From acclaimed economists George Akerlof and Robert Shiller, the case for why government is needed to restore confidence in the economyThe global financial crisis has made it painfully clear that powerful psychological forces are imperiling the wealth of nations today. From blind faith in ever-rising housing prices to plummeting confidence in capital markets, "animal spirits" are driving financial events worldwide. In this book, acclaimed economists George Akerlof and Robert Shiller challenge the economic wisdom that got us into this mess, and put forward a bold new vision that will transform economics and restore prosperity.Akerlof and Shiller reassert the necessity of an active government role in economic policymaking by recovering the idea of animal spirits, a term John Maynard Keynes used to describe the gloom and despondence that led to the Great Depression and the changing psychology that accompanied recovery. Like Keynes, Akerlof and Shiller know that managing these animal spirits requires the steady hand of government-simply allowing markets to work won't do it. In rebuilding the case for a more robust, behaviorally informed Keynesianism, they detail the most pervasive effects of animal spirits in contemporary economic life-such as confidence, fear, bad faith, corruption, a concern for fairness, and the stories we tell ourselves about our economic fortunes-and show how Reaganomics, Thatcherism, and the rational expectations revolution failed to account for them.Animal Spirits offers a road map for reversing the financial misfortunes besetting us today. Read it and learn how leaders can channel animal spirits-the powerful forces of human psychology that are afoot in the world economy today. In a new preface, they describe why our economic troubles may linger for some time-unless we are prepared to take further, decisive action.

Preface to the Paperback Edition vii
Preface xxi
Acknowledgments xxvii


Introduction 1

Part One: Animal Spirits
ONE Confidence and Its Multipliers 11
TWO Fairness 19
THREE Corruption and Bad Faith 26
FOUR Money Illusion 41
FIVE Stories 51


Part Two: Eight Questions and Their Answers
SIX Why Do Economies Fall into Depression? 59
SEVEN Why Do Central Bankers Have Power over the Economy (Insofar as They Do)? 74
POSTSCRIPT TO CHAPTER SEVEN The Current Financial Crisis: What Is to Be Done? 86
EIGHT Why Are There People Who Cannot Find a Job? 97
NINE Why Is There a Trade-off between Inflation and Unemployment in the Long Run? 107
TEN Why Is Saving for the Future So Arbitrary? 116
ELEVEN Why Are Financial Prices and Corporate Investments So Volatile? 131
TWELVE Why Do Real Estate Markets Go through Cycles? 149
THIRTEEN Why Is There Special Poverty among Minorities? 157
FOURTEEN Conclusion 167


Notes 177
References 199
Index 219