Re: [Pen-l] Akerlof and Schiller on the real estate bubble

[Sandwichman <lumpoflabor@xxxxxxxxx>]

What Akerlof and Schiller are trying to do here -- propose a counter-narrative to the traditional rational actor model in economics -- is laudable and timely. However, it is also awkwardly executed. The rule is a counter narrative must be at least as parsimonious as the dominant story it seeks to displace (Occam's razor). A & S's "animal spirits" is a loose and baggy monster made even looser and baggier by the catch-all category of "stories". It's also a doubtful stretch to try to pin credit for their concoction on Keynes. Sure, he referred to animal spirits somewhere but he also talked about green cheese (in reference to money illusion). So what makes money illusion an 'animal spirit' rather than a 'green cheese'? 

Instead of applying Occam's razor to their animal spirits, A & S have tied themselves up in a Gordian knot. Elsewhere I have proposed an appropriately parsimonious alternative to the rational actor model. I call it Persona parsimoniae. Instead of rational calculation, Pp's behaviors are guided by habit and custom. Pp has two distinct kinds of needs, absolute or relative, material or symbolic, subsistence or status, necessary or superfluous. And instead of maximizing individual utility through market transactions, physical and social limits to production necessitate non-market social co-ordination of consumption to avoid excessive waste and deprivation. See how simple that is? Three elements, not five, each of them keyed to a characteristic of the dominant model.

On Mon, Apr 13, 2009 at 7:55 AM, Louis Proyect <lnp3@xxxxxxxxx> wrote:

The housing market touched on all aspects of the animal spirits identified by Keynes — confidence, fairness, corruption, storytelling, and money illusion. It's clear, in this market and many others, that those animal spirits help drive the economy and that, to steer it safely, economists and policy makers will have to study such behaviors further and take careful account of them in devising new incentives and reforms.

-- 
Sandwichman
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