Narrative Economics | Robert J. Shiller

Summary of: Narrative Economics: How Stories Go Viral and Drive Major Economic Events
By: Robert J. Shiller

Introduction

Embark on a journey into the fascinating world of ‘Narrative Economics’, as Robert J. Shiller unmasks the power of collective stories in shaping major economic events. This book summary dives into the concept of narrative economics, which uncovers the impact of our shared beliefs and experiences on economic behavior – a side often ignored by traditional economists. Explore riveting examples like the 1929 stock-market crash, the rise of Bitcoin, and the evolution of perennial economic narratives, unveiling the compelling link between economics and the art of storytelling.

Narrative Economics

Understanding the Impact of Stories on Economic Behavior

Economists speak in numbers, often leaving out the messy human stories that are crucial to understanding economic behavior. Narrative economics considers the collective stories that change economic behavior. Modern narratives can describe a shared belief or story by a group of people, such as the popular narrative of the “shrewd businessman” in the United States. Trump capitalized on this narrative to appeal to voters, and it helped him get elected. Narratives also played a role in the stock-market crash of 1929, with stories of ordinary people becoming rich leading to bad investments and the ultimate crash. Economists rarely focus on stories, with the exception of Keynes, who considered public sentiments in his predictions. Understanding the impact of stories on economic behavior is crucial to our understanding of any big economic event.

The Power of Narrative in Economics

In 2008, Satoshi Nakamoto posted a paper that introduced the world to Bitcoin, a cryptocurrency that took the financial world by storm. Bitcoin’s success doesn’t stem from its complex mathematical theory, but the story behind it. The promise of a new way of handling currency, a currency not owned by big institutions, and the idea of being part of a futuristic world has made Bitcoin investors feel like enlightened, techno-savvy citizens of the world. Bitcoin’s success is a clear illustration of the power of narrative in the world of money.

The Economics of Epidemics

Specialization in different fields, while bringing wonderful insights, can be a hindrance due to a narrow focus. Working together can enrich the different fields. One field that economics can learn from is epidemiology. Studying epidemics can offer insights into narrative epidemics. Just like contagious diseases, economic narratives spread through people, media, and technology. They follow a similar pattern as disease epidemics, with a rapid rise followed by a slowing process. When people lose interest and become outnumbered by those who are not contagious, the story dies. Bitcoin is an example of a contagious economic narrative that matches the shape of a disease epidemic. Studying the pattern of epidemics allows for modeling of economic and political responses to certain contagious stories.

The Power of Narrative Constellations

Narratives often gain momentum by connecting to other related stories forming constellations of ideas. The Laffer curve, a theory associated with economist Arthur Laffer, exemplifies this phenomenon. The curve gained traction only after it connected with other existing related narratives, such as the mistrust of big governments fueled across the world by politicians like Ronald Reagan and Margaret Thatcher, and the bestselling novel Atlas Shrugged by Ayn Rand. This phenomenon emphasizes that understanding one popular narrative is insufficient, and we must actively seek to view it as part of a bigger picture formed by its constellation of associated ideas.

The Power of Narrative in Economics

Our minds shape everything into narratives. This is why in economic terms, particular details can help build narratives that have a dramatic impact. Economic narratives often hinge on vivid details. People tend to form narratives around human details, even in a controlled experiment, which demonstrated that a seemingly irrelevant detail helped obtain a conviction from the experimental jury. In 2001, the US economy was in the middle of a recession when the terrorist attacks of 9/11 occurred. Economists feared that this would further erode confidence and deepen the recession; however, President George W. Bush’s rousing speech spurring people on to resist the seemingly inevitable economic slump provided a counter-narrative, which inspired US businesses and the whole economy to respond accordingly, ultimately bringing the recession to an end. The key takeaway here is that narratives can have a significant impact on the economy, and by leveraging it, everyone can play a part in shaping the economy’s future.

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