How fuzzy minds affect buzzy times. Here’s a book that puts the economy on the couch to have its head examined
Often, appealing to common sense works. Even in economics. If an economy functions by human behaviour, taking a realistic version of it will be more useful than a robotic model. In other words, we must pay attention to the ‘thought patterns that animate people’s ideas and feelings, their animal spirits’, not just the assumed dictates of their rational brains. Philosophers do it: Amartya Sen speaks of an open ended sort of self interest. Marketers do it: Honda City’s ‘Enjoy Your Challenges’ ad campaign sharpens its whizzy aim at your self confidence. And it’s no secret others do it too: the Ultimatum Game always finds people ready to ‘lose’ for the sake of fairness. Try it on yourself. Say, you and your partner are to share a set of desirables, a series of Big Os, but you find you’ve been allotted only a fifth of the whole bargain; you can either accept this allotment or dump the deal, in which case neither of you gets any of the Big Os. What would you do? Economists would expect you to accept it, since something is better than nothing.
Ah, but do economists do it? Pay attention, that is, to animal spirits? There’s a suspicion they don’t. Or didn’t until the Subprime Tubgrime came to light, forcing them to think again. This splendid book comes as a big boost to behavioural economics. It is written by Professors George Akerlof and Robert Shiller, market efficiency sceptics who warned us against markets going out of whack on account of ‘asymmetric information’ and ‘irrational exuberance’, respectively. In this 2009 book, they clutch their chins, knit their eyebrows and examine the economy as a beast under the influence of confidence, fairness, money illusion and other such animal spirits, and then use these quirks of human existence to explain stuff like acute poverty and yo-yo stock prices.
The book’s title is taken from John Maynard Keynes’ General Theory, the 1936 classic that led the way out of the Great Depression. Here too, there’s hope on offer—even if it’s a drag drawing upon Keynesian ideas at the prime of his pump. Akerlof and Shiller do not; rather, they cite his lost analogy of the Beauty Contest. A newspaper once published a panel of beauty contestants and asked readers to select the loveliest, offering prizes for picking the most popular. By Keynes’ reasoning, one ought to ‘pick the faces that one thinks others are most likely to think that others think are the prettiest… investing in stocks is often like that.’
If there’s a letdown, it’s Chapter 13. Akerlof and Shiller want state intervention to resolve a problem of perverse labels that distort judgment and job markets. Me? I’d rather rely on information and imagination. I’d count on sizzlers such as the Rawlsian Roulette scene in Dhoom: II. One bullet is spun in a six-chamber revolver, and two lovers who’ve fallen out take turns pulling the trigger at each other. You can work out the horror of rising probability. Or just hope the bullet’s a blank, as a general rule for all, whichever end you’re at. John Rawls knew it. Others know it. Equity and justice animate people: just let a depth-of-field view of the Indian scenario come into play, and hear the economy roar with self confidence.