What Did Keynes Mean by “Animal Spirits”?

20 December 2011 at 9:39 am Peter G. Klein 3 comments

| Peter Klein |

Keynes’s idea that investors are motivated by “animal spirits” has come back into vogue with the recent Keynesian revival, but the term is often misunderstood. Keynes referred not to psychological factors that make investors reluctant to invest, but those that make them invest at all — in the face of deep uncertainty, he thought, only a manic, driven, strong-willed person would put capital at risk. When animal spirits are strong, investment is sufficient to maintain aggregate demand; when they lag, aggregate demand falls, and the economy lapses into depression. (Lord Skidelsky approvingly calls this the “mood swings theory” of business cycles — an idea just crazy enough to spawn a recent NBER paper.)

The new issue of Capitalism and Society features a piece on What Keynes Really Meant on this issue, and it’s a good read:

Animal Spirits Revisited

Alexander Dow, Glasgow Caledonian University
Sheila C. Dow, University of Stirling

The term ‘animal spirits’ has returned to academic and public discourse in a way which departs significantly from the original use of the term by Keynes. The new behavioural economics literature uses the term to refer to a range of behaviour which falls outside what is normally understood as rational. This treatment follows from the mainstream dichotomisation between rationality and irrationality. However, Keynes explained that, given fundamental uncertainty, rationality alone was insufficient to justify action. Animal spirits was the name he gave to the (psychological) urge to action which explained decisions being taken in spite of uncertainty; animal spirits for him were neither rational nor irrational. Nor are they beyond analysis. We explore how the nature and role of animal spirits can vary according to context (as between different sectors, types of firm and within firms). This analysis indicates ways in which policy can promote structural change to strengthen animal spirits in the long term as well as offset short-term weakening in animal spirits.

Entry filed under: - Klein -, Bailout / Financial Crisis, History of Economic and Management Thought, Jargon Watch, Myths and Realities, People.

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3 Comments Add your own

1. Browsing Catharsis – 12.21.11 « Increasing Marginal Utility | 21 December 2011 at 5:33 pm

[…] Keynes did NOT mean what behaviorists imply he meant by “animal spirits.” This is a subtle, well-articulated point. It makes the relationship between Keynes’s macro and his statistics/epistemology clearer, and it flushes the 2009 Akerlof/Shiller book down the toilet. […]
2. Jousting with the Knightian knights: Uncertainty and entrepreneurship | Níntil | 30 August 2015 at 11:21 am

[…] no rational reason for investing under such conditions, they will be driven by irrational passions: animal spirits. This issue could quickly overflow the topic of this post, and seep into issues of the meaning of […]
3. Will 'Animal Spirits' Fire Up the U.S. Economy? - Stockmarket news - Forex - News - Realtime market Data- World News - Trading Ideas- Tradebuddy.online | 21 March 2017 at 1:37 am

[…] In his General Theory, Keynes defined “animal spirits” as “a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities.” In order words, “animal spirits” are the instincts or “gut feel” that a business person or investor brings to decision making under uncertainty, presumably based on experience. Indeed, even the most rigorous quantitative analysis itself typically rests upon numerous assumptions that can be challenged, and often does not yield unambiguous signals about the proper course of action going forward. Meanwhile, in a marked departure from Keynes’ original meaning, today some behavioral economists use “animal spirits” as synonymous with irrational decision-making, according to professors Alexander Dow and Sheila C. Dow. […]