The 'animal spirits'


In the General Theory of Employment, Interest, and Money, John Maynard Keynes pondered on a peculiar characteristic of human nature. He identified it as a major contributor to the cyclical pattern of growth of modern capitalist economies. In his view, most human decisions are not made on the basis of a "weighted average of quantitative benefits multiplied by quantitative probabilities." Instead, Keynes believed that most wealth-generating activities are a result of "spontaneous optimism."

Further, he proposed that economic downturns are caused by sudden mood swings among consumers and producers. Since the outcomes of investments are impossible to predict and their benefits often come months and years down the road, most entrepreneurial actions are driven by "animal spirits." To put it simply: Market volatility is, to a large degree, a consequence of irrational hopes and fears.

The unusually high level of mistrust and pessimism that I observed during a recent visit to Bulgaria made me think that there might be more than a grain of truth in this Keynesian psychological hypothesis. Every time I introduce one of my classes to the fascinating field of game theory, I begin with the so-called "trader's dilemma." The point of the exercise is to demonstrate to students that, without complementary arrangements building trust, a market is likely to get stuck in an equilibrium of suboptimal returns on investment and low consumer satisfaction.

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Historically, the establishment of public and private institutions responsible for contract enforcement would have been impossible without a certain preexisting level of personal trust. Such trust was based on a common set of values safeguarded by religion and transmitted through family structures. It allowed for specialization and trade within local communities in antiquity.

Over the centuries, depersonalization of trust allowed for the expansion of markets. The global exchange system of today has opened the door for billions of people to achieve very comfortable lives, but it has its pitfalls. Since our trust lies not with particular people but with a set of rules, frequent sharp policy changes could have significant negative impacts on the "animal spirits." And it seems that both the Bulgarian path of constant reforms during the past 22 years and the American swings of rhetoric and political action since 2008 support such a conclusion.

Alex Tokarev
Alex Tokarev

Alex is the chair of the Department of Business at Morthland College in West Frankfort, Ill., and teaches at Northwood University in Midland, Mich. The native of communist Bulgaria fanatically supports the Bulgarian soccer team, Levski.


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