Animal Spirits

Animal spirits refers to the state of confidence or pessimism held by consumers and businesses. Expectations for the future inevitably influence decisions made today about how much consumers are prepared to spend or save and the willingness of businesses to commit funds towards capital investment in their chosen markets.

The financial crisis and subsequent economic recession has revived interest in the impact that changing animal spirits can have in markets and industries across the world. In a new book “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism” George Akerlof and Robert Shiller have argued for the necessity of an active government intervention in economic policymaking to prevent a deterioration in consumer and business sentiment leading to the risk of a deflationary depression.

Animal spirits is a term coined by John Maynard Keynes to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Akerlof and Shiller put forward the case for “behaviorally informed Keynesianism” where psychological changes in confidence, fear, bad faith, corruption and a concern for fairness can all impact on decisions made in the economy.

The huge macroeconomic policy response made in the aftermath of the credit crunch is testimony to the importance now attached to changes in sentiment and confidence. In the UK, consumer confidence has rebounded as our chart shows, and sentiment about the overall state of the economy has moved quite sharply higher in recent months - a positive sign. But the resilience of this rebound in confidence remains in doubt.