DEFINITION: The phrase “animal spirits” refers to the fact that much of human action in general, and economic action in particular, is motivated by factors such as instincts, proclivities, and emotions, rather than “pure reason.”
ETYMOLOGY: The word “animal” derives from the Latin noun, animal, animālis, meaning “animal.”
The Latin animal is formed from the adjective, animālis, animāle, meaning “living,” which is itself connected to the noun, anima, meaning “soul.”
The noun “spirit” derives, via Middle English and Old French, from the Latin noun spīritus, spīritūs, meaning ‘breeze,” “breath,” the “breath of life,” “divine inspiration,” “high spirits,” or “pride.”
The word spīritus, in turn, is connected with the verb spīro, spīrare, meaning “to blow” or “to breathe.”
USAGE: The phrase “animal spirits” entered economic parlance in 1936 with the publication of The General Theory of Employment, Interest and Money, by John Maynard Keynes.
However, the phrase became known far beyond the bounds of the academic economics world in the wake of the international financial crisis of 2008, when Alan Greenspan, who had served as Chairman of the US Federal Reserve from 1987 until 2006, began to use the expression in his public comments on the crisis.
Consciously borrowing from Keynes, Greenspan explained that he had had to revise his own earlier conviction that a human being was primarily a rational actor—a sort of glorified calculating machine.
Instead, he had changed his mind and now believed that Keynes was right that much of human behavior, including economic behavior, could only be explained by non-rational factors, such fear, hope, greed, impatience, and euphoria.
Greenspan was asked why he thought everyone had “missed” the fact that the startling increase in real estate prices prior to 2008 amounted to an unsustainable “bubble.”
Greenspan replied that the bankers, Wall Street traders, and other investors at that time did know they were in a bubble. The problem was that they didn’t care.
Why did they not care?
Greenspan said they did not care because they were no longer acting according to reason, but rather were being driven by animal spirits.
More specifically, they were helpless to bail out of the bubble in time because they were overwhelmed by feelings of sheer exuberance, unjustified optimism, and fear of missing out the chance to make still more profits before the music stopped.
Finally, they were driven by the herd effect: When everyone else is running in a stampede, it is not easy to turn away and strike out on one’s own.
Analogously, in the run-up to 2008, everyone was getting rich and this made it nearly impossible for anyone to break ranks and go his own way.
All the foregoing psychological factors are encompassed by the phrase “animal spirits,” which play a much greater role in real-world economic behavior than most theoretical economists would like to think.
Recently, though, a new economic subdiscipline has grown up, which attempts to do just that—namely, “behavioral economics.”