On Human Psychology, and Business Strategy
John Maynard Keynes first tackled the concept of "animal spirits" in his description of how psychology effected the markets.
Keynes Confidence Multiplier - the Keynesian Multiplier - rated the propensity of a consumer to spend, especially her or his propensity to spend part of a stimulus package. You had a choice. Spend your portion of a stimulus package, or save your portion. The more people who decide to immediately spend their portion of a stimulus package, the greater the impact of the stimulus, as that expenditure allowed the person or entity which received your portion to immediately spend, and so on. The higher the propensity to spend funds, the greater the impact. As computers and modelling were growing economic tools during the Depression and the periods following it, there ended up being a multitude of multipliers like the consumption multiplier, the investment multiplier, a government expenditure multiplier, and a confidence multiplier (Akerlof, 16).
Akerlof expands the discussion of the Confidence Multiplier's effect on economies to include Fairness, Corruption and Bad Faith, the Money Illusion, and, finally, economic Stories that effect results. If you have thought about it much, you probably realize that portions of capitalism are unfair. That realization may require closer examination. Involuntary unemployment has an economic cause (or certainly a psychological one), but that doesn't make it fair. The disenfranchised - the involuntary unemployed - seeth at their status which effects consumption. Inflation has an effect - a fairness effect - on aggregate output, as well (Akerlof, 25).
Corruption is a little more obvious, as we have a series of scandals to point to, like the Savings and Loan fiasco in the 80s, the Enron fiasco in the 90s and, more recently, the Subprime Mortgage market. These scandals effected not only their immediate environment, but the whole system. Hear enough about what is bad about a system and you may decide that just maybe your stimulus funds are better put into savings than into a newly "corrupt" investment.
If accounting is the langauge of business, business isn't working very well. Why? Well, after quite a bit of discussion, Akerlof (50) shows that accounting doesn't take into account inflation. Leave out inflation and you don't know what your savings account will really be in five years, your estimate of the current value of a bond will be off, you projection of a stock's price will be erroneous, wage contracts will be spurious, prices will be off (especially those contractually set into the future), and, those wonderful statements your receive about your stock holdings will suddenly be a lot less useful than you had expected.
Economists are supposed to base their predictions on facts, not stories (Akerlof, 54). There is a flaw here that explains why confidence takes a dive during a recession. All consumers hear is statistics. They don't hear stories about what is really happening, nor what economists think should be done. What economists forget is that facts don't drive markets - stories do. Eighteen banruptcies in your zip code or census tract don't mean much until you see those people thrown out on the street (OK, that doesn't happen much any more, I know). Then, the story of their plight will guide your decision making. You want to help, yes. You also don't want to end up in the same position. That effects your relationship to a stimulus package: you'd better save, the story goes, even when consuming is better for the economy. The stories people tell are more important than the facts.
So, some recommendations for your stategizing this summer:
- Start with confidence. Maybe there is a reason to build your team up.
- Make sure things are fair. Sometimes, fairness takes some explaining. You want to be fair to your current team and you want to be fair to your new hires. Fairness to each of those populations may read differently.
- Corruption does have an effect. You have to stand back and decide whether the shrinkage you are undergoing is a boost to limited salaries - or theft. Both effect ultimate profitability in very different ways.
- Southwest Airlines made more money through the last years than other airlines because it made fair estimates of the oil price increases and built those future prices into its contracts. When prices spiked, they had fixed price contracts that helped them weather the storm.
- Stories matter. Employees listen to what you say. If you are going to tell a story, consider what the real message is. Make sure it is confidence building. And, remember, a confidence building story is sometimes hard to come by, so don't just wing it. Finally, remember that your team won't remember the statistics - they'll remember the story. Make sure it is a good one.
Reference
Akerlof, Geroge A. and Robert J. Shiller. Animal Spirits. How Human Psychology Drives the Economy, and Why It Matters For Global Capitalism. Princeton University Press. 2009.
Wikipedia. Animal Spirits. http://en.wikipedia.org/wiki/Animal_spirits_(Keynes)