Sozialalmanach - Caritas Luxembourg

thinking. The discipline of economics will have to shed its ‘hard science’ pretentions,
and accept its role in the ‘social sciences’. It will have to become more modest too. But
this is easier said than done – an entire generation has been brought up to believe in the
concept of the efficient market. Institutions will continue to cling to this concept, and
a paradigm shift will be more difficult than recent revelations would justify, especially
since alternative constructs are not readily available.
Paul de Grauwe intimates that perhaps the root cause of this academic oversight
was the error of modern mainstream economics in believing that the economy is
simply the sum of microeconomic decisions of rational agents. The profession of
economics was so caught up in this rational actor and market efficiency paradigm
that it completely forgot some of the most elementary dynamics of economic crises:
animal spirits. Fundamental to Keynesian economics is the idea that instead of rational
actors, much economic activity is governed by animal spirits, best understood as
waves of optimism and pessimism 39 . Left to their own devices, capitalist economies
will experience manias, followed by panics. It is the function of the modern state to
sail into the wind of these excesses: when the population over-spends, they should
over-save, and vice versa. In the evolution of the paradigm shift from Keynesianism to
monetarism and rational expectation macroeconomics, the study of animal spirits has
almost completely disappeared from mainstream macroeconomics, and the economics
of finance. When expectations are assumed to be rational, intellectual models little
room for waves of pessimism and optimism to exert an independent influence on
economic activity. As time went on, more and more professional economists were drawn
onto the bandwagon of passive acceptance of the dominant intellectual paradigm.
Most academic economists shied away from probing the underlying vulnerabilities of
loose macroeconomics, financial deregulation, mortgage and pension markets, and
distorted incentives and bonus schemes in the big financial institutions that exacerbated
economic instabilities. Moreover, the high level of sub-disciplinary specialisation in
the field of economics made it difficult for any single academic to put together all the
pieces. This intellectual inertia and sub-specialisation blinded academic economists
to the underlying causes of the crisis. In this respect, the current crisis is a wakeup
call, re-introducing the concepts of animal spirits, imperfect information, cognitive
limitation, and heterogeneity in the use of information, back into macroeconomic and
financial market modelling and analysis.
39 Grauwe, De (2008); see also Akerlof & Shiller (2009).
165