Animal Spirits – the term rose to prominence in economic commentary through George A. Akerlof and Robert J. Schiller’s eponymous book in 2009. In the context of economic decisions, the most significant use of the term is credited to John Maynard Keynes whose 1936 magnus opus The General Theory of Employment, Interest and Money defined animal spirits as “a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities”.
But the use of the term has been traced as back as 1543 to an English writer Bartholomew Traheron, who in the context of surgery, identified an ‘animal spirit’ which sits in the brain, “because it is the first instrument of the soule”. Since then, Arthur Conan Doyle, Descartes, Isaac Newton, Karl Marx and P.G. Wodehouse have all acknowledged the role of these Animal Spirits in their works – mental beliefs and vivacity in influencing social and economic outcomes.
This decade, with a year short spent on recovering from the Covid-19 shock, offers the perfect cross-roads, where India’s economic destiny will be determined by these Animal Spirits. A world learning to live with the virus, which hasn’t necessarily disappeared and the dreams of a $5-trillion economy and the journey to international prominence where India’s voice matters to global outcomes offer a perfect antithesis of sorts. The tilting of balance of outcomes towards the latter requires not just known, traditional enabling factors of governance but a bold embrace of the unknown – a reshaping and seizing of opportunities.
Akerlof and Schiller talked about five characteristics which shape Animal Spirits. As India emerges out of the pandemic, much of these ingredients seem to have lined up nicely like the proverbial ducks in a row. This time not to be hunted, but rather to use the talons itching to turn the tables on the vicissitudes unleashed by the virus.
The first of five cognitive psychological phenomena driving economic self-belief is confidence. Several sectors of the Indian economy have emerged healthier on the other side of the two year journey on the downward and then the upward arm of the V. Large firms have managed to clean their balance sheets, shed the excesses of the previous credit boom and have readied themselves for a fresh round of capital expenditure.
Foreign direct investment not just grew in the last two years, the last financial year set a new record for attracting capital to Indian businesses. New unicorns are being minted every few days in the technology sector. Starting up is no longer either fancy or an outlier and that's a big change from how society viewed entrepreneurship relative to searching for stable jobs till just a few years ago.
The second core phenomenon which has an interplay with Animal Spirits is corruption, which perverts positive development. In India’s case, the disappearance of top-level corruption, march towards greater transparency and disclosure in doing business and a general shake-up of the political-corporate nexus creates positive externalities.
The third psychological phenomenon influencing Animal Spirits is money illusion, in that the human mind prioritises nominal over real. The impact of nominal expansion is usually most visible in India in the real estate sector. Coming out of the previous downturn and supply overcapacity, the sector – a big driver for employment and positive feedback loop into the economy – is picking up again. The wages, at least in the knowledge economy, are comfortably clearing the market.
In a recent article, Neelkanth Mishra, part of the Prime Minister’s Economic Advisory Council wrote – “Economic growth occurs when someone, an individual or an enterprise, takes a risk, and is willing to exchange cash for something that may potentially lose value immediately”. As wages grow in some sectors in real terms, it will create second order benefits for asset prices and hence increase the confidence and the ability in the larger economic system to assume more risks.
Fairness is the fourth factor of a confident psychological economic make-up. As new firms raise capital in high-decibel public offerings and as media covers how a single such issue leads to several dozens of new rupee or even dollar millionaires, a downstream impact is to create new symbols of success from ‘people like us’.
India’s public digital infrastructure and the larger digital entrepreneurial ecosystem have emerged as great levellers. Access to credit, ability to move money, education, vaccines or a hospital admission have all seen significant levelling at the margins. This generates an inherent sense of fairness as a psychological offshoot on top of the ensuing economic productivity.
The final factor driving Animal Spirits is stories. Hardly anyone will deny that the news-flow out of the country has been increasingly positive. Global investors are betting on India. New factories are starting. Expressways and highways are being built at a rapid pace. Symbols of national consciousness are witnessing a transformation.
Economics may be a mental faculty but Akerlof and Schiller demonstrated how it is not necessarily rational. The emotional and ‘gut feel’ aspect of decisions are often underestimated. The Indian economy sits at that crucial juncture, where a significant shift in risk propensity is underway, enabled by a range of structural and governance factors.
Is it sustainable? That short question often defines the gap between the exuberance of expectations and the sober realities of life.
As we step into a new year, we should pay heed to the wise words of Ralph Waldo Emerson, the American philosopher and yet another proponent of Animal Spirits in his work Society and Solitude – “Heat puts you in right relation with magazines of facts. The capital defect of cold, arid natures is the want of animal spirits”.
There is no reason for the cold of despondency to not be unmasked – speaking figuratively, and one hopes quite literally too.
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