Background
“Animal spirits” is an economic term introduced by John Maynard Keynes (1883–1946), which refers to the human instincts and emotions that drive economic decision-making, particularly in investments and business ventures. It emphasizes the role of psychological factors and gut feelings over cold, rational calculations.
Historical Context
Keynes introduced the concept in his seminal work, “The General Theory of Employment, Interest, and Money” (1936). In this context, he sought to explain why individuals might embark on investment ventures despite substantial uncertainties and risks that could deter more rational and cautious decision-making.
Definitions and Concepts
“Animal spirits” convey the idea that major investment decisions are often driven by the instinctual and emotional hunches of entrepreneurs. Rather than purely relying on calculated forecasts of potential profits, these decisions are based on an entrepreneur’s confidence and courage to pursue opportunities despite underlying economic uncertainties.
Major Analytical Frameworks
Classical Economics
Classical economics assumes that individuals act rationally, making decisions that maximize their economic well-being and efficiency. Hence, it largely ignores the role of psychological factors like animal spirits.
Neoclassical Economics
Neoclassical economics, like classical economics, emphasizes rational decision-making and optimal allocation of resources. While it marginally recognizes deviations from rational behavior, it doesn’t deeply integrate concepts like animal spirits into its models.
Keynesian Economic
Keynesians fully embrace the concept of animal spirits, acknowledging that psychological factors and emotions profoundly impact economic dynamics, particularly investments. Animal spirits explain the inherently volatile and unpredictable nature of markets and aggregate demand.
Marxian Economics
Marxian economics focuses more on class struggles and economic exploitation rather than on individual behavior. While it recognizes the role of human behavior, it doesn’t directly address the concept of animal spirits.
Institutional Economics
Institutional economics, which emphasizes the role of institutions and social and cultural factors in shaping economic behavior, can find common ground with the idea of animal spirits insofar as it acknowledges non-rational influences in decision-making.
Behavioral Economics
Behavioral economics examines how psychological factors and cognitive biases affect economic decisions. It directly aligns with the concept of animal spirits by showing that even investors often make irrational decisions influenced by emotions and heuristics.
Post-Keynesian Economics
Post-Keynesian economics builds on and extends Keynes’ ideas, fully incorporating the notion of animal spirits into its analysis of market fluctuations, investment decisions, and the broader economic cycles.
Austrian Economics
Austrian economics focuses on individual human action as the key driver of economic phenomena but typically emphasizes purposive rational behavior. While it appreciates entrepreneurial spirit and innovation, it does not explicitly categorize these as “animal spirits.”
Development Economics
Development economics can consider animal spirits in understanding how entrepreneurial courage and innovations spur economic development, particularly in emerging economies by overcoming constraints and uncertainties typical in these contexts.
Monetarism
Monetarism maintains a strong reliance on the role of money supply in driving economic activity, focusing less on psychological drivers like animal spirits.
Comparative Analysis
When comparing different economic schools of thought, it’s clear that the Keynesian, Post-Keynesian, and behavioral economics frameworks offer the most robust explanations integrating the concept of animal spirits. These frameworks recognize the importance of psychological factors in economic dynamics far more than classical, neoclassical, monetarist, or even Marxian schools of thought.
Case Studies
Various economic crises and bubbles can be explained through the lens of animal spirits. For example, during the dot-com bubble of the late 1990s, investment decisions were significantly driven by entrepreneur optimism and investor exuberance, aligning well with Keynes’ concept of animal spirits.
Suggested Books for Further Studies
- “The General Theory of Employment, Interest, and Money” by John Maynard Keynes
- “Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism” by George A. Akerlof and Robert J. Shiller
- “Irrational Exuberance” by Robert J. Shiller
Related Terms with Definitions
- Investor Confidence: The degree of trust or certainty investors have in the market or in a particular investment, significantly influenced by emotional and psychological factors.
- Market Sentiment: The overall attitude of investors towards a particular security or financial market, which can be bullish or bearish.
- Behavioral Economics: A field of economics that examines how psychological influences and biases affect the economic decisions of individuals and institutions.
