Rob Horning understands me! Please read his post on the economics and politics of “animal spirits.”
There are perplexingly many glosses “on animal spirits.” One of them is “confidence,” which is what investors faced with uncertainty about the economic climate are now lacking. Another might be “ambition.” As Chris Dillow writes in his mini review of Shiller and Akerlof’s new book:
What’s more, 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.
Perhaps, then, it’s not just that animal spirits are ubiquitous – but they are necessary too.
It’s worth pointing out that it is exactly this sense of animal spirits, animated by the spirit of ambition or “emulation,” which Robert Frank and Phillip Cook declare inefficient in The Winner-Take-All Society, and argue we should tax into submission. But as Gary Becker and Kevin Murphy point out in Social Economics, echoing Nisbett and Ross, the expected payoff to entrepreneurial risk is so low that in the absence of positional competition, we would get very little of it. Entrepreneurial risk-taking is the source of innovation, which is the source of increasing productivity and wealth. So a society lacking this kind of status-seeking animal spirit might not grow at all, unless it was capable of successfully importing and deploying the innovations of more ambitiously inventive societies.
This focus on positional competition recalls the psychological microfoundations of Adam Smith and David Hume’s theories of civilization and economic growth. Their theories of motivation seem to me to do much more to illuminate the recent financial collapse than does modern macroeconomics. The myopia of financial executives making huge bets on securities graded according to algorithms that could not begin to understand was certainly driven by positional competition. The key insight of eighteenth-century political economy is that institutional rules and social norms must align ambitious, emulative, and status-seeking animal spirits to the aims of innovation, refinement, and advancement of the public good. The soaring abstraction of techno-high-finance — which decoupled investment decisions from any human sense of real economic value — encouraged the sense that the great race for astronomical bonuses was consistent with the public interest. And the sums involved discouraged the players from double-checking. It does seems that a kind of carelessness became contagious, and I don’t think it’s wrong to see “greed” as a source of Wall Street’s rather astonishing indifference to verifying the real utility of the game it was playing, though “greed” is not a very helpful diagnosis in the end. Ours was a failure of “regulation” in the broadest sense: the joint failure of institutional rules and the cultural climate to regulate the expression of positional ambition. But the lesson is not to discourage it, but to redirect it; to make it again not only safe but serviceable.
The big question is whether a risk-seeking society — which must maintain a status-seeking, ambitious culture — is or is not fated to run some of its institutions into the ground from time to time and occasionally wreak havoc on the context of trust and stable expectations that makes ordinary economic activity possible.
For those of a scholarly bent, here’s a passage from Adam Potkay’s A Passion for Happiness: Samuel Johnson and David Hume (I’ve removed the scholarly citation apparatus) on the central role of “emulation”–which is what they called positional ambition — in eighteenth-century accounts of progress.
“An honest emulation,” rooted in a “self-love” that inspires us to think highly of ourselves in comparison with others,” is the source of all achievements, all greateness: “the philosopher’s curiousity may be inflamed by a catalogue of the works of Boyle and Bacon, as Themistocles was kept awake by the tropies of Miltiades.” Again we should recall Pope: “Envy, to which th’ ignoble mind’s a slave, / Is emulation in the learned or brave.”
The necessity of “emulation” to a beneficient progress is a, perhaps the, great theme of the Enlightenment in Britain, shared alike by Hobbes, Mandeville, and Shaftesbury, Hume and Johnson. It pervades Johnson’s Idler essays still more than his Rambler. The “renaissance of letters” that, according to standard eighteenth-century wisdom, began in fourteenth-century Italy is itself a product of emulation: “[T]he European world was rouzed from its lethargy; those arts which had been long obscurely studied in the gloom of monasteries became the general favourties of mankind; every nation vied with its neighbour for the prize of learning; the epidemical emulation spread from south to north and curiosity and translation found their way to Britain. Emulation is responsible for “elegance” of building, clothing, food; “commerce has kindle an universal emulation of wealth.”
Johnson and Hume agree that the fire that animates both the fine and practical arts “is not kindled from heaven. It only runs along the earth; is caught from one breast to another; and burns brightest, where the materials are best prepared.” The theme of emulation is omnipresent throughout Hume’s Essays and History of England–its responsibility for the enlightenment of both ancient Greece and modern Europe; the birth and refinement of all arts and sciences, mechanical arts and manufactures.
Isn't the real goal of these animal spirits to escape accountability?
Don't hassle me, man, I'm a genius!
To be rewarded for success even when it's not achieved?
To be able to declare success and not be fact-checked?
Sure. But two caveats:
1. When emulation gets decoupled from a willingness to subject practices to moral scrutiny, you're in trouble. Radical expansion of the division of labor combined with the dependence of relative prices on current endowments often make it difficult to judge the marginal morality-relevant consequences of one's job. And subjectivism about value–originally a claim about factor-price *tendencies*, rather than a normative argument, but now doing double-duty with every mention of GDP on the news–makes it seem reasonable to give up the task entirely, to immunize the economic sphere from ethical considerations altogether (aside from following (the letter of) (a particular naive-positivist interpretation of) the law). No, I don't have any solutions. Despair is my brand.
2. You keep talking about the importance of institutions that support stable expectations, but I have a hard time seeing why that pushes against counter-cyclical fiscal policy. Unemployment insurance, welfare payments, medicaid/care, public transit — maintaining these at non-recession levels, or even expanding them to take into account greater demand, seems like just the sort of thing that both (a) helps stabilize expectations about potential downside risk, thus keeping entrepreneurship in reach, and (b) requires, given our current political system, a federal “stimulus.” (A straightforward consequences of the fact that most of this stuff is state-run and partly state-funded, and the states are much more credit-constrained.) Does Wilkinsonian Rawlsekianism really object to -that- sort of stimulus?
2b. “But that's not the sort of stimulus we get–or at least, even if we get some of that, we get a lot more spending-as-prioritized-by-clout.” Well, sure. I don't like the American political system much. But one way of thinking about the effects of spending of this sort is that it expands the set of expectations that can support a non-contractionary equilibrium path. So long as I don't expect immediate crowding out–and I think it's clear that most folks don't, right now–If I expect gov't spending to go up a certain amount, period, then my expectations about private investment / consumption can be lower while still being consistent with a “keep production / spending high” strategy. When people save rather than spend in a situation like this, it's not because they're socking away the tax payments they expect to make in the future (Ricardian equivalence), it's because they're afraid of losing their jobs due to demand contraction (mostly; obviously, there's lots of heterogeneity!).
2c. And again, as far as expectations go: I strongly suspect that most folks *expect* the government to use its policy levers to attempt to ameliorate recessions, on both the fiscal and monetary side. (Feel free to dig out the data here; I know it exists.) Hell, there's a federal statute that explicitly commits the US Gov't to both price stability and full employment. So I think that, expectations-wise, the burden of proof is actually on the no-stimulus side: given that the “do nothing” approach would, in fact, be a *huge surprise* to everyone, “do nothing” proponents need to say why their disruption of settled expectations is justified.
2c. The tricky part here is that, 1, people *expect* the rules to change when it seems like the rules have failed, but 2, changing the rules seems like just what you don't want to do. There's no real way to square this circle. But, insofar as this is your real concern (and I think it should be), you should care about the bank bailouts / new bank regulations, NOT the stimulus.
Man, I should have just blogged this. Maybe I shall!
I'm giggling at the thought that you can write an entire post on 'animal spirits' in the context of economics and politics and not once mention the thinker who introduced this radical idea to contemporary discourse; The Baron of Tilton, John Maynard Keynes!
From The General Theory.
“Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits – a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.”
I would further submit that you can probably learn more about the psychological underpinnings of 'action bias' by looking at something rather more modern than an 18th Century Scottish philosopher? Modern cognitive science has a wealth of insight into what motivates human being. We've come a lot further than the idle speculation of a generation of men who's asses were comfortable ensconced in the leather of their enlightenment club-room chairs.
The key insight seems to be that we are compelled to action by several kinds of biological urge, but that these urges find expression in culturally specific ways. If you begin with a Marxist view of the world that “economics uber alles”, you're going to lack a great deal of predictive power. Start with biology, not philosophy, and work sideways, to money.
x., Too much to reply to. But your entire comment seems to be based on the false assumption that I've been defending “doing nothing,” so almost all of it is moot. Please refer to my post “Managing Expectations Better,” in which I argue for making more use of pre-designed “auto-stabilizers” as an alternative to ad hoc discretionary intervention, for example. 2c: Of course people expect intervention. cf., Lucas and Prescott. 2c. I what to change the rules. But I want to change them deliberatively and rationally, not ad hoc, opportunistically, and self-defeatingly.
Thanks for the Keynes quote. I was taking it for granted. My “field,” if I have one, is not economics, but the intersection of political economy and contemporary moral psychology. The striking thing is how contemporary work in psychology are basically rediscovering Scottish sentimentalism. But psychologists, cog sci, philosophy of mind types tend to be so economically illiterate and politically silly that one can hardly do better than go back to Hume in applying the psychology to politics and economics.
And I agree with you that it would be much better to have had statutory auto-stabilizers, etc. But, you know, we don't! Even the so-called “automatic” ones are generally nothing of the sort, because the states need to pony up their share of the costs, and the states are much more severely credit-constrained (sometimes by law). So under our current system–which does need to be changed, yes–a bill has to be passed for the particular moment. Which means Congress has to sign on. Which means they have to be bought off. Etc.
As for the Lucas and Prescott ref–my general feeling towards the Lucas critique is that his insistence that you replace one false assumption with another hardly makes him Dalton II, especially when his preferred falsities seem to be more misleading than others in the situations of most importance (e.g., fast, global economic contractions). And as you might guess, I'm not a huge fan of the RBCycle literature, either.
So, ok, we're both on board with wanting to change the rules deliberatively and rationally. You know when that's NOT going to happen? The first months into a new administration, with the global economy tanking at an alarming rate. I agree that putting pressure on legislators / Obama to maximize aid to the semi-automatic stuff, etc., and minimize 'ad hoc' stuff was / would have been helpful. I don't think we're very far apart on the policy side. But I'm having trouble understanding how your series on macro / managing expectations can be seen as an intervention into the -actual- political debate that was raging at the time, as opposed to an invitation to change the debate to one that would have resulted in an even uglier, more Frankenstein-patched-together kind of bill, because it would have had to *also* play the part of a stimulus if it were to get votes at all.
In other words: it was almost a political certainty that some “stimulus bill” would happen. And, given current expectations, it was right to pass one (even if not, ideally, this one). In this environment, trying to simultaneously tackle long or medium term restructuring of incentives would have been wrong: it would have delayed something non-controversial in order to pass something -incredibly- controversial, with the resultant bargaining generating less coherence within -both- aspects of the package than could be expected if dealt with serially.
Perhaps what I should say is: I don't understand what the illocutionary force of these posts is supposed to be. My puzzlement comes from the tension between their apparent force (viz., persuading others that the stimulus is, if not bad exactly, then misguided; the gov't should really be focusing on something else) seems in conflict with their apparent content (viz., expectations -really do- matter a great deal in macro-economic performance, even if macroeconomic theory is really bad in its attempts to bring them into general equilibrium models of behavior-subject-to-constraints; intentionally pursuing policies that will drastically upset expectations is a bad idea).
Except this won't do. No. Not at all.
Hume was a moralist. He believed psychological motivations were, at their heart, moral and ethical. A struggle between moral and non-moral 'passions'. Most famously, Hume wrote (this from memory – I might have it wrong).
“Morals excite passions. Morals produce or prevent actions. Reason itself is utterly impotent in this particular. “
Every shred of contemporary evidence paints a picture rather different to Hume's. Our 'gut' is fundamentally a-moral. We are driven and (mis)guided by complex biological and evolutionary processes. All Hume's 'morality' does is to provide a medium within which to explain and justify our pastiche of behaviors. Morality presents us with an organizing system; not an engine of motivation.
Hume's account was utterly revolutionary for it's time, and it remains a bedrock worth studying. It's certainly better than 'the devil made me do it.' But it seems to me it's a subject more worthy of study in High School; alongside the results of his (near) contemporaries Boyle, Hooke, Newton and so on. It's simply not very useful, these days. Hume's description of human nature, for example, has nothing to contribute when it comes to questions about when, where, how and why our mind 'tricks' us into false consciousness and therefore particular actions in preference to other actions.
Turning to the charge of economic illiteracy on the part of cognitive psychologists, this is not completely true. Much contemporary psychology (the work of Kahneman, Tversky, Thaler) uses markets as experimental models. Where Hume would, as you have, argue that “The soaring abstraction of techno-high-finance — which decoupled investment decisions from any human sense of real economic value — encouraged the sense that the great race for astronomical bonuses was consistent with the public interest.”, modern cognitive psychologists would say that nothing so organized as that actually took place.
“What's good for Wall Street is good for America” is a post hoc rationalization. It isn't and wasn't connected to a motivation. Nor can it be reliably used to guide us looking ahead. The psychologically more useful explanation has these folks being tricked into error by their evolutionary biology.
A third approach!
Separating the liberaltarian project of intellectual coalition-formation and identity-questioning from partisan politics is really hard. But it can and ought to be done. You're totally right here!
Separating discussions of macro-economic theory and policy from partisan politics, while using the events of the political process and the comments of the wonkosphere in response to those events as jumping-off points, in January-February of 2009, is not possible. Questions about illocutionary force rather than content are not merely predictable but proper.
This just doesn't make any sense to me. And I feel like you're demanding that I take part in a debate whose partisan terms I find intellectually cheapening and culturally corrosive. Using events as a jumping off point for a larger discussion is perfectly sensible, in my opinion. I simply have no special skill for tactical commentary. My sense is that little I say can have any effect on the direction of current policy. The best I can do in the short-term is to help some people (myself included) understand why a theoretically sound position cuts against the approach we're getting, which makes it OK to be skeptical now. And I can use the occasion, and peoples' current interest in the issues, to try to develop and spread a sensible point of view that can be usefully applied in future. What's wrong with that? I've been pretty exasperated by the way the current downturn led to a resurgence of truly sophomoric vulgar Keynesian, and I was also pretty disappointed in the capacity of much of the economics profession and of economically literate commentators to muster a cogent reply in time. I assume we'll have future recessions, and similar debates. I often didn't know what to say this time, since much of this is new to me, but I'd like to be better prepared next time.
I'm not even sure why you think we disagree. I've been in favor of a stimulus not all that different from the kind Alice Rivlin proposed. That's the “do something,” it's fast, clean, as effective as anything could be, and has little or no effect on the basic structure. A little later, you don't try to change long-term incentives. You start putting together your blue-ribbon commissions and what-have-you to start restructuring the the incentives of the deeper institutions, understanding that's what really matters.
I'm afraid you don't understand Hume.
A theoretically sound position ?
Theoretically, the capitalists wouldn't have destroyed our economy with their stupidity and unchecked greed.
Even Randroid Greenspan was surprised.
What use is “a theoretically sound position” when it has no value in the real world?
Aaah!
Not falling into the naturalistic error there, Will? Proceeding from what is the case (Hume's writing) to what 'ought' to be the case (your preferred conclusions)?
Although you've not enlightened me as to my misunderstanding, I remain puzzled why you would privilege the experiential psychology of Hume's day over modern experimental psychology. Thaler seems to me to explain much more than Hume.
Here's another razor distinction. Hume's enlightenment view of human behavior includes no consideration of the systematic capacity human beings have for error and self-delusion. Hume – your quote, and I assume you understand him – argued “that institutional rules and social norms must align ambitious, emulative, and status-seeking animal spirits to the aims of innovation, refinement, and advancement of the public good.”
A modern view of that would be that that is all very well and good, but it ignores the fact that human beings are systematically error prone. We delude ourselves. We fail tests of reason and perception all the time. We have had sets of institutional rules and social norms that were intended to direct us along the paths you suggest. These systems failed.
Modern psychologists would argue that it's not that carelessness and greed became contagious. In fact, they're not aberrations. A modern psychologist might even argue that carelessness and greed are precisely the things you (Will) roughly describe as 'animal spirits'. They're chaotic. Unguided. Cthonic. And they appear to be systematic (indeed, predictable) features of the human mind.
If you want me to go all pop on you, recall Warren Buffet's advice to only ever invest in a business an idiot could run, because one day, an idiot will. If we embrace human fallibility in ways Hume overlooks, we build social systems with human weakness uppermost in our mind. We build systems where no part of it can become so important that, should human self-deception lead to the collapse of one part, the overall system is impacted.
Which is a radical departure from Hume's advice, and follows from enormous improvements in our understanding of minds.
Too many on the Right are saying “if animal spirits exist, then only tell me good news!”
I think that is only a first-order reading of animal spirit implications. In fact, it might be a little higher order to roll back and look at the role of boosterism in bubble building. A good news bias only builds bubbles higher (and more often).
I think the best answer is tell me the real news, just as soon as you can. Tell us early and let us develop skills of healthy moderation and skepticism, to prevent the extremes of public sentiment from leading us to euphorias or panics.
Shorter: I read Bob Horning as a defense of CNBC perma-bulls. In my opinion, they were not blameless in this crash.
“Robert Frank and Phillip Cook declare inefficient in The Winner-Take-All Society, and argue we should tax into submission…”
Any real data that the sorts of tax structures Frank and Cook advocate (if they advocate any particular structure) would significantly endanger entrepreneurial risk-taking? I'm pretty sure my animal spirits would persevere were I to be taxed at (say) 50% at the $500K margin. So too, apparently, does Bill Gates.
Am I reading your response correctly in interpreting it as suggesting that we should be more focused on preventing harm than promoting good?
A joke?
Why is a more genetic based view of our psyche and what drives us rarely considered?
“The Selfish Gene” by Dawkins was a life changing book for me. Why are people altruistic? Why are they suicidal?
This “animal spirits” mumbo jumbo just sounds like a sophomoric almost spiritually based understanding of why people appear to act irrationally.
I think people naturally want to do a good job on things, and that leads to innovation and capital formation. Even people who work unsung jobs with no chance of fame often try to do their best and try to make things work well. I am an engineer and I think a big part of why is that can be truly painful for me when something is malfunctioning or working suboptimally. I enjoy kudos for a good job but it's not the main reason I work hard. In fact, I also find that kind of attention embarrassing.
To boil it all down to status competition is a big mistake. I think it comes from the intersection of neo-Social-Darwinism (the strain of evo psych that emphasizes aggression and dominance to the point of celebrating it) and the academic mindset, which is big on fame and status. But the neo-Social-Darwinists are wrong, and not everyone is an academic. Basically, humans are complicated, and simple explanations for what they do are wrong.
Not sure. Not all mistakes and errors are harmful. Failure teaches.
I rather think that we need to be constantly mindful of the need to minimize the scope or extent of the harm, rather than prevent it. And in doing so — the argument would go — we do the best to promote good outcomes.
Too many on the Right are saying “if animal spirits exist, then only tell me good news!”
I think that is only a first-order reading of animal spirit implications. In fact, it might be a little higher order to roll back and look at the role of boosterism in bubble building. A good news bias only builds bubbles higher (and more often).
I think the best answer is tell me the real news, just as soon as you can. Tell us early and let us develop skills of healthy moderation and skepticism, to prevent the extremes of public sentiment from leading us to euphorias or panics.
Shorter: I read Bob Horning as a defense of CNBC perma-bulls. In my opinion, they were not blameless in this crash.
“Robert Frank and Phillip Cook declare inefficient in The Winner-Take-All Society, and argue we should tax into submission…”
Any real data that the sorts of tax structures Frank and Cook advocate (if they advocate any particular structure) would significantly endanger entrepreneurial risk-taking? I'm pretty sure my animal spirits would persevere were I to be taxed at (say) 50% at the $500K margin. So too, apparently, does Bill Gates.
Am I reading your response correctly in interpreting it as suggesting that we should be more focused on preventing harm than promoting good?
A joke?
Why is a more genetic based view of our psyche and what drives us rarely considered?
“The Selfish Gene” by Dawkins was a life changing book for me. Why are people altruistic? Why are they suicidal?
This “animal spirits” mumbo jumbo just sounds like a sophomoric almost spiritually based understanding of why people appear to act irrationally.
I think people naturally want to do a good job on things, and that leads to innovation and capital formation. Even people who work unsung jobs with no chance of fame often try to do their best and try to make things work well. I am an engineer and I think a big part of why is that can be truly painful for me when something is malfunctioning or working suboptimally. I enjoy kudos for a good job but it's not the main reason I work hard. In fact, I also find that kind of attention embarrassing.
To boil it all down to status competition is a big mistake. I think it comes from the intersection of neo-Social-Darwinism (the strain of evo psych that emphasizes aggression and dominance to the point of celebrating it) and the academic mindset, which is big on fame and status. But the neo-Social-Darwinists are wrong, and not everyone is an academic. Basically, humans are complicated, and simple explanations for what they do are wrong.
Not sure. Not all mistakes and errors are harmful. Failure teaches.
I rather think that we need to be constantly mindful of the need to minimize the scope or extent of the harm, rather than prevent it. And in doing so — the argument would go — we do the best to promote good outcomes.
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