Tuesday, November 16, 2010

Animal Spirits

A friend of mine and I occasionally discuss questions of politics and economics. He recently read George A. Akerlof's and Robert J. Shiller's Animal Spirits. At his recommendation, I am also reading it. Of course, I can't help but read it from the Misesian perspective I've been absorbing as I read through Von Mises's Human Action. I'll be using this space to comment as I read through.

I just finished the introduction. So far, I have only two problems with the text. The first is the implication that the Classical model of economics (which Akerlof and Shiller are calling "traditional economics") was somehow the last word in economics before the entire profession was awakened by first the Great Depression and, today, this recent series of closely followed crashes. This is not true, as in both cases there were those who successfully predicted the events (and were at the time universally derided for it). Ludwig von Mises, for example, successfully predicted the Great Depression as the inevitable result of Federal Reserve policy during the "Roaring Twenties." More recently, Peter Schiff, a follower of the same set of ideas, called this recent recession several years before it materialized.

There are similarities between the Misesian approach to economics, and the approach proposed by Akerlof and Shiller in this book, which brings me to the second problem I have: the terminology the authors chose to employ. For while "Animal Spirits" may have good book-selling shock value, the term is highly misleading in that it has both a surface meaning (the new-agey ideas about totems and ghosts and stuff the average reader would get from it) and the more archaic meaning the authors are using, which simply refers to the fact that human beings make their own decisions according to the world as they see it, rather than the world as it actually is (or rather, I dearly hope this is what they are getting at).

This is similar to Von Mises' approach, which he termed methodological dualism. Von Mises, in Human Action, briefly alludes to the philosophical debate about whether or not human beings have "souls" or "spirits", whether or not people have free will or are slaves to a chain of cause and effect going back billions of years that determines what we do. He then dismisses these questions as being outside the scope of economics and without satisfactory answer as of the writing (and even as of today, so far as I can tell). According to Mises, to be correct, the economist must theorize as if people have the ability to decide upon action independently of this chain of cause and effect the strict materialist believes determines our actions, since economics has no way of following this chain beyond the confines of the human mind (the way I always put it is that, from the perspective of economics, the mind is a black box), and psychology, as yet, cannot follow it reliably. Thus the term methodological dualism. The term "dualism" refers to the idea that there are two sources of "cause" in the universe: the physical chain of cause and effect that can be analyzed and predicted by the physical sciences, and the actions of human beings which cannot. The term "methodological" refers to the fact that the economist is laying no claim to the the truth of the idea of human free will... merely that this assumption is a requirement for economic analysis under the current scientific conditions.

In other words, these ideas are hardly new... they simply have never been taken seriously in the context of mainstream economics (whether neoclassical or Keynsian). I'm looking forward to getting to the meat of this book and seeing where the authors go with this.

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