Throughout the first part of George Akerlof and Robert Shiller’s book Animal Spirits, the authors discuss how human psychological assumptions are missing from modern economic theory and describe the role psychological factors play in determining economic behavior. As I read the first few chapters of the book, I found myself relating these psychological assumptions to the economics of the built environment, and in particular, Seattle’s current real estate market.
Akerlof and Shiller discuss the notion of “fairness” in the reading and show how people strive for fairness, as well as self-interest, in their economic exchanges. This concept plays out in the context of gentrification and housing policy in Seattle. Developers in the city (and in other parts of the Central Puget Sound Region) are rapidly buying up parcels of land that currently provide housing for low-income residents and using this land to construct luxury housing for the middle and upper class. While developers often ignore the issues of displacement and gentrification, they create a clear issue of fairness by making a valued housing asset (location) unavailable for much of the population, including current residents. The City, however, has stepped in to regulate the housing market and correct this issue of fairness. The City has enacted policies that require developers displacing affordable housing units (based on percentage of average median income) to supply replacement affordable housing at a 1:1 ratio. Even with these policies, however, the exchange is often considered by be unfair since developers are able to replace affordable housing units in an off-site location.
Another psychological force, “confidence,” is also a major factor currently at play in Seattle’s economy. Akerlof and Shiller describe confidence as being determined by how others perceive the state of the economy. Confidence in Seattle’s real estate market today is driven by the perceptions that the region will continue to experience significant growth and that major employers, such as Amazon, will continue their upward hiring trend. Announcements that employers will be adding (or keeping) jobs in the region influences positive growth projections, increased residential and commercial development, and an overall perceived sense of confidence in the local economy. Therefore, the economic outlooks of the region’s major actors highly influence the city’s confidence and current trends could be reversed if these outlooks change.
There are many examples of “animal spirits” playing a role in the economics of growing cities, like Seattle. Decision-makers, both locally and nationally, should study and be aware of these forces to better understand economic behaviors and craft more informed urban development policies.