What are Keynesian Animal Spirits?

Keynesian animal spirits is a concept introduced by the economist John Maynard Keynes in his book "The General Theory of Employment, Interest, and Money." Animal spirits refer to the non-rational and unpredictable psychological factors that influence economic decision-making, particularly in relation to investment and consumer behaviour.

Keynes argued that economic decisions are not solely driven by rational calculations based on expected returns and objective data. Instead, he recognized that human psychology, emotions, and confidence play a significant role in shaping economic activity. These subjective factors can lead to fluctuations in investment and consumption levels that are not easily explained by traditional economic models.

Animal spirits encompass a range of human emotions, including optimism, pessimism, confidence, fear, and uncertainty, which influence individuals' willingness to take risks and make economic decisions. When animal spirits are high, people tend to be more optimistic, confident, and willing to invest or spend money, which can lead to increased economic activity and growth. Conversely, when animal spirits are low, people may become more cautious, pessimistic, and reluctant to invest or spend, potentially leading to economic downturns or stagnation.

Keynes argued that government policies, particularly fiscal policy, could help mitigate the negative effects of low animal spirits during economic downturns. By increasing government spending or cutting taxes, policymakers can stimulate aggregate demand and boost confidence, encouraging private investment and consumer spending. This approach is often referred to as Keynesian economics and is associated with the use of expansionary fiscal policy during times of economic weakness.

In summary, Keynesian animal spirits describe the psychological and emotional factors that influence economic decision-making and can lead to fluctuations in investment and consumer behavior. They highlight the role of confidence and sentiment in shaping economic outcomes.