Keynes’ “Animal Spirits”

Macroeconomics does not work for a multitude of reasons. First and foremost is that it does not pick up the “changes” at the microeconomic level. That is, it does not deal with changes in incentives and disincentives that individual decision-makers like business owners, consumers and investors use to fashion their behavior.

An excellent example is the British Petroleum fiasco. No macroeconomic model is capable of discerning the sentiments expressed in this short blurb from Steve McCann that appeared at American Thinker:

The Obama administration has just made certain that there will be minimal foreign or even domestic investment in the United States.   Their shakedown and blackmail of BP has major corporate investors looking elsewhere for expansion and exploration.   No company answerable to their shareholders or investors will risk capital in a country which has brutally abandoned the rule of law.

My company is headquartered in Switzerland and in recent conversations with business executives and clients overseas, they have told me that this and many of this governments actions has completely chilled their enthusiasm to invest in the United States.

The same applies to domestic U.S. companies, why would they expand within the country or even continue to do business here?  They will not.

This lack of faith and confidence will not be easily overcome and will exacerbate and make permanent a high unemployment rate and a lower standard of living.  This is yet another step in making certain another recession in just over the horizon.

Mr. McCann was careful to point out that violations of The Rule of Law extend well beyond the current treatment of British Petroleum.

Macroeconomics is wholly dependent upon the stability of microeconomic behavior. For more on why macroeconomics cannot work and why Obamanomics will not improve the economy, see here.

Perhaps it was these changes that John Maynard Keynes would not understand that caused him to talk about his mysterious catch-all — “animal spirits.” To microeconomists, animal spirits are nothing more than rational reactions to changed incentives and disincentives.

For Keynesians, there is confusion why business has not picked up. They utilize extra-model terminology such as “risk aversion,” “liquidity trap” and “animal spirits” as explanations why their model does not conform to what people are actually doing. Of course, these “explanations” merely beg the issue as to what causes these anomalies.

In reality, there is little mystery as to why businesses stopped hiring and investing and why consumers cut back spending.  Given the changes in incentives and the increased uncertainty regarding future regulatory disincentives such as tax rates, healthcare legislation, trampling of the Rule of Law, etc. only macroeconomists can be puzzled. It is because they ignore decision-makers. There is no place for decisions or individual decision-makers in their aggregated mathematical models.

No matter, the current economic problem will become worse and they will become more bewildered. Some already are and have demanded “more stimulus.”

Academics will have the opportunity for all sorts of econometric analysis as to why the economy did not respond the way the it was “supposed to.” Useless scholarly articles and dissertations will be written about this anomaly. Only people in the Ivory Towers that practice Keynesian economics will read them. While the articles will not educate them, they will at least occupy them for some time — a good thing in the eyes of us that want to be left alone.

The rest of us, economists or not, know why there will be no recovery under current conditions. Keynesians could remedy their confusion by merely getting out and talking to the average non-economist on the street. “Common folk” are more learned than their Ivy League degreed “bettors,’ at least in this regard.

This post appeared on American Thinker today.

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