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Nobel Prize-winning economist Robert Shiller came to the New York Stock Exchange to discuss his new book, “Narrative Economics.”
It’s a book about storytelling: Humans understand the world by telling stories, Shiller says.
“The most natural thing in our brains to talk about is gossip, okay?,” Shiller said. “We love these stories. We center around one guy and we talk about that person incessantly. We’re not exactly fully rational.”
I asked Shiller why two recent narratives have “gone viral” this year:
1. We are going to have a recession in 2020: “People are fascinated by this idea of a business cycle, so they say that we’re overdue for a recession or they say that we’ve got an inverted yield curve. These are stories that have been amplified and they’ve gotten to the point where they may be self-fulfilling prophecies. The inverted yield curve causes a recession because people think it will.
2. Tariffs and trade wars are bad for the global economy: “The modern version of it came in in the Great Depression. And it was about retaliation. Back then, if you go back 200 years, tariffs were just there as a way to — they didn’t have an income tax, they had to raise money somehow, so it wasn’t so narrative-based. But then they start to think, yes, it’ll be a war — a trade war and that sounds really bad. And that got people scared.”
Why economic narratives are like a disease outbreak
Shiller believes we should spend more time studying why some economic narratives “go viral.” The use of medical terms “viral” and “contagion” to describe how we tell and transmit narratives is deliberate. Shiller says it is time to start thinking of these narratives as a form of disease that are transmitted by word of mouth, and that follow contagion models described by epidemiologists.
This was difficult to do until data analytics platforms like Google Ngrams made it possible to track mentions of these narratives in books and newspaper articles going back more than 100 years.
Shiller notes that these narratives follow “epidemic curves” very similar to outbreaks of infectious diseases. They tend to be bell-shaped: they have an initial “contagion” period where the outbreak occurs, then peaks, then declines.
For example, in a recent lecture Shiller noted the similarities between the charts comparing the outbreak of an Ebola epidemic in Liberia in 2014 and the global unemployment rate for the last 20 years with a notable spike up during the Financial Crisis that began in 2008, spiked in 2009 and 2010, and then began tailing off. “It looks kind of like a pair of epidemics two different outbreaks of a disease called pessimism or financial uncertainty,” he said.
Machines are taking our jobs: The fear is very old
Shiller notes that many economic narratives that have “gone viral” today — like worries that machines will take all our job — which are remarkably old. Here are a few:
Labor saving machines. Fears of these machines taking jobs began appearing in newspaper articles in the 1830s, particularly regarding machines replacing agricultural labor.
Technological unemployment. The fear of robots taking over jobs–this time in the manufacturing industries, particularly autos–was a major issue in the 1920s and 1930s, but concerns tapered off over time.
Automation. The idea that machines would control machines — that there would soon be a “scientist in a control room pushing buttons and running a factory with no employees” as Shiller phrases it — became a major topic of discussion in the 1950s.
Artificial Intelligence. This most recent buzzword did not even show up as a relevant topic until about 1960 and only really took off about 1980. Surprisingly, it seems to have already peaked as a topic of interest.
What does all this worry about job loss amount to? “Well, other people at other times are more similar to us than you’d even think. This room [at the NYSE, built in 1903] was pretty much the same back then. … They were worried about robots, too.”
Supply-side economics: How this narrative changed the world
The combinations of these narratives can create super-narratives that do more than just go viral. They can influence public policy and millions of lives.
Take the narrative around “supply-side economics” — that economic growth can be encouraged by decreasing regulation and lowering taxes. Who is not in favor of lower taxes, particularly if it is accompanied by the miracle of economic growth? Shiller notes that the term went viral in the early 1980s, along with other terms like “Laffer curve” and “leveraged buyouts.” It was associated with narratives of extremely high tax rates in European countries and the deleterious effect it had on productivity there, about narratives around “welfare mothers” and of narratives that real estate taxes were so high that homeowners could no longer afford their homes.
This narrative proved so appealing that under the Reagan administration the top US federal income tax bracket went from 70% to 28% and “touched off an intense public mandate for tax cutting,” Shiller writes.
Why bitcoin went viral
Shiller notes that bitcoin’s amazing popularity can be explained because it is tied to many different narratives, including an anarchy narrative (use of the term began around 1880 and is tied up with freedom and the later “hacker ethic”), the desire for economic freedom, the fear of economic inequality, and the feeling of helplessness.
There’s another powerful narrative around bitcoin: a cosmopolitan class narrative — the desire of many to identify with advanced technologies and be a part of the future. “And it’s a matter of identity,” Shiller said. “You know, people are looking for ‘who am I?’ So, in the case where we’re worried about this computer age developing, we want to somehow be part of it. We want to be part of the ‘in’ people, and so there’s a real easy way to do it. Buy some bitcoin. That is so easy to do. You don’t have to understand, but now you’re a part of it.”
Why people make bad economic decisions
Shiller won the Nobel Economics Prize in 2013, largely for his contribution to behavioral economics, which studies how psychological factors impacts economic decisions. One key insight: humans do not act rationally. They don’t buy high and sell low, as classical economics said they would. They often do the opposite.
Why, for example, did investors continue to sell stocks at the very bottom of the Financial Crisis in March, 2009, even after the market had declined by more than 50%? Classical economics would say a rational person would not sell that far down.
Shiller insists this happens because the brain uses short-cut rules (Shiller calls them “heuristics”) that might work in the short-term, but are often bad long-term.
“So, if you’re a caveman and you were walking through the woods, and you see a tiger maul somebody, you don’t want to walk there ever again, okay? It’s just — it’s not even rational, right? You just feel the terror. But someone might point out, well, the tiger isn’t around here anymore, you know? Why are you [afraid to walk there]….It was something that evolved to protect us when we’re even potentially more irrational. It’s something that works- if you get scared by 2008, you stay scared for a while, because the heuristic doesn’t assume that you know what’s going on. Just be generally scared and careful.”
Fear is extremely potent as a deterrent: that fear of a loss is much greater than pleasure from a gain is one of the key insights of behavioral economics.
How potent is fear? Shiller noted that one study he did found that an earthquake made people who had been in it fearful of the stock market.
Why? “That makes no sense rationally. But you’re just generally fearful after an earthquake.”
Economic forecasts are mostly “worthless”
Why is economic forecasting so bad? In his book, Shiller points to the dismal record of economists: “They can accurately forecast macroeconomic changes a couple quarters into the future, but for the past half century, their one-year forecasts have been on the whole worthless.”
Shiller thinks this happens because of excessive group think: “Experts, when they get together in committees, they get kind of shy about expressing thoughts that are not accepted, not based on accepted theories and wisdom. So they only refer to a certain paradigm and they’re blind to the [other paradigms].”
Shiller’s conclusion is that we need to spend more time studying these narratives and how they are constructed: “We have to recognize that people are not rational and their attention is grabbed by certain narratives, and they live on as if that narrative were true for a while until they forget it.”
A better understanding of narratives might also help improve the dismal science of economics: “With economic events coming again and again for no apparent cause, it would be a time to think whether economic theory could stand some fundamental improvement.”
