Capitalism in trouble? (2)

On Wednesday, I argued that the increasing number of books about capitalism's problems are proof that the system is safe.

I've just finished one of those books, Animal Spirits, by George A. Akerlof and Robert J. Shiller. It is a perfect example of the expression "don't judge a book by its cover".

The cover is beautiful and funny. It shows monkeys hanging from a graph. At the high points of the graph (booms), the monkeys are laughing; at the low points (recessions), they look very worried indeed. That's capitalism.

The problems start inside the book, whose subtitle is "How human psychology drives the economy and why it matters for global capitalism".

The authors couldn't seem to make up their minds whether they were writing for a lay or an expert audience. The individual chapters seem as if they were thrown together to make a book (which the introduction more or less says). And the style is nowhere near as beautiful or funny as the monkeys.

This is a shame for two reasons. First, the authors really are experts. Akerlof won the Nobel Prize in Economics in 2001. He is also famous for a paper ("The market for lemons") that looked at the problems that arise when buyers and sellers have different amounts of information about products, such as second-hand cars. (The "lemons" are the bad cars.)

Shiller, a professor at Yale University, is the best-selling author of Irrational Exuberance and one of the few economists who predicted that the dot-com and housing booms would end in tears.

The second reason it's a shame is that the book's message is an important one. Psychology — or "animal spirits" — play a much greater role in the ups and downs of economies than standard economic theory allows.

Factors such as confidence, and the concepts of fairness (for example, in wages) and corruption, as well as the positive or negative economic "stories" that people tell play a key role in determining how economies develop.

The authors say they are "willing to believe, with some qualifications that [the Scottish economist Adam Smith] was essentially correct about the advantages of capitalism. But we think that his theory fails to describe why there is so much variation in the economy."

One of the important policy recommendations in the book is that governments should set targets for the amount of credit that is granted — to make sure it is not too low.

Puritans may hate the idea, but modern economies depend on borrowing and lending. Without credit, firms can't finance their operations. When the lending stops — as in the current credit crunch — recession is certain.

"Yet we are currently not really in a crisis of capitalism," write the authors. We must merely recognize that capitalism must live within certain rules." True, but hardly novel.

After finishing the book, I was disappointed that I was so disappointed. It is not a bad or uninteresting book. But my "animal spirits" had expected more. The cover, on the other hand, continues to give me endless pleasure.