Sunday, February 14, 2010

What I've been reading

Animal Spirits : How Human Psychology Drives The Economy And Why It Matters For Global Capitalism by George A. Akerlof and Robert J. Shiller. I am not sure how many more books we need on the lines of Black Swan for people to understand what's at stake. We are not rational beings, period. The food we eat, smoking, credit cards, mortgage, friends, colleagues, parents, neighbors and the man in the mirror - none of  them are rational. It's just quixotic to expect the "invisible hand" to be operated by transcendental rational creatures. Everyday neuroscience is exposing our irrationality and behavioral economics is a pioneer to decimate the "beautiful" mathematical models albeit with limited success so far.

The first part of the book exposes what the economists ease out of their models, the irrational animals spirits (not in context of looking down on animals) driven by five main factors - Confidence, Fairness, Corruption,
Money Illusion and Stories. Although this book is primarily a Keynesian vs Friedman economics argument, it has lot more to offer in terms of human psychology which cannot be quantified by any models.

Here's Paul Samuelson's remark's on Milton Friedman  -  "Friedman is like the little boy who knew how to spell banana but did not know when to stop."

That's probably the issue with anyone who reads Hayek, Friedman et al they get polarized and stop reading or listening to everything else. They need to grow up. I can relate to this because I have been there and done that. But at the same time I have lived in pre-economic boom India for 16 years and I know what it looks like without capitalism.You cannot start to understand how government can corrupt the whole society without living in it and liberals need to learn (if possible live) that too. We need to find a middle ground without polarization.
Second part of the book gives some basic (non statistical for ease of understanding) answers to eight questions which some of us long to know the answers. 



1. Why do economies fall into depression?
2. Why do central bankers have power over the economy? 
3. Why are there people who cannot find jobs?
4. Why is there a trade off between inflation and unemployment in long run?
5. Why is savings for future so arbitrary?
6. Why are financial prices and corporate investments so volatile?
7. Why do real estate markets go through cycles. 
8. Why is there special poverty among minorities?


Reading answers to some of these questions, I felt naked being exposed of my past irrationalities. This is book is not an economic panacea but an urgent call that needs to heeded before the next irrational exuberance (everyone uses that Alan Greenspan's phrase, why can't I?). Sometimes it makes me wonder, how will I be reacting to the next bubble? Will it be obvious for me to see it? Or I am going to be just perpetually paranoid? How much of my irrationality can I control or is under my conscious control? I am looking forward to get some answers in future.

Here's an interview with one of the authors, Robert J. Shiller:



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