The Simple Dynamics of 'Animal Spirits'

In the tradition of physiological psychology dating back to Wilhelm Wundt, an adaptation-level approach is taken to the level of economic certainty, as measured by the psychologically sensitive unemployment series. Unemployment levels ‘low’ relative to the adaptation level are shown to promote confidence — high ‘animal spirits’ — while the converse holds for ‘high’ unemployment rates. It is suggested that attempts to smooth the business cycle may become counterproductive (to the extent that such policy can be considered exogenous) if they produce less than ‘optimal’ levels of ‘variety’, construed in this context as alternation of confidence levels.