George Akerlof and Robert Shiller, Animal Spirits, Princeton, 2009.
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Herman Melville, The Confidence Man, Norton, 2006.
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Donald Mackenzie, An Engine, Not a Camera, MIT, 2008.
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C. Wright Mills, “The Theory of the Leisure Class” in Veblen’s Century, ed. Horowitz, Transaction, 2002.
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Thorstein Veblen, Absentee Ownership, 1964, Viking Press.
Akerlof and Schiller ask, “Why did most of us utterly fail to foresee the current economic crisis?”, and their answer is that we failed to take animal spirits into account.
My own response is: “What do you mean ‘we’, white man?” Lots of us were uneasy about the twenty-year boom/crash cycle we found ourselves stuck in, but few of us are economists. Lots of people also tried to tell the economists that their models were dangerously unrealistic, but economists were securely protected by tenure and were being rewarded very well by the malefactors who controlled the economy, so why should they care what anyone else said? Economists are smarter than anyone know tons and tons of math, you know.
What are “animal spirits”? According to Keynes (A&S, p.3) animal spirits are the “spontaneous urges to action” of large numbers of people which have unpredictable effects on the greater economy, whereas for Akerlof and Schiller (p. 4) they are “the restless and inconsistent element in the economy”. Thus stated, “animal spirits”, whatever it is that causes the economy to behave erratically, might seem merely to be the active equivalent of the dormitive element in morphine — a big fudge-factor, and just a way of kicking the can over to the psychologists and saying “We didn’t do it! The Second Great Depression is your fault, not ours!” However, in fairness, it’s not quite as bad as that. Akerlof and Schiller do describe several of the factors interfering with economic rationality: variations in levels of confidence, considerations of fairness, bad faith, the money illusion, and the ways people understand their world by means of constructing and telling stories:
But the current crisis bears witness to the role of such changes in our thinking. It was caused precisely by our changing confidence, temptations, envy, resentment, and illusions — and especially by changing stories about the nature of the economy. [A&S, p. 4]
They seem to think of these factors primarily as impurities or contaminants which unfortunately have disrupted the otherwise perfect descriptive / prescriptive rational economy which economists discovered / created / imposed, rather than as evidence that the economic model they’ve been working with for fifty years is no damn good. Almost sixty years ago, in the “Introduction” to Positive Economics, Milton Friedman claimed philosophically that scientists can make shit up and get away with it. For decades this has been professional dogma, and economics grad students who have had trouble believing this have been weeded out. As one consequence of this, during the last several decades economists have been working with a risible notion of individual economic rationality which is neither empirical nor normative, and which was chosen purely because it makes mathematical modeling possible.
Akerlof and Shiller are moving away from this notion of rationality, and in itself this is progress. However, they still apparently hold to the methodological individualism of economics. For them “animal spirits” are a matter of individual psychology and consist of enormous numbers of individual volitions — “aggregates” of “variations in individual feelings, impressions, and passions”. But what we are seeing now is not millions of human atoms happening to do the same thing at the same time. Human atoms are not simple and identical: each has had its own history and formative experiences. And they are not fully independent either, because there are commonalities in their histories, and because they communicate with one another, emulate one another, and persuade one another. Animal spirits are contexted and social: historical, social-psychological, cultural, or sociological rather than simply psychological.
Behavioral economists’ efforts to understand The Human Mind and its evolution are quite welcome, but they’re not going to help explain actual behavior unless they’re integrated into the study of economic history, social forms (including market forms and legal structures), culture, and individual acculturation. In other words, the mysterious friction or turbulence or irrational exuberance or animal spirits baffling economics are just the economic effects of the social and cultural forms that economists bracketed out in their attempt to design neat models, and reminders that the economic description of society is false. During the bubble, everyone who was anybody saw their net worth increasing, and for that reason nobody who was anybody cared about what they saw as minor technical problems in economic theory. (Back when they were successful and admired, economists laughed hysterically whenever anyone mentioned “sociology” or “culture”, but now that they have to keep an eye out for peasants with pitchforks, perhaps they’re behaving with a bit more restraint.)
One of the major forms of animal spirits affecting the recent crash was excessive confidence:
["Overheated economy"] refers to a situation in which confidence has gone beyond normal bounds, in which an increasing fraction of people have lost their normal skepticism about the economic outlook and are ready to believe stories about a new economic boom. It is a time when careless spending by consumers is the norm and when bad investments are made, with the initiators of these investments merely hoping that others will buy them out, not feeling independently confident that the investments are sound. It is a time when corruption and bad faith run high, since they rely on trusting behavior n the part of the public and of apathetic public regulators. This corruption, however, is mostly recognized publicly only after the fact, when the euphoria has ended. It is often also a time when people feel social pressure to consume at a high level because they see everyone else doing so….[A&S p. 65]
Americans are especially susceptible to this error (and for the moment, America’s problems are the world’s problems):
In identifying with capitalism, the American feels that it is fully appropriate to partake of the goods that capitalism provides and makes him want to buy. If he sees something at the mall that strikes his fancy, it is appropriate not to resist it. That is what the story of capitalism is all about. That is what it means to be a good American. [A&S p. 129]
Or, as MacKenzie says, there is
“a vague but pervasive feeling that being “bullish” is “American” and of wide benefit, whereas being “bearish” is un-American and of only private benefit. (An Engine, Not a Camera, MIT, 2008, p. 274.)
Excessive confidence is cyclically pervasive in American history. 150 years ago it was described by Herman Melville, and as much as a century ago it was more scientifically described by Thorstein Veblen. My next two sections will consist mostly of citations from these two authors.
Thorstein Veblen
The current situation in America is by way of being something of a psychiatrical clinic. In order to come to an understanding of this situation there is doubtless much else to be taken into account , but the case of America is after all not fairly to be understood without making due allowance for a certain prevalent imbalance and derangement of mentality, presumably transient but sufficiently grave for the time being. Perhaps the commonest and plainest evidence of this imbalanced mentality is to be seen in a certain fearsome and feverish credulity with which a large proportion of Americans are affected. (Cited by C. Wright Mills in “Veblen’s Century”, ed. Horowitz, Transaction, 2002, p. 109).
Uncritical devotion to the national pretensions being a meritorious habit, it is also a useful article of camouflage, a shelter for gainful purposes and transactions which might otherwise be open to doubt, a means of avoiding unfavorable notice and of securing a profitable line of goodwill. In this sense it has come to have a merchantable value, so that professions of such devotion have become a businesslike matter of course among those who follow “gainful pursuits”. Which weeds out profitless argument and reflection in these premises and dispenses with any irritating afterthought. And men will commonly believe and live up to those things which they habitually profess. That is the meaning of autosuggestion. (“Absentee Ownership”, Beacon Press, 1923/1967).
Herman Melville: The Confidence Man
Melville’s novel consists primarily of a series of dialogues between passengers on a riverboat ascending the frontier-era Mississippi. One of the passengers is a con man who takes on eight different disguises in the course of the trip. The phrase “confidence man” had been coined not too long before Melville wrote his book, and had specific reference to a particularly brazen New York City con man named, inter alia, William Thompson. Thompson’s specialty was to preach the virtues of trust to people and then, after gaining their assent, asking them to lend him something of value in order to prove that they really had learned to trust by trusting the con man with something of value: ‘Well, then,’ continues the ‘confidence man’, ‘just lend me your watch till to-morrow.’ (New Orleans Picayune, June 21,1849).
During those wild and woolly, fraud-ridden, overheated days of American finance, the satirical possibilities of Thompson’s con were immediately recognized by ordinary journalists, and Melville shortly developed the confidence man idea far beyond mere satire:
1.
A man asks how he can resist the baneful spirit of mistrust. The confidence man replies:
“You cannot be sure, but you can strive against it.”
“How?”
“By strangling the least symptom of mistrust, of any sort, which hereafter. upon whatever provocation, may arise in you.” (CM, p. 42)
2.
The confidence man is selling the shares of a failed corporation:
A month since, in a panic contrived by artful alarmists, some credulous stockholders sold out. but, to frustrate the aim of the alarmists, the Company, previously advised of their scheme, so managed it as to get in his own hands those sacrificial shares, resolved that, since a spurious panic must be the panic makers should be no gainers by it. The Company, I hear, is now ready, but not anxious, to redispose of these shares; and having obtained them at their depressed value, will now sell them at par, though, prior to the panic, they were held at a handsome figure above. That the readiness of the Company to do this is not generally known, is shown by the fact that the stock still stands in the transfer-book in the company’s name, offering to one in funds a rare chance for investment. For, the panic subsiding more and more every day, it will daily be seen how it originated; confidence will be more than restored; there will be a reaction; from the stock’s descent its rise will be higher than from no fall….. (CM, p. 30)
Later on, the same man says:
“The depression of our stock was solely due to the growling, the hypocritical growling, of the bears.”
“How, hypocritical?”
“Why, the most monstrous of hypocrites are these bears: hypocrites by inversion; hypocrites in the simulation of things dark instead of bright; souls that thrive, less upon depression, than the fiction of depression; professors of the wicked art of manufacturing depressions; spurious Jeremiah’s; sham Heraclituses, who, the lugubrious day done, return, like sham Lazuruses among the beggars, to make merry over the gains got by the pretended sore heads — scoundrelly bears!” (CM, p. 56)
3.
The confidence man has a plan to unite all of the world charities into one, sell shares on the stock market, and solve all of the world’s problems in a few years:
“But may you not be over-confident?”
“For a Christian to talk so!”
“But think of the obstacles!”
“I have the confidence to remove obstacles, though mountains.” (CM, p. 56) 47-9?
4.
The confidence man does not like questions:
“How is the gain made?”
“To tell that would ruin me. That known, everyone would be going into the business, and it would be overdone. A secret, a mystery — all I have to do with you is to receive your confidence, and all you have to do with me is receive it back, thrice paid in trebling profits.” (pp. 79-80)
Later:
“The other trembled, was silent; and then, a little commanding himself, asked the ingredients of the medicine.”
“Herbs”.
“What herbs? And the nature of them? and the reason for giving them?”
“It cannot be made known”.
“The I will have none of you”.
Sedately observant of the juiceless, joyless form before him, the herb-doctor was mute for a moment, and then said “I give up”.
“How?”
“You are sick, and a philosopher….. a sick philosopher is incurable.”
“Why?”
“Because he has no confidence.” (CM, p. 86)
5.
The confidence man rejects the concept of falsification:
“Because, since the common occurrences of life could never, in the nature of things, steadily look one way and tell one story, as flags in the trade-wind; hence, if the conviction of a Providence, for instance, were in any way made dependent on such variabilities as everyday events, the degree of that conviction would, in thinking minds, be subject to fluctuations akin to those of the stock-exchange during a long and uncertain war.” (CM, pp. 72-3)
6.
Watching two hustlers fleece two college boys at cards, the confidence man rejects the idea that anyone can ever lose:
“Sour imaginations, my dear sir. Dismiss them …. Years and experience, I trust, have not sophisticated you. A fresh and liberal construction would teach us to regard those four players — indeed, this whole cabin-full of players — as playing in games in which every player plays fair, and not a player but shall win.” (CM, p. 62).
Confidence
Behind the “confidence” preached by Melville’s con men lie broader and deeper notions: trust in Providence, optimistic magical thinking, the rejection and condemnation of nay-saying, doubt, and critical thinking, the rejection of negative evidence, the faith that all apparent evil ultimately turns works for good, and the belief that those who suffer are either being justly punished or else being tested by God. These were all commonplaces of American religion and culture of that era, both popular and elite, and both the con men and their victims express versions of the common belief of the time.
Not much has changed: “confidence beyond normal bounds” (and to a lesser degree fraud) have been institutionalized in American culture, and for the last two or three decades irrational exuberance has been the common sense of the middle and aspirational classes. Melville’s book foreshadowed the fraudulent optimism of yesterday’s finance journalism, investment manuals, pyramid scams, self-help books, prosperity theology, pentecostal Christianity, conservative and neoliberal ideology, futurology, transhumanism, cornucopianism, lottery promotion, TV game shows, and (until just recently) real estate advertising. Without countervailing forces the boom and bust cycle was inevitable — and for these theologies busts are a good thing, since they purge the rottenness, punish the lazy and wasteful, weed out the unfit, and reward the worthy survivors.
Economists’ theories, the actions of the Federal Reserve Board, and the conservative / neoliberal deregulation of finance not only failed to take animal spirits into account, by weakening the countervailing forces they helped unleash them, and to the extent that in they they actively encouraged the boom, they were among the irrational “animal spirits” leading us to disaster. (Whether those working in economics, finance, and finance journalism were themselves confidence men, or suckers, or both, should be a topic for future research). But with or without any of these particulars, the fraudulent production and exploitation of confidence are foundational to American culture. Examples could be multiplied from any era, and from any area of American life.
…..
More:
Panurge and The Confidence Man.
“The tweakers are crashing on us.” (Was the irrational exuberance chemically enhanced? And if so, does this mean that we should start pee-testing contestants for the Bank of Sweden Prize?)
