Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

We Don’t Need “Animal Spirits” to Understand Economics

Economics / Economic Theory Apr 06, 2014 - 05:14 PM GMT



Per L. Bylund writes: A recently published article at The Week, titled “How can we unleash positive animal spirits into the economy? Change the narrative,” provides a clear example of what’s wrong with the perception of economics and why modern economic approaches, possibly aiming to amend the shortcomings“identified” by this perception, is at a loss of explaining anything important.

Perhaps the title of the article, written by John Aziz, is sufficiently telling, but let’s have a look at the assumptions and assertions in the first couple of paragraphs — and how they apply (if at all) to economics. Aziz begins:

Economics is a tough science. People are complicated — they have different (and unstable) desires, react differently to events, and view the world in different ways. Markets are complex interactions between millions of these different people.

It appears Aziz finds it highly problematic for economics that people have different desires. This is indeed a problem for a science attempting to understand or predict those desires. In this sense, I certainly feel for those psychologists working on such issues. But as an economist, it is hard to get puzzled by the statements. Rather, one feels excitement about the “complex interactions” that Aziz mentions. Yes, that’s where it gets interesting — the social phenomena arising due to individuals’ actions independently, in concert, and within an institutional framework. Here’s where the economics is. So let’s see where Aziz takes us from here:

In this respect, understanding the economy requires an understanding of people’s motivations. They invest and spend money (or withhold from investing and spending money) to fulfill certain desires and objectives, such as making a profit, building a nest egg, or simply acquiring useful goods and services. Sometimes these economic decisions are rational. Other times, instincts like greed (during an economic boom) and fear (during and after a bust) can cloud our rationality.

This paragraph is at best puzzling. The first sentence makes no sense: why does understanding “the economy” requiring understanding “people’s motivations”?It does not follow. The economy does not reflect the motivations, but people’s actions based on them. In order to understand what happens to the water when ice melts we do not need to know what the source of heat is. In order to understand the storyline of a novel we do not need to know on what type of machine it was typed or printed. Likewise, we do not need to understand people’s motivations to study the outcome of their actions.

Aziz continues:

Markets go through phases of mass optimism and mass pessimism — booms and busts. John Maynard Keynes called the forces underlying these phases animal spirits, the emotional and intuitive factors that drive economic decisions. They are an unavoidable part of economics, since there are questions that can’t be answered in an easily quantifiable way. For example, am I investing in a company selling goods and services that people want? Is the market getting stronger or weaker? Are people feeling more confident about the future or less confident? Will interest rates — which set both borrowing costs and the return on your savings —rise or fall in the future? How about inflation?

More assertions. And they’re even stranger this time. Obviously we need to throw in “animal spirits” as they are “an unavoidable part of economics” because they’re not “easily quantifiable.” It is difficult to make sense of this statement. What does it mean for the study of economics that motivations to the actions that bring about the phenomena we study are not easily quantifiable? And how can it be an improvement or a solution to this supposed problem to assert “spirits” as explanans? This is strange indeed! Not to mention how utterly unscientific such an arbitrary assertion is. (And let’s not think about the article’s outrageous mixing of Weberian-style “understanding” with “quantifiable” data.)

Let’s consult the following paragraph:

Economists have gotten vastly better at addressing these questions than when Keynes was writing in the 1930s; for example, there are now business confidence and consumer confidence indices. But many of the actions we take still depend on gut decisions, for consumers and businesspeople alike.

The power of our animal instincts and the weight of our experience can override rational argument.

At least Aziz here acknowledges where economics went wrong: John Maynard Keynes. Getting “better” here translates to doing more of the type of cheap psychological and mathematical analyses that psychologists and mathematicians would be embarrassed to even consider. And, of course, constructing indices of aggregates of what is not “easily quantifiable” appears to be completely unproblematic to Aziz. Just like the “gut decisions” that we somehow need to understand to figure out the economy.

It is perhaps interesting to understand what sort of “gut decisions” made people purchase blue rather than green sweaters on that one sunny day, but it is rather irrelevant for the fact that quantity demanded of blue sweaters increased and that of green sweaters decreased — and that this caused changes to relative prices, the production structure, etc. Unless, of course, one thinks “understanding” the economy is the same thing as being able to predict and steer it in some specific direction. Unfortunately, many (including, it seems, Aziz — and Keynes) seem to think economics as a descriptive science is somehow not enough (or even, in a strange twisting of words, unscientific) whereas social engineering is the proper way to go to “understand”economics.

One does not need to think about this for more than a brief second to realize that there is something very wrong here, at all levels. It is no wonder that modern mainstream economics fails to explain economic phenomena if economists share this strange perception of what is needed to understand the economy. Mixing cheap psychologizing, indices of the unquantifiable, and a bunch of animal spirits is hardly a recipe for scientific success.

This type of pseudo-scientific drivel is an insipid waste of time at best, but it seems to be very fashionable and appears to be central in how people perceive (and do) mainstream economics. Though, of course, it means absolutely nothing. Sooner or later even the animal spirits will succumb to this fact.

Per L. Bylund, PhD is a research professor in the Hankamer School of Business, Baylor University Visit his website. Send him mail. See Per Bylund's article archives.

© 2014 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in