Thursday, April 2, 2009

Animal Spirits: How Human Psychology caused the Current Economic Crisis

I took advantage of a guest lecture at the law school because the subject was about the current economic crisis. Psychology and economics are important forces in every situation so a lecture involving both by a professor of economics from Yale University appealed to me as a way of coping with the dire news reports of unemployment. In the last year, I have lost touch with current events, so Friday seemed like an opportunity to adjust the balance. Robert Shiller did not disappoint with his lecture on Animal Spirits: How Human Psychology caused the Current Economic Crisis. He illustrated his lecture with economic charts for housing, income and debt in three countries; the United States, Japan and Canada. The story of capitalization as triumphant is over, and the need for stimulus packages is urgent. Canada’s stimulus package is not enough. He recounted an interesting detail from the 1933 World’s Fair. Miracle Whip mayonnaise was introduced in the Great Depression because sales were slipping for Kraft mayonnaise. It was a blend of existing mayonnaise and less expensive salad dressings. Shiller pointed out that Miracle Whip is still with us and still very popular, but most of do not know why. He noted that Starbucks is launching a new line of instant coffee. In this age of coffee aficionados, it seems unbelievable but 70 years from now people may be buying instant coffee from Starbucks and not know the reason it is offered and where the trend originated. I certainly did not know that Miracle Whip was a legacy from the Great Depression.


Shiller demonstrated that human or animal spirits are huge drivers in the economy. That the rising anger in the U.S. over AIG and huge executive bonuses is a force. Fairness is a one of the elements of animal spirits. Corruption and bad faith are in there too, along with money illusion. His charts illustrate that economic trends are driven by animal spirits, which in turn point to narrative-based thinking. If our inner narratives lead us to pulling back, to old economic thinking, to a negative contagion as it did in the Great Depression we will be drinking instant coffee from Starbucks. The G20 conference will be an important historical event because the level of anger is high. Economics must be coordinated around the world because the crisis lies in people’s minds, our cultures, and our way of thinking. We are interconnected culturally and we think similarly. Shiller pointed to the power of enlightened decisions and gave the example unemployment insurance, innovative thinking when it was introduced and is needed now. We are experiencing a crisis of confidence that we haven’t seen since the Great Depression. A lot depends on how President Obama shapes confidence in the future and changing psychology to achieve recovery.



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