Over the weekend, economist Robert Shiller argued in an NYT op-ed that we basically need a stimulus package of happy talk. Distilling the thesis of his recent book, Animal Spirits, co-authored with George Akerlof, Shiller claims that “the Depression narrative could easily end up as a self-fulfilling prophecy.” The idea behind this is basically the same as the one that causes economists to fret over consumer-confidence surveys. Economic behavior is guided by people’s expectations, which are shaped not by rational assessments of their prospects but by their feelings (Shiller identifies these as including confidence, the ability to trust, and a faith in an economic system’s fairness) which in turn are shaped, presumably, by the narrative driven by the media. If people invest, or spend, not out of strict need or want, but in accordance with how they feel about wanting, then the implication is that the media owes society some happy talk about the economy to keep up the “animal spirits”—Keynes’s term for the irreducible ambition that drives entrepreneurs regardless of their probability of success. As Chris Dillow puts it, in a review of Shiller and Akerlof’s book,
given that the private benefits of innovation are low, and the probabilities of success in many arts and industry small, it might be only animal spirits that give us artists and entrepreneurs. As Richard Nisbett and Less Ross wrote years ago: “We probably would have few novelists, actors or scientists if all potential aspirants to these careers took action based on a normatively justifiable probability of success. We might also have few new products, new medical procedures, new political movements or new scientific theories.”
Rational motivations are insufficient to explain entrepreneurialism. (Marx, for what it’s worth, argued that technological innovation was a requirement of capitalism, which shapes would-be capitalists in its image. “Animal spirits” might be considered a ideological, pseudo-naturalistic account of that otherwise contradictory process in which insecurity and confidence merge to produce ambition.)
According to the “fragile animal spirits” thesis—the idea that at any given moment, a culture bears responsibility for bolstering these tenuous entrepreneurial impulses—not only do we need happy talk, but the state must take action—passing a big stimulus package, for instance—to try to change the public mood. As Akerlof put it in this interview with Conor Clarke of the Atlantic Monthly:
one of the things is that one of the roles of the government is to offset the animal spirits. So that when animal spirits are high—and people are too trusting and they engage in investment projects that they shouldn’t engage in—one of the roles of the government is to offset them. More should have been done to curb the over-exuberance and excesses in the housing market. That’s one. But at the same time, if the confidence then dries up, it’s the role of the government to stimulate the demand that’s fallen because of the lost confidence.
This sort of thinking has apparently been driving Will Wilkinson nuts. He seems to regard it as voodoo macroeconomics. “It now seems pretty plainly true that the thrust of prescriptive macroeconomics is propaganda.” He adds in another post:
I’m extremely suspicious of what strike me as intellectually contentious, ad hoc interventions into the economy aimed at expectation management. Countercyclical economic mood-control initiatives seem to me inconsistent with the maintenance of a general framework of stable rules — that is, they don’t take the importance of expectations seriously enough — while also smacking of illiberal state propaganda.
Elsewhere, he cites another stimulus skeptic, economist Greg Mankiw, who writes
The sad truth is that we economists don’t know very much about what drives the animal spirits of economic participants. Until we figure it out, it is best to be suspicious of any policy whose benefits are supposed to work through the amorphous channel of “confidence.”
Moreover, Wilkinson argues that it’s incoherent to use Depression fears to marshal support for stimulus spending: By the logic of fragile animal spirits, scare tactics hurt confidence while trying to garner support for a policy that will boost it. “The economics says we need confidence. But political reality says we need panic. So we try to induce panic so that we can later induce confidence. This seems an extremely awkward and implausible approach, but that doesn’t keep anyone from trying it.” Well, now that the stimulus bill has passed, it’s intellectually consistent, at least, that Shiller would take to the media to address the panic problem.
But the deeper problem here, of course, is that talking up the necessity of happy talk seems to lend support to the idea that the press should be censored for the economy’s sake. Wilkinson: “If the thoughts and feelings of the population are the issue, then maybe the real problem is that the mass media are unduly scaring people. Wouldn’t it follow, then, that good economic policy would have at least as much to do with controlling the media as controlling the money supply? If the problem with handing Maria Bartiromo a script of state-mandated talking points is that it wouldn’t work, how do we know that? It would be pretty interesting if it turned out that manipulating the money supply is what an efficient state turns to when it can’t more directly manipulate ‘animal spirits’ through propaganda.”
If reality is too scary for our fragile animal spirits, and helicopter drops and massive fiscal spending don’t work to shift that reality, will we lose our scruples about the Potemkin option? Economic data could come out along the lines of how the Soviets would present data on their five-year plans. Politicians would then lie about conditions (Herbert Hoover style, as Shiller pointed out) until the populace begins acting against their instincts to hunker down as unemployment and hardship afflicts them or the people they know.
Delusional thinking about credit risk got us into this mess, so now the only thing to get us out is more widespread and more doggedly institutionalized delusional thinking? All right then! Not sure how this would help the “trust” and “faith in the system” components of animal spirits, but oh, well. Maybe if we perfect the dissemination of these delusions, we’ll be free at last from those ultimately irrelevant real economic conditions, and the state can just drop in to tell us what condition our animal spirits should be in.