Sudip Bandyopadhyay’s Blog

Robert Shiller & his co-author George Akerlof, in  their recent book Animal Spirits- How Human Psychology Drives the Economy and Why it Matters for Global Capitalism,  argues that our own psychology and emotions, such as envy and resentment, drive house prices, debt levels and share values.

In the book, they  also argue: “What had the people been thinking? Why did they not notice until real events — the collapse of banks, the loss of jobs, mortgage foreclosures — were already upon us. The public, the Government and most economists had been reassured by an economic theory that said that we were safe. It was all OK.But that theory was deficient. It had ignored the importance of ideas in the conduct of the economy. It had also ignored the fact that people could be unaware of having boarded a rollercoaster”.

One of the driving forces in economics, is the story we tell ourselves. We create happy versions of life in the boom times and sad ones in the bust.  It might be said the story is the product of events. But the process is circular. Events drive the story, the story drives our behaviour and our behaviour drives events.  Franklin Roosevelt grasped the point when he told the American people in 1933 that the only thing they had to fear was fear itself. So what is the story today? On the face of it, a happy one. Equity markets are flying – most of the time, anyway. Investors are hurling billions of new money at the banks, including the most moribund ones.  The world’s fund managers, are positively bubbling.  That mood is shared by the general public.

Professor Shiller  captured the mood pretty neatly when he likened the current sense of optimism to a marital row.  “You don’t know whether the argument with your wife is really over or not.  Is the problem something that your spouse will bring up again, and again?”