The book by George A. Akerlof and Robert J. Shiller "Animal Spirits, How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism"  has inspired me to share with you these thoughts. John Maynard Keynes introduced the term "Animal spirits" in 1936 to describe the instincts, proclivities and emotions that ostensibly influence and guide human behavior in business and so impact the economic outcome and development. G. A. Akerlof and R. J. Shiller provide in this book evidence that contemporary theory of economics based on the hypotheses of efficient market and rational expectation fails to explain economic processes in the periods of global crises. They further develop the term of Animal Spirits seeking to explain the evolution of global economy in the periods of crises and depression and looking for the appropriate measures how to overcome the economic slump.
Authors’ suggest characterizing the Animal Spirits by five human behavioral features. First of them - confidence and its multipliers, second - fairness, third - corruption and bad faith, forth - money illusion or failure to account it and the fifth one - stories as the main form of information people are used to deal with. They think that all these features of agents acting in the economy make the development unsustainable, unpredictable and condition the formation of global economic and financial crises. There are no direct recommendations in this book how to modify the contemporary theories of macroeconomics or finance, nevertheless, there is sense of confidence that concept of Animal Spirit can be very useful working out Governmental and Central Bank policies to avoid or overcome economic and financial crises.
The new view at contemporary theory of economics is valuable for us as providing additional arguments for the applications of statistical physics in economic and other social systems. The continuing dispute among econometricians, working in the framework of present theory of economics, and econophysicists, trying to disengage from this framework, could be protracted if economists themselves were not expressing criticism against contemporary theory. The new view presented in the book of Nobel prize winner 2013 R. J. Shiller probably will serve for the development of new macroeconomic and financial theories.
In the previous essay, Econophysics as a new view on the social sciences, we already discussed the initiatives to use methods of statistical physics for the analyses and modeling of social systems, which started long before present global financial and economic crises. There we paid more attention to another book , written by M. Aoki ir H. Yoshikawa. One of the main ideas developed in this book is the proposition to reevaluate the macroeconomics from the point of view of statistical physics. From our point of view both books are written in very different styles, nevertheless, there is common sense regarding limitations of contemporary theory of economics, which fails to explain huge economic fluctuations. Though recipes how to improve theory provided in these books are not identical, the background of ideas is really common. We would characterize the common background as necessity to deal with heterogeneous economic agents acting in dynamically changing endogenous and exogenous circumstances. Consequently the dynamics of social systems is a result of interactions between heterogeneous agents and their groups and is not as simple as response of averaged representative agent to exogenous information.
The modeling of economic and other social systems by heterogeneous agents already is becoming a widely accepted research method with practical applications. The idea that rational behavior of humans can be replaced by zero-intelligence agents (Animal Spirit) is becoming a real outbreak. The significant simplification of agents by classifying their behavior gives an opportunity of quantitative description of their dynamics, and in exceptional cases it leads to the macroscopic description of the whole social system. For example, the herding model formalized by A. Kirman is applicable for the modeling of ants’ colony as well as for the modeling of financial markets. There is a research group working in this direction in Lithuania, more information in popular presentation about models in development and research you can find on the web site https://rf.mokslasplius.lt/.
- G. Akerlof, J. Shiller. Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Princeton University Press, 2009.
- M. Aoki, H. Yoshikawa. Reconstructing Macroeconomics: A Perspektive from Statistical Physics and Combinatorial Stochastic Processes. Cambridge University Press, 2007.