Robert Shiller: Fewer Stats, More Stories!

The Context: Beyond Mainstream Economics

Criticism of mainstream economics abound. To name just a few: It relies on formalistic mathematical equations, which might be neat to solve but bear only scant resemblance to reality; it is overly optimistic about the power of the market to produce good results, while diminishing the role of the state; it portrays people as egoistic and driven by rationality, instead of including other motivations. Therefore, proposals how to amend traditional models and suggestions for alternate approaches are booming. In our latest GED Reads, we took a closer look at a new approach to include a gender perspective into thinking about economic globalization. This time, we turn to the importance of the economic stories that people tell.

The Thesis: Stories Matter!

For decades, Robert Shiller has compiled an impressive record for introducing thought-provoking ideas into economic thinking. Ten years after his critically acclaimed “Animal Spirits – How Human Psychology Drives the Economy and Why It Matters for Global Capitalism” (together with George Akerlof), he summarizes his research findings on economic narratives. He argues that economists tend to focus too much on macroeconomic facts or data and relying too strongly on a mere rational account when judging people’s intentions and behavior. Instead, he recommends that economists incorporate important economic narratives into their science, in order to arrive at better findings, particularly at better forecasting. While other academic disciplines have made great progress in including them, economists still too often put them aside as dispensable background noise.

The Definition: What Are Economic Narratives?

In Shiller’s words: “An economic narrative is a contagious story that has the potential to change how people make economic decisions.” While there is no standard storyline and they often go viral for random reasons (A good performance at a World Cup competition might for example lead to a boom of economic confidence), he points out that they usually share a number of common traits. As a current example, he turns to Bitcoin. It comprises an element of anarchy by challenging the established monetary order. It has a powerful human-interest story, as its mysterious founder Satoshi Nakamoto has not yet revealed himself to the public. Finally, it promises its adherents or buyers to be part of an avant-garde advocating a better future rife with individual empowerment and free from government control.

The Approach: Borrowing From Epidemics Research, Linguistics and More

In order to back up his thesis, Shiller draws on a host of insights from other academic fields. Most importantly, he contends that the evolution of a narrative resembles an epidemic curve: At first, there are a few infected people, who spread the story. Then, often by random events, the infection suddenly takes up speed and goes viral. Finally, the story gradually fades away – but society usually does not become immune to new infections, i.e. the process can easily start anew. Moreover, Shiller points out the importance of stories and vivid images to reveal their values or ideas about the world: “The human brain tends to organize around metaphors.” People think about a sudden drop of the stock market prices as a “crash” or they characterize the economy as a “sick” or “healthy” person.

The Core Argument: Nine Big Recurring Narratives

Using new research tools such as Google Ngram Viewer to track their epidemic curves over time, Shiller identifies and describes in detail a total of nine important narratives or narrative constellations, mostly taken from the history of his home country, the United States. These narratives, he contends, shed additional light on major economic events – so much light that their careful analysis would have been immensely helpful in better anticipating these events. However, he is also very careful to note that causality can run both ways: On the one hand, an economic narrative may help to bring about a new event; on the other hands, economic events also inform existing narratives or trigger new ones.

The Prominent Example: Automation and Artificial Intelligence Replacing Jobs

While the original narrative of technological unemployment probably goes back to the invention of the steam engine, Shiller finds that stories about large-scale labor displacement peaked four times in the United States after World War II – albeit in different mutations. First, in the 1950s when electronic data processing started to run entire business operations (the 1957/58 recession was even dubbed “the automation recession). Second, in the recession of the early 1980s – aided by the ubiquity of successful science fiction movies, such as the Star Wars franchise or Terminator. Third, in the 1990s, when the mainstreaming of the internet created a powerful narrative about the advent of computer networks. And today, when stories about a “new useless class” gain traction due to the growing sophistication of artificial intelligence.

The Conclusion: Go Back to Keynes

For the road ahead, Professor Shiller recommends to take a closer look at new research methods to do exact research in an admittedly not so exact, yet very helpful science. For instance, instead of merely describing an upcoming recession by referencing the decline of leading indicators, economists should take a closer look at the stories, which might reveal the underlying causes for these trends. He also recommends revisiting best practices for good narrative economics. Not quite surprisingly, he points to John Maynard Keynes as a role model, particularly to his treaties on the Paris Peace Conference of 1919. In the “The Economic Consequences of the Peace”, Keynes arrived at a fairly accurate and insightful prediction about the coming unraveling of the Post-World-War-I order by taking a close look at how people would interpret the peace settlement.

The GED Take: Videos, Surveys and Linguistic Analysis

In line with the advice of Robert Shiller, GED has been trying to supplement our rich work on economic fundamentals  with a number of activities that shed light at the stories that people tell and the perceptions they hold. In our crossroads video series, we have collected personal stories about economic change from Mozambique to Cuba, from Argentine to India. With or bi-annual survey on attitudes toward globalization, we try to get a better sentiment of how people feel about major global economic trends. In our latest edition, we detected a growing demand for a safety net for globalization. In our upcoming reform recommendations, we will include a linguistic analysis of the shifting public perception of the World Trade Organization (WTO). So, stay tuned for more GED STORIES!