Making Sense of Economic Stories
Review of Narrative Economics by Robert Shiller
Economists don’t put a lot of stock in anecdotes. History, journalism and other qualitative studies without rigorous mathematical proofs are often dismissed as mere “stories.”
There might be some truth to that. But it’s not the insult some think it is. Stories shape our lives and decisions in ways spreadsheets never can.
Robert Shiller’s latest book Narrative Economics: How Stories Go Viral and Drive Major Economic Events corrects the record, calling for scientifically valid study of key narratives in American history and how those narratives have influenced broader economic trends. You might recognize Shiller’s name from the Case-Shiller Home Price Index, which tracks changes in regional housing costs in the US.
Released in late 2019, the book coincidentally borrows from the medical science theory of contagion - an ever-present theory and process amid the global COVID-19 pandemic. Just as viruses spread exponentially, Shiller writes, so do narratives of economic trends and truths. It might seem like a clunky metaphor, but Shiller’s appendix shows he’s done the math. Through graphs of Google News searches for terms like “gold standard,” “housing bubble,” and “automation,” spanning centuries of digitized content, Shiller shows that the prevalence of these terms over time mirrors the arc of an epidemic, rising upward as it spreads, peaking and declining in prominence over time.
More interesting for the average reader is his application of neuroscience and literary analysis. Our brains respond physcially to narrative structure, stories with a dramatic arc increase our oxytocin and cortisol levels, aiding memory and pleasure while heightening our fear response. Over time, story details change but, literary scholars say, most stories fall into one of 20 or so narrative frames - i.e. rags to riches, defeating the monster, tragedy, comedy, etc.
Narratives that urged 1920s Americans to “keep up with the Joneses” led to overspending and speculation. They were followed during the Great Depression by narratives that frugality was decency and that deflation would continue to drive prices down. Combined, these two narratives may have led to a prolonged Depression as households held off on purchases out of propriety or the promise of lower prices. More recently, rapidly appreciating home prices in the early 2000s led to an overheated real estate market and the collapse that followed in 2008.
Shiller notes that one narrative itself is often not enough to drive economic trends, but narratives that build on existing narratives - “narrative constellations,” as he calls them - have a better chance of catching on and driving broader decision-making. The viral narrative of Bitcoin is one example. The notion of a global currency, free from government regulation, appeals to the narrative that government financial systems are either clogged with bureaucratic regulation or cronyism. The narrative that blockchain-based distributed ledger systems and the cryptocurrency they enable might allow the tech-savvy investor to skirt those outmoded governmental systems builds on the earlier narrative of government incompetence and irrelevance. The celebrity and mystery surrounding Satoshi Nakamoto, supposed founder who communicates only by email and has never been seen, heightens the anarchist appeal.
Truth is not enough to stop false narratives, Shiller writes, pointing to Ebola denialism in African villages during a previous outbreak. Recent COVID denialism confirms that fact as well as another feature of narratives - they “thrive on human interest, identity and patriotism.”
Because consumer activity as a whole can drive changes in the overall economy, narratives of downturns or upticks can often become self-fulfilling prophecies. That’s what happened during the 1930s Depression, when narratives of a downturn led many to hold off on purchases which prolonged the spiral. Narratives can amplify underlying trends and tend to have some basis in truth.
In a time of economic upheaval such as 2020, the financial and political press are fashioning new narratives. The “K-shaped recovery” narrative, where high-income remote workers weather the recession just fine while lower-income retail workers struggle to find jobs gets reinforced with each week of new unemployment claims. This narrative resonates with existing narratives of rising inequality, particularly since the 2008 Recession. A new narrative of people moving to less dense suburbs post-COVID pandemic builds on existing narratives of millennial aging and initial spikes in cases and deaths in New York City. While the epicenter of COVID-19 cases has shifted most recently to rural areas like South Dakota, the narrative persists.
The drop in college enrollment in Fall 2020 (4% overall; 9% at community colleges) also reinforces narratives of the declining competitive value of a college degree. During typical recessions, college enrollment rises as laid off workers look to retrain. Logistical and public health challenges have no doubt influenced students’ decisions to return or take time off. Time will tell whether this trend will reverse, but in the meanwhile existing narratives of out-of-control student loan debt, return-on-investment for the average college degree, and college graduates returning to technical school for skills training could compound to supplant the long-standing narrative that a college degree is the price of admission to the middle class.
Overall, Narrative Economics provides a new frame with which to examine new pieces of economic information. Thinking consciously about the background narratives through which we’re putting that information into context is a useful exercise for decision-making and thinking about the broader economic world. Short of that, they’re just good “stories.”