How animal Spirits point the way to behavioural economics

Keynes seemed to use odd terms such as sticky prices and animal spirits.

The notion of animal spirits was just as important to Keynesian analysis as sticky wages and prices. He uses the term to mean the emotions humans feel when making decisions. Economists prior to Keynes, and the current UK Conservative government consider humans to make rational decisions in their best interests. If this was the case almost no one would vote Conservative.

It's not a made up term, it does show Keynes philosophical leanings and it's straight out of the Eton/Cambridge thoroughbred stable.

The term animal spirits was first known to be used about 300BCE. It's from the Latin spiritus animalis and it means 'the breath that awakens the human mind'. In Roman anatomy, it refers to what they thought was fluid surrounding nerve endings and can result in events like mass mania and mass hysteria, human herd behaviour.

The term animal spirits doesn't appear in psychology or consumer psychology but it does figure in finance. It represents emotions like hope and confidence, fear and pessimism. It's also considered to be socially infectious so a mood can be generated among a group or even a large section of the financial sector. Whether the collective mood is high or low can affect the decision making in investment and banking. The mass mood can act against logical expectations. Mistakes are made because of 'animal spirits' acting contrary to common sense.

Keynes knew this and knew the same herd behaviour can happen to consumers. This is one of the reasons he realised the classical laissez faire economic ideology that had preceded his theory was wrong (and is wrong today)

Keynes was pointing the way to behavioural, economics and consumer psychology. A low or pessimistic mood would now be called cognitive dissonance.

Two contemporary American economists, Akerlof and Shiller recommend governments take 'animal spirits' into account in their economic planning. They present strong Keynesian arguments in their 2009 book, Animal spirits how human psychology drives the economy and why it matters to global capitalism. (quite a title for a best selling book).