Financial History Issue 133 (Spring 2020) | Page 42

BOOK REVIEW  BY JAMES P. PROUT Narrative Economics By Robert J. Shiller Princeton University Press, 2019 377pp with appendices, notes, references and index What drives people and societies in making economic and financial decisions? Classical economics says self-interest, everyone looking to maximize their own gain. Taken together, individual choices result in society using its resources most efficiently. Not so, says behavioral eco- nomics! Economic actors often make decisions which are not in their best inter- ests. Psychology, neurological hardwiring and sensory factors play a powerful, some- times overwhelming role in choosing one course or another. In Narrative Economics: How Stories Go Viral & Drive Major Economic Events, Robert Shiller, Yale professor and Nobel Prize winner, offers new insight on this debate, one which he modestly describes as “a new theory of economic change.” It is not only self-interest, or the effects of ingrained behavioral tendencies, says Shiller, which pushes people one way or the other. Narratives, or more colloquially, stories, play a huge part in how economic decisions are made. By understanding how economic narratives are formed and how they are transmitted, we can more pre- cisely chart their effect and, presumably, make more informed policy decisions. Like many economists, Shiller can’t get his mind around bitcoin, and this is where the book begins. This new class of assets, on which fortunes have been made and lost, can’t be explained rationally. Instead, says the professor, it has taken hold in the minds of its enthusiasts as a “new world” of money and finance. Deep in the mysterious electronic bitcoin mines and independent of central authority, bitcoin- bugs are motivated by a potent brew of contrariness, frontier mentality and technological snobbery. We don’t need no stinkin’ central banks or national cur- rencies! (See The Treasure of the Sierra Madre). It is this “story”—this “narra- tive”—which has propelled the bitcoin phenomenon. From here, Shiller moves into how events or impressions are aggregated into narratives. There is rarely one source for popular stories; instead, they form from many inputs, widely dispersed and some- times unrelated. Shiller unearths the con- cept of “consilience” to explain how sepa- rate disciplines come together to form a “unity of knowledge.” As stories form, they are transmitted person-to-person similar to how biological contagions or epidemics occur. Hence the adoption of “viral” to describe the rapid dissemina- tion of stories and trends. When these two concepts—creation and transmis- sion—relate to economic matters, narra- tives take on tremendous power to change economic fortunes for good or bad. Big data can now show us how quickly and widely stories are adopted. Trying to organize such broad concepts into a cogent economic theory is a tough nut. Stories, of course, are everywhere. Deciding how and why some narratives matter economically and some don’t is where the book leaves the classroom and enters the real world. Shiller outlines seven key propositions to help us try to apply his ideas. To highlight just four: • Epidemics can be fast or slow, big or small; 40    FINANCIAL HISTORY  |  Spring 2020  | www.MoAF.org • The economic impact of narratives may change through time; • Truth is not enough to stop economic narratives; • Economic narratives thrive on human interest, identity and patriotism. Shiller spends the rest of the book look- ing at a range of economic events both recent and historical through the lens of his narrative propositions: Panic v. Con- fidence, Frugality v. Conspicuous Con- sumption, Machines over Labor, Gold Standard and Bi-metallism, Stock Mar- ket Bubbles, Automation and AI, and so on. Not surprisingly, he finds “the narra- tive” in each and traces how his proposi- tions echo through them. Most often, he laments how narratives are hijacked by misinformation and emotion. These his- torical nutshells are well-paced, and easy to read. They reflect Shiller’s wide-ranging knowledge and experiences. One has to tip-toe around finding fault in a work by someone as eminent as Rob- ert Shiller. But here goes. The references to epidemics and contagion sound very enticing, particularly in the covid world in which we now live. But stories aren’t viruses; they don’t infect people without their knowledge. It takes a conscious deci- sion to adopt them and behave accord- ingly. And looking backwards, it is easy to see “narratives” wherever you look for them. But looking ahead, how do we recognize when an important narrative is being formed, and how can we measure its probable economic impact? That’s the trick. More work has to be done in this area, concludes the author. These are interesting times for econo- mists. While they are eagerly sought out to opine on just about everything, many of the most time-honored economic truths have failed to materialize. Will “narrative economics” emerge as a new economic theory? That story is still being written.  James P. Prout is a lawyer with over 30 years of capital market experience. He now is a consultant to some of the world’s biggest corporations. He can be reached at [email protected].