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Chapter 12e

The Animal Spirits

by John Maynard Keynes Icon

5 minutes • 1003 words

Table of contents

How to mitigate the effects of our ignorance of the future

Human nature has an instability wherein most of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral, hedonistic, or economic.

Most of our decisions to do something positive, of which the full consequences will be realized after many days to come, are caused by animal spirits.

These spirits spontaneously urge us to action rather than inaction,* and not from the result of a weighted average of quantitative benefits multiplied by quantitative probabilities.

Superphysics Note

Here, Keynes exposes his big misunderstanding of Descartes’ animal spirits which he confuses for the propensities of the chakras. Animal spirits or chi or prana are just energy which drives action. That action can be anything, as investing action, gardening action, eating action, etc. It is the chakras the impose what action that energy will course through. Optimism is generally a product of the higher chakras. But the optimism in negative actions, such as winning in gambling, successfully robbing a bank, or quietly stealing a car is from the lower chakras.

Enterprise only pretends to be mainly actuated by the statements in its own prospectus, however candid and sincere.

Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come.

Thus, enterprise will fade and die if:

the animal spirits are dimmed
the spontaneous optimism falters

These would leave us to depend only on mathematical expectation though the fears of loss may be as reasonable as the previous hopes of profit.

It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. *

Superphysics Note

This is wrong. A long term hope for the profitability of coal-fired plans would actually be detrimental to life on Earth. Enterprise by itself is not immediately moral or immoral just as patience or waiting is. Quantitative measures such as profitability is impotent in determining the morality of an action. This has been discussed extensively by David Hume. Qualitative measures that match the dharma of society are the better basis for morality, or what is better or worse for society.

But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits. In this way, the thought of ultimate loss which often overtakes pioneers is put aside in the same way that a healthy man puts aside the fear of death.

Unfortunately, this means that:

slumps and depressions are exaggerated in degree
economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average businessman.

The fear of a Labour Government or a New Deal might depress enterprise. But this is not the result of:

a reasonable calculation or
a political plot

It is the mere consequence of upsetting the delicate balance of spontaneous optimism.

Therefore, in estimating the prospects of investment, we must have regard to the investors':

nerves and hysteria
digestions and reactions to the weather

This does not mean that everything depends on waves of irrational psychology.

On the contrary, the state of long-term expectation is often steady.

Even when it is not, the other factors exert compensating effects.

We merely remind ourselves that human decisions affecting the future, whether personal, political, or economic, cannot depend on strict mathematical expectation.

This is because the basis for making such calculations does not exist.

It is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance.

How to mitigate the effects of our ignorance of the future

There are many individual investments with a prospective yield that is legitimately dominated by the returns of the near future. This is because of the operation of compound interest combined with the likelihood of obsolescence with the passage of time.

Buildings are the most important class of very long-term investments.

Their risk can be frequently transferred from the investor to the occupier
Or at least the risk can shared between them, by means of long-term contracts.

The risk would be outweighed in the occupier’s mind by the advantages of continuity and security of tenure.

In the case public utilities, a substantial proportion of the prospective yield is practically guaranteed by monopoly privileges coupled with the right to charge such rates as will provide a certain stipulated margin.

Finally, there is a growing class of investments entered upon by governments.

They are influenced in making the investment by a general presumption of prospective social advantages from the investment.

I have given full weight to the importance of the influence of short-term changes in the state of long-term expectation, as distinct from changes in the interest rate.

Yet we are still entitled to return to the changes in the interest rate as exercising a great, though not a decisive, influence on the investment rate.

Only experience, however, can show how far management of the interest rate can continuously stimulate the appropriate volume of investment. *

Superphysics Note

All that Keynes’ system did is to create a lose-lose situation where raising interest rates causes recession, but lowering interest rates causes inflation. Our solution is to bring back barter so that it can absorb the unemployment and excess capacity during recessions. This will create a win-win solution where interest rates are much less relevant. This was the case in Classical Economics before the Federal Reserve was established.

I am sceptical of the success of mere monetary policy directed towards influencing the interest rate.

The State can calculate the marginal efficiency of capital-goods:

on long views and
on the basis of the general social advantage.

The State should take more responsibility for directly organising investment.

This is because the fluctuations in the market estimation of the marginal efficiency of different types of capital, calculated on the principles described above, will be too great to be offset by any practicable changes in the interest rate.