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AP Macro and IB teachers should read this review of George Akerlof and Robert Schiller's book "Animal Spirits". There are some great points in this piece that can be brought into the AP or IB classroom with regards to the assumption of rational behavior and more importantly the Keynesian/Classical debate on Macroeconomic policy issues.
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The last two years, in which capitalism has suffered one of its periodic shocks, have given John Maynard Keynes a new lease of life. Events have demonstrated the limits of the theory that economies can be relied on to be stable if they are lightly regulated and otherwise left to themselves. There is now much talk of the paradox of thrift, whereby the rational choices of individuals can prove collectively ruinous, and of the need for government to counteract the inherently anarchic tendencies of markets. Keynes has been revived because he understood that markets are very often irrational. Unfortunately, few of those who urge that we go back to him seem to have understood why he believed this.
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Apart from a brief postscript to one of the chapters and a few remarks in the preface, George Akerlof and Robert Shiller’s Animal Spirits was written before the current crisis. Yet, based on research undertaken over many years, it can be read as prefiguring the current disillusionment with economics. The trouble with prevailing theories, in Akerlof and Shiller’s view, is that they assume human beings are more rational than they actually are. ‘This book, which draws on an emerging field called behavioural economics, describes how the economy really works,’ they claim. ‘It accounts for how it works when people really are human, that is, possessed of all-too-human animal spirits.’
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Is China's economic success a result of the government's close management of market activity? Or is China's economic success actually a myth in itself? As the author says "While it had been thought that 100 million Chinese live on less than one dollar per day, there are actually 300 million Chinese living on less than one dollar per day."
The author refutes claims that close government regulation creates higher, more long term growth, claiming that "We can see the strength of the case for economic freedom even more clearly through proper economic theorizing. Free-market economists like Friedrich Hayek and Ludwig von Mises arrived at the proper conclusions regarding socialism and interventionism long before the evidence on modern state planning was in."
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Chinese success in recent decades proves that government planning is a better path. Countries that follow the "free-trade" neoliberal path will lag behind while regulated economies, like China, come to dominate the global economy.
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As of 2008, China ranked the 126th freest economy, in the "mostly unfree" category of the most recent Index of Economic Freedom.
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