Animal spirits are the non-calculative drivers of economic decisions: confidence, fear, optimism, and narratives that influence spending and investment, especially when the future is genuinely uncertain.
The Keynesian point
Keynes emphasized that many investment decisions cannot be made by plugging known probabilities into a neat expected-value calculation. When outcomes are uncertain and information is incomplete, firms and households rely on:
- stories about where the economy is going,
- confidence about future sales and incomes,
- conventions (rules of thumb) that can shift suddenly.
“Animal spirits” is shorthand for those shifts in confidence.
How animal spirits move the macroeconomy
A simple channel is through investment demand:
- Sentiment becomes more optimistic.
- Expected profitability rises (or perceived risk falls).
- Firms increase investment and hiring.
- Aggregate demand rises, raising output and incomes.
- The improved outcomes can validate optimism (or, in reverse, validate pessimism).
This helps explain why booms and recessions can be larger than what fundamentals alone would predict.
Practical example
After a major innovation wave, firms may become optimistic about future demand and invest heavily, even though precise forecasts are impossible. If optimism fades (for example, after a financial shock), investment can collapse quickly, amplifying the downturn.
Related Terms
- Expectations
- Uncertainty
- Investment
- Aggregate Demand
- Business Cycle
- Keynesian Economics
- Behavioral Economics