Animal Spirits and Environmentalism

by Ray Grigg

The economy is one of the single most vivid images of humanity’s collective character. The material expression of most of what we are doing and what we profess to be doing can be measured in economic terms. Because this empirical evidence is difficult to dismiss or deny, the comments made by the former Chair of the US Federal Reserve, Alan Greenspan, are particularly illuminating.

Greenspan — known as the “Maestro” because of his insightful skills in managing the US economy — oversaw the conditions leading to the Great Recession of 2008, an economic crisis of seemingly unstoppable circumstances that nearly wrecked the world’s financial structure. This inevitability created an epiphany and a paradigm shift in his understanding of the relationship between economics and human nature.

Greenspan had been a strong believer in individualism. As a kind of libertarian philosopher, he subscribed to the notion that the random distribution of decisions throughout a large number of people would create balanced and healthy economic conditions. The necessary regulating controls, he believed, were inherent elements in a society, so banking and financial rules could be minimized to allow the economic process to govern itself.

The Maestro realized that the 2008 crisis exposed two basic flaws in his logic and strategy (Globe and Mail, Oct. 29/13). He discovered that “a certain kind of rugged individualistic society” was “causing a lot of problems.” And, also, that fundamental market decisions were not being made by the random distribution of individual decisions but by tides of emotional forces — the “animal spirits” of large numbers of individuals were following the dynamics of group behaviour. Economic activity was being guided more by human psychology than mathematical formulas. “Animal spirits”, he concluded, “are not random events, but actually replicate in-bred qualities of human nature”. Greenspan’s new perspectives, as outlined in his recent book, The Map and the Territory, are radically different from his old ones.

He now believes that behavioural psychology plays an important role in market activity, no longer subscribing to the notion that bankers, if left to act in the own self-interest, will avoid doing harm to others. He always knew that the “irrational exuberance” of “animal spirits” in the human character did have unpredictable market effects but he vastly underestimated their pervasive influence in actual economic activity.

But Greenspan’s most important realization was that Individual people are not inclined to make rational decisions based on their self-interest. Neither are they inclined to make rational decisions based on society’s collective best interest. In reality, the economy is a very human system governed by a feeling species that thinks, rather than a thinking species that feels.

The difference is immense. It reverses the equation explaining economic activity and provides an entirely different understanding of who we are and what we are likely to do. More importantly, it explains what we are unlikely to do. In Greenspan’s words, this “raises questions about whether or not [a] rational long-term self-interest actually describes the way people behave.” When this insight is applied to environmental issues, the ramifications are the both insightful and sobering.

If we are not inclined to act rationally in our self and long-term interest, then we are unlikely to respond to the threats of continuing greenhouse gas emissions, desertification, ocean acidification, species loss, pesticide toxicity, systemic pollution, population increases or any of the litany of serious environmental crises unfolding around us. Not only do these future events seem remotely unreal but — if Greenspan is correct about our economic behaviour —not even knowing about them helps us to act in our own interests. Scientists can warn us to the point of frantic desperation about environmental threats but we are unlikely to respond to their reasoned arguments. The emotional satisfaction provided by our present materialism is sufficient to overcome the consideration of a future ecological apocalypse. The momentum of rampant consumerism — just like the rush to buy in a surging stock market that will inevitably crash — is too enticing to cause worry about prudence and sustainability. Our inclination is to join the crowd, take the risks and hope for the best.

Of course, we do respond when a crisis confront us. If climate change initiates an extreme weather event, we are heroic, diligent and resourceful in rescuing the victims and repairing the damage. Caring and compassion are two of our laudable attributes. But our inclination is to confront the tangible and immediate rather than avoid the abstract and inevitable. We are far better at dramatizing and mythologizing the tragedies of our own making than exercising the foresight to avoid them. If Greenspan’s assessment of our human character is correct, we invite these self-inflicted tragedies because it’s not in our character to do otherwise. Our “animal spirits” keep dominating the precautionary warnings that are often so glaringly obvious. We are programmed to respond to feelings rather than evidence.

If any optimism resides in Greenspan’s insight, it’s to be found in awareness. If we know of this failing in our character then we can make conscious efforts to avoid being victimized by it. In economics, we can institute stringent controls to regulate markets. In ecosystems — where damage is rarely repairable — we can stop defying the laws of nature and limits. We can harken to the dramatic signs of environmental deterioration, imagine the results of them being progressively dismantled, then take the pre-emptive measures to avoid the inescapable consequences.

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