Using Emotions Help Explain The Economy

1796 Words8 Pages
Ashley Stephens
April 8, 2015
Macroeconomics
Term Paper
Using Emotions to Help Explain the Economy
When examining the economy, many economists assume that economic contributors make their decisions as unemotional rational beings. John Maynard Keynes, one of the most influential economists of the 20th century, was one of the driving forces in a revolution of economic thinking. In his 1936 book, Keynes coined the term “animal spirits” to describe the instincts and emotions that influence and guide human behavior which have a direct impact on the economy. Following the financial crisis of 2007-2008, economists and authors George Akerlof and Robert Shiller published the book, Animal Spirits: How Human Psychology Drives the Economy, and Why it
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Additionally, people desire fairness, which can cause them to make decisions that are not always in their best economic interests. Many people would choose to be unemployed than work for wages that they view as unfair. Thirdly, corruption and bad faith can contribute to a recession. There are incentives to profit from enthusiastic people who are too trusting when the economy is doing well, which causes the positive developments of the booming economy to slow and even stop. The next element the authors discuss is money illusion, or the cognitive failure to account for inflation or deflation in prices or wages. Workers for example will refuse a pay cut, or even to ask for a raise in times of recession. They don’t want to take more from their firm during challenging times, but they also don’t want to make less money. Finally, the authors outline the importance of stories in determining behavior. For example, the story that house prices will always rise caused many people to invest in housing, which contributed to financial crisis.
The second part of Animal Spirits uses the five animal spirits to explain eight different questions about economics. First, they claim that economies fall into recessions/depressions because people get overly confident and make rash decision, which encourages corruption until people become panicked and their confidence disappears
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