The Confidence Fairy versus the Animal Spirits—Not Really a Fair Fight
By Robert Higgs | Wednesday August 3, 2011 at 11:28 AM PDT
The humor columnist for the New York Times, Paul Krugman, has recently taken to defending his vulgar Keynesianism against its critics by accusing them of making arguments that rely on the existence of a “confidence fairy.” By this mockery, Krugman seeks to dismiss the critics as unscientific blockheads, in contrast to his own supreme status as a Nobel Prize-winning economic scientist.
The irony in this dismissal, as others, including my friend Donald Boudreaux, have already pointed out, is that Krugman’s own vulgar Keynesianism relies on a much more ethereal explanatory force for its own account of macroeconomic fluctuations—namely, the so-called animal spirits. The master himself wrote in The General Theory: “Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die. . . . [I]ndividual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits. . . .” (p. 162). Because Keynes conceived of his “animal spirits” as “a spontaneous urge to action rather than inaction” (p. 161), he of course had no way to explain their coming and going or to measure or evaluate them in any way. They are as surreal as a ghost—when and why they come and go, no man knows or can know. Such is the force that drives the ups and downs of private investment in Keynesian economic theory, and such theory unfailingly drives Krugman’s commentaries on the recession and on the possibility and effective means of recovery from it.
Regime uncertainty, however, has a much more grounded basis. In my own research on the topic, I have presented evidence derived from (1) a mass of testimony by investors, businessmen, and other contemporaries, (2) voluminous historical facts on the character of government actions that reasonable people had every reason to interpret as theatening the security of their private property rights, (3) variations in the structure of investment, especially as between short-term and longer-term projects, and (4) specific twists in the term-structure of returns on private corporate bonds, as well as other relevant evidence on the behavior of financial markets.
As against this varied and substantial evidence, what does the proponent of animal sprits have to offer? Well, nothing at all. The idea is purely fanciful, the product of Lord Keynes’s fertile imagination.
However, we would do well to note that in the section of his book where Keynes introduces the idea of animal spirits, he also discusses it in a way that makes its effects somewhat similar to those of regime uncertainty as described in my own writings.
This [operation of varying animal spirits] means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labour Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent;—it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we must have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.” (p. 162, emphasis added)
Although Keynes greatly underestimated the degree to which investors’ expectations about the security of their property rights rest on perfectly rational grounds for fearing what a Roosevelt administration or an Obama administration might do, he recognizes that, whatever the basis for variations in the flow of animal spirits, business confidence plays an essential part of driving private investment. Paul Krugman, please reread your master’s masterpiece.
Tags: Economics, Employment, Entrepreneurship, Great Depression, Power, Presidential Power, Property Rights, Regulation, Taxation, The State, Uncategorized, Unemployment 
Nice article, but I think it contains one error: it assumes that the proclamations in Krugman’s columns are based on any kind of honest analysis, even based on flawed premises.
Even while he has a background as an academic, Krugman’s current role now is purely that of a polemicist, acting on behalf of the banking establishment. You can point out inconsistencies or contradictions with Keynes all day and it will not faze him, nor his readers. Unfortunately.
Scott Bieser | Aug 3, 2011 | Reply
@Scott...sad, but true.
lizzie | Aug 3, 2011 | Reply
I agree with Scott. To take Krugman’s positions seriously, as the product of academic thought which has been rigorously tested against sound logic, is to give him far too much credit. Krugman has long since abandoned the field of serious scholarship.
Darryl | Aug 3, 2011 | Reply
“Humor columnist.”
Nice. I’ll use that.
Brad Delung | Aug 3, 2011 | Reply
I frankly do not see any evidence that Krugman nor any other Keynesian polemicist have the slightest understanding of what Austrians are actually saying. Otherwise, they would construct a workable facsimile of our position if only to create a straw man. None of them can do that and they never will.
Their generic response to Prof. Higgs’ work is to explain that Keynes has his own theory of uncertainty too, so therefore the Keynesians must really understand the Austrians [end of discussion]. That Krugman and his minions can seemingly instantaneously forget such an essential concept of their “school of thought” depending on the circumstances suggests that they are not only dishonest, but just not that bright.
Bob Roddis | Aug 3, 2011 | Reply
Actually Scott, I think Paul Krugman honestly believes this-banking establishment or no. I personally think that when people say things, they honestly believe them to be true. Really, philosophers as far back as Plato have pointed out that no-one advocates what they believe to be false or evil.
To claim that they are puppets of some shadowy elite or willing conspirators avoids having to accept this hard fact; he honestly believes he is right, and the other side is wrong. Same with us. Same with his fans. Same with anyone else.
Neoconservatives actually do believe the world benefits from America intervening everywhere to spread democracy. Keynesians of all variants really do believe what they advocate. Christian fundamentalists and other theocrats really do believe what they say.
The concept of someone being knowingly evil or factually wrong is foolish on closer inspection. When someone says something is good, they really believe that. I know I sound like a broken record, but I don’t think Higgs is wrong to assume good faith.
To try to assume bad faith or malign intent of one’s opponents is an attempt to run from the real horror; they actually do believe what they are advocating. If someone says that initiating force is acceptable...they actually do think it is acceptable. They don’t believe it to be wrong. When a war monger says we must fight to protect our freedom, they really are deluded enough to think it is threatened.
Power doesn’t make people evil; power makes them really, really stupid. The so-called ‘power elites’ really are a gaggle of incompetent, deluded idiots. Everything they do is really by pure accident. They do these awful things without realizing it at all.
Null Void | Aug 3, 2011 | Reply
In the face off all this criticism, Krugman will simply put out another piece explaining how OF COURSE he knows what animal spirits are but his critics don’t understand the meaning of the words “confidence” or “animal spirits” and that he didn’t use them in the way his critics claim he used them and that his critics are just stupid terrorists without Nobel Prizes so why should anyone listen to his critics anyway?
Mr. Blather | Aug 3, 2011 | Reply
I am a psychiatrist, with no training in economic theory . Krugman reminds me of patients I see with unstable personalities, who are ccnstabtly consumed with anger and reacting in a state of agitation. People like this “think” with their gut, and what passes for analysis is not a calm reasoned review of information, but a boiling rant of emotional bilge. What is more worrisome is that he is held up as a paragon of reason and leadership by NYT and liberals.
Dr J | Aug 4, 2011 | Reply
The real comedy is that organization in charge of Nobel prizes. Krugman for Eonomics? Barack Hussein Obama for Peace? roflol.
Jon Roberts | Aug 4, 2011 | Reply
My issue is not with the basic premise of Keynsianism – that government should boost spending well into the deficit range during a downturn; it’s that no one seems to remember that the other half of his argument is that governments must run a surplus during the ‘good times’ to have the money for deficit spending – thereby running a roughly balanced budget over the longer run. I think the US has had 4 balanced budgets in my lifetime (i’m 58, and didn’t pay attention before the late 60′s).
As such, here in the US, we are at best “Half-Keynsian” in our philosophy – i.e., run deficits under almost every condition. Not a smart plan. Unless you’re trying to buy votes.
Mike | Aug 4, 2011 | Reply
The cargo-cult “science” of economics has become a form of idolatry in which justification for pursuing a given economic policy is provided by the mere citation of a person’s name. So, for instance, if Keynes or Friedman said such-and-such, well then, it must be so.
This is not much different than quoting text from the Koran to sentence an individual to death by stoning.
Of course, economic “science,” unlike quoting from the bible, is buttressed by elegant and sophisticated mathematical formulations, despite the fact that these “proofs” can never be tested under controlled conditions.
Because of this, economic “science” has become a branch of politics, in which economists trot out the results of their latest data-mining eexpeditions, or worse, provide their socio-politico-economic theological opinions in which either their academic credentials or a suitable quotation from their economic “god” provide all the support necessary to “validate” their case.
One result of this, in addition to literally bankrupting nations and ruining the lives of millions of ordinary families, is the farcical existence of “conservative” and “liberal” economists.
This alone should provide pause to anyone who risks heeding the advice of any economist, let alone actually imposing an economic policy upon the guinea-pig citizenry, based purely and solely on an unprovable economic hypothesis.
Any science in which controlled experiments are not possible is not a science at all, it is simply a pseudo-science like astrology (except that astrologists can tell you where the planets will be any time into the future, whereas economists cannot even agree as to the who/what/where/how of PAST economic dislocations).
Economists should all be required to read the definition of a “cargo cult” science as developed by the great physicist Richard Feynmann.
JA | Aug 4, 2011 | Reply
And, finally(?), the market, etc, surely look uncertain to me and everyone else, for the past couple years.
ralph | Aug 4, 2011 | Reply
Of course, Krugman will never accept the possibility that his own recommendations might be doing more harm than good.
As with the great depression he has already begun resorting to the ad hoc approach, “Well gee if we did nothing, all hell would’ve broken loose...”
As if that has not happened already.
http://mises.org/daily/5512/The-Austrians-Were-Right-Yet-Again
RJ Miller | Aug 4, 2011 | Reply
Mock Professor Krugman and his fancy learnin’ all you like. If you read him regularly you would know that he has been prescient in his take on the economy.
Bobboson | Aug 4, 2011 | Reply
That is a paradox of Keynesianism. Deficits are supposed to boost demand but they create business uncertainty with regard to future tax rates and about how the deficits will be financed. This was one of Roger Garrison’s main points.
He was pretty fair to Keynes in that he said Keynes was not a big fan of deficit financing actually; it was a last resort. For vulgar Keynesians it is a a second resort, after monetary easing fails.
Now everything has failed, monetary and fiscal policy.
Greg | Aug 4, 2011 | Reply
The article brings out some great points. However, it does rest on the premise that Mr. Krugman prefers to argue facts rather than a motive perhaps a bit more nakedly ideological. One opposing argument also brought out in the article rests on the premise that the nobel prize confers some type of infallibility on the part of its recipients. I might bring up the current president of the US as an example that disproves this premise on its face. I think rather than the nobel prize enhancing the estimation of the opinions of Mr. Krugman, Mr. Krugman follows in the pattern of those who bedraggle whatever cache may be left in the economics or peace prizes. The article does bring up the interesting argument that perhaps Mr. Krugman is really just one more in the long line of humorists at the New York Rag in recent times.
AG Harris | Aug 4, 2011 | Reply
You’re wrong if you think Krugman is dishonest. He’s crazy. What he says make no sense, but the difference is that he actually believes it.
Bruce Fancher | Aug 4, 2011 | Reply
Krugman’s receipt of the prize reveals the prize to be politicized, meaning the prize no longer has any value whatsoever, save to recognize an political hack extraordinaire.
Keynesian economic “theory” (is that the new word for ‘lie’?) has been proven to be merely a tool for enlarging govt, impoverishing people and removing freedom. That Krugman is a Keyensian is no surprise. He worships at the altar of power.
The real joke is on the amerikan public: you cannot live forever on the backs of others, despite what you were told.
kirk | Aug 6, 2011 | Reply
Pierre Lemieux in his provocative little book, Somebody in Charge: A Solution to Recession?, provides an interesting twist on the interaction between animal spirits and the confidence fairy (pp. 133-53. Keynes conceived of his “animal spirits” as “a spontaneous urge to action rather than inaction” (p. 161), and Lemieux asks, “Why shouldn’t the state be affected by similar animal spirits?” He then argues the animal spirits of the state – the will to action rather than doing nothing in time of crisis is the root of failed policies and the creation of an environment that creates the regime uncertainty which causes the confidence fairy to go on an extended sabbatical.
What I have called the animal spirits of the state – greed, faddish behavior, inefficiency, collectivism, power, and hubris- makes the institution the most dangerous systemic risk in society. The recent economic crisis was an actualization of that risk (p. 152).
John P. Cochran | Aug 9, 2011 | Reply