real estate bubble. One can see the same sorts of animal spirits, the same psychology, behind both of those phenomena. Why didn’t we learn from the first bubble?
A: People get into habits of thinking about the economy. The changes in our thinking that led to the stock market bubble just naturally extended to the real estate bubble. One example we use in the book is another book that came out in 2004, at the height of the boom, advocating real estate investment. The interesting thing was that the book was advocating real estate investment without any argument. It never explained why it’s an almost sure thing that you’ll make profits in real estate investment. It didn’t even mention the possibility of a real estate bust. It assumed that the reader already knew real estate was a sure thing, and that real estate prices can only go up, and the book was full of stories of people who found a new life or the excitement of investing in real estate. “Hey, I can get a home in Florida and I’ll get rich in the process, and other people are doing it, so I’d better hurry.” That’s the level at which a social epidemic moves. People who wouldn’t think of buying a house in Florida—it’s far away and unfamiliar—suddenly get this sense of confidence by seeing a lot of other people doing it, and a sense this is what the smart people are doing, so I’ll do it too.
Q: You mention in the book that this recent boom was accompanied by an epidemic in poker playing. What does poker playing have to do with the state of the economy?
A: One thing that has happened in recent years is a wave of gambling, not just in the U.S. but all over the world. Casinos have been opening up everywhere. Fifty years ago, lotteries were considered immoral or inappropriate. And now poker has become a legitimate spectator sport—that represents a real change. I may be over-interpreting this, but Texas Hold’em and other forms of poker are games that simulate aggressive, selfish personal profit pursuit. Poker is about bluffing, it’s about being dishonest, in a sense, and it’s not a family game. We compared it to contract bridge which flourished in the Great Depression. Bridge is different, it’s a partners’ game, so you have someone with you in it, and they don’t generally play for money.
Q: You argue as well that financial bubbles tend to be accompanied by corrupt and antisocial behaviour in the economy, hence the many financial scandals in recent years. I’d have thought that bad actors are just as prevalent in good times or in bad, but that they simply have more room to play in good times.A: In good times people are more willing not to do due diligence. They think they have to get in fast to stay ahead of the game and they have a sense that other people aren’t doing due diligence, so they go along with it. It’s a time of trust and that becomes a time of opportunity for hucksters to do things, or if they aren’t hucksters at least people who are not really acting in good faith. Afterwards, when the confidence slips, people fall into a different mode: “You can’t trust anybody, and I’m not going to do anything because I’d have to do all this research to figure it out and I’m never going to do it.”
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