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Nov
14
2009

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.

www.lrb.co.uk/...we-simply-do-not-know
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Keynes rational behavior free markets markets macroeconomics animal spirits fiscal policy efficiency

  • 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.
  • 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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