Sunday Books: Economics = high school drama

Did Keynes go to Ridgemont High?
Did Keynes go to Ridgemont High?

Being in the lobbyist business is a reminder – sometimes painful, always amusing – that we never really left high school. Every psychological issue from high school friends, frenemies, and not-so-friends comes forward: who knows whom, who is rising, who is falling, hooking up, breaking up, parents are divorcing, stuck in study hall – what else? Feel free to add to the list.

Economics is pretty much the same thing, or so argue the authors of Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. In the early pages where I find myself, the book already comes across as a foil to Sowell’s tome Basic Economics that I read over several weeks recently.

Thomas Sowell’s pro-free market, fiscally conservative approach assumes that the markets will always do their thing and government interference is just meddling. For example, rent control actually creates a housing shortage by holding down supply and satisfying the demand of those who don’t really need it.

Meanwhile, Animal Spirits argues that human psychology sometimes acts counter to what the market would dictate. Human strengths and frailties like confidence, fairness, and bad faith influence exchanges as much as do supply and demand. What would Adam Smith say about a study cited in Animal Spirits about the fairness of a store raising the price of snow shovels after a snowstorm?

[T]he rise in demand…should entail a rise in price. But 82% of the respondents [in the study] thought that an increase in the price of snow shovels from $15 to $20 in the wake of a storm would be unfair. The hardware store, which has experienced no increase in its own cost to purchase the snow shovels, would be taking advantage of its customers’ hard luck. Indeed, Home Depot appears to have reacted to such sentiments after Hurricane Andrew in 1992, It avoided charges of price gouging by absorbing a large fraction of its increased costs for plywood.

Another way to view it is that intangibles like fairness are really another kind of cost. Home Depot pays the excess cost reflected by holding the price of plywood down, but reaps a similar profit in the form of grateful customers who will return to buy more stuff.

big0691142335Animal Spirits takes a Keynesian approach in its view of government and the economy. Government, say the authors, is not the meddling, naive do-gooder that conservatives claim. Rather ,it plays an integral role in allowing the markets to work by just enough regulation to prevent the markets from consuming themselves.

In the best Keynesian fashion, Animal Spirits, freshly published with analysis of the current 2008-2009 economic crisis, argues that large amounts of government intervention are necessary to get the economy moving again.

I’m sure plenty will disagree, but then again who, other than your very BFF bestest best friend, did you agree all the time with in high school?


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