Sunday, April 27, 2008

Sunspot and Animal Spirit

05/05/08 revised

(Case Study)
Japan had a big recession for 10 years. Many people were unemployed and had to look for a job.

Recession is so strange: many people can’t live a good life even though they are in well developed society. Price goes down, but simultaneously income goes down. Generally, price goes down more slowly than income. So many people have a hardship in their life.

Recession can always occur in developed countries, because there are a lot of goods there and also people are rich already. If people do not want to buy goods any more for some reason, salespeople cannot sell goods even at lower price, they cannot get income and thus they cannot buy any more. And then, price goes down, income goes down,... It is, what is called, a deflationary spiral.

By the way, why people don’t want to buy goods any more? People feel nervous about buying goods. Why people are so nervous? It’s a psychological matter. Nobody knows. It depends on the situation that people are having. It can be explained by the "sunspot theory".

"Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
(The General Theory of Employment Interest and Money, 161-162)

If you are a graduate student and have taken macroeconomics 1&2 and learned dynamic programming already, you should know about what the sunspot theory is.
(Downloaded from Roger E. A. Farmer)

Note that the sunspot theory doesn't look like the idea of the Neoclassical (King-Plosser type) RBC model or the Keynesian (Kiyotaki-Blanchard type) imperfect competitive models.

The point is that the equilibrium is self-fulfilled. The path to the equilibrium is undetermined and moreover the multiple paths can happen. Nobody knows what equilibrium will happen.

Some economists really support this theory. It seems to me that it describes well the real economy. What do you think of it? Especially if you like RBC, what do you think of this theory?
Let me listen to your idea.


FrostFire said...

The idea of "Animal Spirit" sounds irradiative to me. Actually, I encountered some problems recently and I feel very confused. I would like to talk with you via email, may I?

Taro said...

Dear frostfire-san,

("San" means Mr. or Ms. in Japan.)
Thank you very much for your email and I really enjoyed reading it.

I am really happy to hear that you enjoyed this topic and you really cheer me up to write more about this topic.

The related topics are coming soon. Don't miss it.

If you have a question or disagreement, please feel free to have me a frank email or comment.
Again thank you for your interest.