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].