Animal spirits
Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT
Meaning
Animal spirits is the name John Maynard Keynes gave to the feelings behind investment decisions: confidence, optimism, fear and gut instinct. He used it in the General Theory (1936). Firms invest for years ahead, and nobody can calculate that future exactly. So decisions often rest on mood, not on careful sums. When the mood swings, investment swings too, and output and jobs move with it. Keynes used this to explain why investment is unstable and why the government may need to step in during a slump.
Example
Suppose business leaders in India turn gloomy after bad news, even though interest rates and costs have not changed. Firms put off new factories. Orders for machinery and cement fall, and a slowdown follows. The pessimism has made itself come true.
Don't confuse with
- Herd behaviour: people copy what the crowd does and ignore their own information. Animal spirits are the shared moods of confidence or fear that drive investment, whether or not anyone is copying.
- Rational expectations: forecasts built from all available information and the correct model. Animal spirits are the opposite idea: decisions driven by emotion, not calculation.