I suspect its a good job that Akerlof & Shiller are respected economists in their field, as this book takes a large swipe at large parts of their profession and lands some pretty strong blows. For many years the main move in economics has been to move the field towards a science. Though the authors may not put it that way, they are re-emphasising the social aspect of the field, bringing to the fore such topics as fairness, corruption and stories.
So this book takes the step beyond Dan Ariely and makes the link between behavioural finance and real world economics. Yet there is a nagging doubt. They ask eight questions and give eight answers. Each is compelling (though the trade-off between inflation & unemployment is a bit heavy) but I am aware that there are other, different, answers with stories that many find equally compelling, if not more so. Who is right? We can sometimes see if something is wrong, but as the ongoing Keynes/Hayek debates show, for many complicated situations its hard to know. And basically this covers pretty much anything in macro economics!
Clearly one of their aims is to show some of the inadequacies of current economic approaches. In the first chapter they are dismissive of the measures of confidence that are out there. I wondered if this was fair. They state these may measure something other than animal spirits and suggest they are better indicators of future income and expenditure. I emphasise the ‘may’ as it is clear to me that these two concepts are intimately related. The correlation may not be perfect, but I’d put money on it not being zero either. The second thought I had was that even if current measures are not quite right, then perhaps it is possible to construct something that does. Such a measure would probably be poor, especially in the beginning, but if animal spirits are as important as the authors suggest then surely something that is approximately right is an improvement on nothing at all.
These, however, are minor points relative to the strength of the book as a whole. Reading it will enhance your understanding of both economics & people. The authors may not be able to prove that what they say is right, but I doubt anyone will prove them wrong and that is perhaps the best we can do for now.