Narrative Economics

In his book Narrative Economics: How Stories Go Viral & Drive Major Economic Events, Nobel Prize-winning economist Robert J. Shiller calls on other economists to incorporate the study of narratives into their predictive models.  He believes the stories we tell each other that go viral are important factors in how economic events unfold.  The book is clearly written and makes its case convincingly, but there isn’t much for individuals to apply to their own lives unless they are economists or politicians.

A simple example of how narratives can cause future events is a viral story about deflation.  At times in the past, people have widely believed that prices were going to fall.  As a result, consumers delayed purchases expecting to buy cheaper later.  This caused spending to fall, and ultimately contributed to sellers lowering their prices.  Narratives can become reality.

Shiller gives many examples of different classes of narratives, including the morality of frugality and conspicuous consumption, the gold standard, automation replacing jobs, market bubbles, evil business, evil unions, and more.

Broadly, the book shows that “popular narratives gone viral have economic consequences.”  Shiller wants “economists to model this relationship to help anticipate economic events.”  He calls on economists to collect data on narratives to facilitate future economic analyses.  He also says “Policymakers should try to create and disseminate counternarratives that establish more rational and more public-spirited economic behavior.”

“When it comes to predicting economic events, one becomes painfully aware that there is no exact science to understanding the impact of narratives on the economy.  But there can be exact research methods that contribute to such an understanding.”  A further challenge is “distinguishing between causation and correlation.  How do we distinguish between narratives that are associated with economic behavior just because they are reporting on the behavior, and narratives that create changes in economic behavior?”

Shiller did a good job of convincing the reader that narratives matter in economics.  However, I have one minor criticism.  In one discussion of bankers and the poor choices they appear to make, Shiller says “It may be best to think of bankers’ behavior at such times as driven by primitive neurological patterns, the same patterns of brain structure that have survived millions of years of Darwinian evolution.”  This unflattering portrayal of bankers’ thinking presupposes that bankers intend to act in the best interests of their banks.  I find this doubtful.  Bankers as individuals all the way up to the CEO have periods of time where they make a lot of money doing things that look good in the short run but hurt the bank in the long run.  This is captured nicely in Charles Prince’s comment, “As long as the music is playing, you’ve got to get up and dance.”  Sometimes, apparently dumb behaviour is actually evil and greedy behaviour.

Overall, Shiller makes a strong case that the spread of narratives should be studied by economists.  However, readers looking for concrete ideas for improving their own investment results won’t find them because this isn’t the book’s focus.