The following articles look at a recently published book by George Akerlof of the University of California, Berkeley, and Robert Shiller of Yale. They examine the role of what Keynes called ‘animal spirits’ and is the title of the book.
The motivation to make economic decisions (to buy, to sell, to invest, etc) may not be ‘rational’ in the sense of carefully weighing up marginal costs and marginal benefits. Rather it can be one of over-optimism in good times or over-pessimism in bad times. Just as individuals have ‘mood swings’, so there can be collective mood swings too. After all, confidence, or lack of it, is contagious. This motivation that drives people to action is what is meant by animal spirits.
But are animal spirits a blessing to be nurtured or a curse to be reined in? Should governments seek to constrain them?
An economic bestiary The Economist (26/3/09)
Good Government and Animal Spirits Wall Street Journal (23/4/09)
Irrational Exuberance New York Times (17/4/09)
Animal Spirits: A Q&A With George Akerlof Freakonomics: New York Times blog (30/4/09)
Questions
- Describe what is meant by ‘animal spirits’ and their effects on human behaviour.
- Why may animal spirits make economies less stable?
- How may animal spirits help to explain exchange rate overshooting?
- Discuss whether governments should seek to constrain animal spirits and make people more ‘rational’? Also consider what methods governments could/should use to do this?
In an earlier news item we saw that the global recession has hit the demand for organic produce. The same is not true for Fairtrade products as a global survey published on 17/4/09 shows (see). Awareness of Fairtrade products continues to grow as do sales. The articles below look at the findings of this survey and at the explanations behind it.
UK: Fairtrade Flows Against Economic Tide Namnews (20/4/09)
The government must act on fair trade now Public Service Review: International Development Issue 13 (20/4/09)
Fairtrade a hit with shoppers as demand rises despite credit crunch Glasgow Daily Record (17/4/09)
Link to short videos from the Fairtrade Foundation; Link to facts and figures on Fairtrade Fairtrade Foundation
Questions
- Consider the reasons why Fairtrade sales have increased while sales of organic produce have declined.
- Does purchasing Fairtrade products mean that consumers are not seeking to maximise their consumer surplus?
- What economic challenges face Fairtrade producers? How should governments help the Fairtrade movement?
- Is the liberalisation of trade in the interests of Fairtrade producers?
When anyone buys assets – shares, a house, a car or whatever – one important consideration is their likely future value. But the future is uncertain. Your decision to buy, therefore, depends not just on the direct return of the asset (the rate of interest or the pleasure from using the asset) but also on your predictions about the future value of the asset and your attitudes to risk. But with the future of markets so uncertain, or at least the timing of market movements, what’s the best thing to do? The article below considers some of the issues.
The irrelevant future Investors Chronicle (6/4/09)
Questions
- Distinguish between ‘risk’ and ‘uncertainty’.
- What is meant by a ‘bear’ in the context of investing in shares? Explain why ‘intelligent bears’ would ‘leave some money in the market’.
- Faced with uncertainty, why might sticking to a simple ‘do nothing’ rule be the best policy?
- If capital markets were efficient in the strongest sense, where everyone has perfect information about the future, would people be able to make large returns on investing in shares and other assets?
The ‘tragedy of the commons’ refers to the overuse of common land. If people can freely graze their animals on such land and have no responsibility for maintaining it, then the land will be overused and everyone will suffer. The problem is that the benefit of using the land occurs to the individual whereas the cost is collectively incurred.
There are many modern examples of the tragedy of the commons and the articles below look at some of them. Perhaps surprisingly, not all cases of the use of common resources end in tragedy; some common resources are used sustainably. A more thorough analysis must involve deeper questions of human motivation and behaviour.
IT’s tragedy of the commons Datamation (IT Management) (8/4/09)
The Tragedy of the Commons TechFlash (7/4/09)
Encarta’s failure is no tragedy Guardian (7/4/09)
How Self-Interest Destroyed The Economy The Huffington Post (23/3/09)
What does The Pirate Bay ruling mean for the web? Telegraph (17/4/09)
Tragedy of the Commons The Manila Times (23/3/09)
Questions
- Explain how the tragedy of the commons arises and give some examples other than common grazing land.
- How and why does the tragedy of the commons occur in information technology? Consider the benefits and costs of the ‘fix’ to the problem advocated in the first linked article.
- Does the case of Wikipedia (see the third linked article) disprove the proposition that common resources will be overused?
- To what extent is free access to content (music, newspapers, videos, books, etc.) a tragedy of the commons? Is the only solution to devise an effective charging model that rewards content creators?
Whilst a recession has a devastating impact on many industries – not least construction and related sectors – there are some firms who will fare much better during a recession. Firms who have products whose demand is income inelastic, or which are even inferior, will feel the impact of the recession much less than those whose goods have a more income elastic demand. The two articles below consider jobs and businesses that are less likely to suffer in recessionary times.
Slump busters: jobs that beat the downturn BBC News Online (27/11/08)
Riding the recession: how some businesses are doing well in the downturn Times Online (23/11/08)
Questions
- Define the terms (i) “normal good” and (ii) “inferior good”.
- What will be the value of the income elasticity of demand for (i) a normal good and (ii) an inferior good?
- Discuss strategies that firms can adopt to minimise the impact of an economic downturn on (a) their total revenue and (b) their profitability.