Narrative Economics

On 6th September I travelled to the London School of Economics for a lecture by Professor Robert Shiller entitled ‘Narrative Economics’.  Professor Shiller is a highly respected economist and best-selling author. He was an early pioneer of behavioural economics, won the Nobel Prize for Economics in 2013, and is currently Sterling Professor of Economics at Yale University.

His latest book is entitled ‘Narrative Economics: How Stories Go Viral and Drive Major Economic Events’.The first idea Shiller talked about was the pattern in which narratives, or stories, are spread; they grow slowly, then gather momentum, until reaching a ‘tipping point’ when they increase rapidly, before peaking and falling away to create a classic bell curve.

This can also be seen in the spread of viruses as they become epidemics, which is why Shiller uses an ‘epidemic curve’ on the cover of his book. To demonstrate, Shiller used the example of Bitcoin. He displayed a graph showing the amount of articles containing the word Bitcoin around the time of the spike in its price to almost $20,000 in December 2017. He then compared this to a graph showing the increase of cases of Ebola during the 2014 epidemic in Lofa County, Liberia, and the similarities were striking.

He argued that this is an important discovery as it means that it should be possible to predict the future path of economic events by analysing the narratives around them.

Shiller admitted that he has only scratched the surface of investigating the phenomenon, and that the key will be trying to forecast which narrative or narratives will take hold, so that the impact on economic events can be predicted. Clearly, this is not easy. Shiller explained that, like infection and recovery rates of viruses, the spread of stories can be faster or slower, and that narratives can also mutate.

One factor that can help a narrative to take off is if is linked to a famous person. To demonstrate this, Shiller referred to the ‘American Dream’. The term was popularised in a 1931 book by James Truslow Adams. However, it was not until President Thoedore Roosevelt articulated his own version of the American Dream that the prevalence of the phrase took off. This narrative became one of the defining moments in American history as the US became the wealthiest and most powerful nation during the 1950s. This also demonstrates that the timing of the narrative is important, as for a narrative to go viral the conditions must be right, again linking the theory to epidemics.

The way in which the narrative travels is also key. Shiller pointed out that there were no speculative investment bubbles before the invention of newspapers. The rise in the popularity of social media and the issue of fake news will undoubtedly have an impact on the spread of narratives. This theory means that journalists can have a huge effect on the economic trends we see, and the influence of state intervention on the press, for example China’s censorship of their media, should not be underestimated.

Interestingly, during the Q&A session at the end of the lecture, Shiller was asked about when he thinks the next global downturn will occur (he famously predicted the last two crashes).

He talked about the inverted yield curve that we currently see, which is commonly linked to the start of a recession, and believes that the change in tone from the Federal Reserve since the start of the year is, at least in part, down to narrative economics. He believes that they are aware of the power of narratives, and are in effect trying to ensure that the ‘inverted yield curve usually precedes a stockmarket crash’ story doesn’t become a self-fulfilling prophecy, and have therefore cut interest rates and tried to guide investors’ expectations to prevent this.