If you are interested in this review, you can watch a video of Robert J. Shiller speaking about his new book at LSE or listen to a podcast of the event, both recorded on 6 September 2019. 

Narrative Economics: How Stories Go Viral and Drive Major Economic Events. Robert J. Shiller. Princeton University Press. 2019.

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Robert Shiller’s new book, Narrative Economics, develops ideas about narrative that he has been shaping for the past twenty years. He takes the reader through various narrative-based enthusiasms relevant to economic behaviour: stock market booms and busts; the rise and fall of Bitcoin; the rise and fall of favourite economic models; and, interestingly, the rise and fall of various contradictory penchants for particular ideas – for example, about the desirability or not of the Gold Standard, automation, artificial intelligence, real estate investment, etc. His stated goal is to ‘improve people’s ability to anticipate and deal with major economic events, such as depressions, recessions, or secular (that is long-term) stagnation, by encouraging them to identify and incorporate into their thinking the economic narratives that help to define these events’ (71). As he puts it, ‘though modern economists tend to be very attentive to causality, as a general rule they do not attach any causal significance to the invention of new narratives’. His argument is not only that narrative causality exists, but also that it goes both ways: ‘new contagious narratives cause economic events, and economic events cause changed narratives’ (71).

Shiller makes his case for this new economic theorem by providing detailed accounts of events and their effects. Long quotes from past sources illustrate the rise and fall of economically relevant narratives using data from Google Ngrams, a readily available tool for tracking the changing frequency of different words in books and journals through time.

The core proposition is that economic fluctuations are ‘substantially driven by contagion and oversimplified in easily transmitted variants of economic narratives. These ideas colour people’s loose thinking and actions’ (26, italics added). Shiller sees aspects of the underlying narratives as like potential infections waiting for propitious circumstances and his theory is not unlike the one proposed long ago by Gustave LeBon (1896).

Shiller’s thesis exemplifies the more and more ‘successful’ behavioural economics framework. You identify behavioural error and then explore its implications for the economy compared to ‘rational’ behaviour. Hence his analogy is with disease epidemics. Narratives are potentially contagious, he thinks, and on the big occasions when they dominate, although not everyone becomes infected, they become the primary cause of behaviour – ‘for most people the narrative will be fundamental to their reasons for doing, or not doing things that affect the economy’.

Shiller is raising important issues, but there is also a way his framework is obscuring the point: far more fundamentally than he considers, narratives are a means of turning data and information into intelligence and are used widely and in numerous forms to imagine the future. If the future is uncertain, particularly if it is radically uncertain (Mervyn King, 2017), narrative thinking is what we have got to cope. Attempting to estimate the value of future investments, for instance – we can imagine and invent more or less rigorous ways for testing our imaginations, but we cannot know (David Tuckett, 2011). A capitalist economy has an apparently endless and quickening pace of innovation reflecting human imaginative capacity and challenging it.

Unlike economics, contemporary writing in sociology tends to take uncertainty as given. Meaning and order are contested and constructed. In that context, drawing on cognitive science, narrative is an evolved human ability, fundamental to conscious thought, which facilitates constructing and communicating meaning (Roy F. Baumeister and E. J. Masicampo, 2010). Children learn through stories. We share stories in the form of news, myths, histories and scientific theories and explanations (Jerome Bruner, 1990). They help us to make sense of the way the world is, as well as how it has come to be like it is and (via simulating futures) how we imagine it will become. In this way, although our futures are uncertain, narrative, which is embodied, provides support and justification for action (Tuckett and Milena Nikolic, 2017).

Elaborating such a view, Jens Beckert and Richard Bronk (2018) show how, if we introduce the reality of radical uncertainty, then whether we call them ‘fictional expectations’ or ‘imaginaries’, narratives become crucial factors for understanding how economic agents plan their futures. They draw on stories of success and failure, heuristics, analogies, local rules, conventions, beliefs, values, norms and accepted practices to build their action-supporting narratives.

Narrative imaginaries, governed by locally plausible, locally available ideas and sources, therefore are important, not because individuals ‘catch them’ irrationally in the Shiller sense, but because as economic actors struggle to act when they cannot know the outcome, they draw on this human capacity to facilitate subjective certainty.

Work that I have just completed in a cross-disciplinary team analysing the theory and practice of monetary policy may indicate how narratives, conceived in this broader way, can illuminate the heart of economic policy analysis.

In a central banking context, narratives have been gaining a greater theoretical role precisely because policymakers and their publics face uncertainty. In fact, over the past thirty years, modern inflation-targeting central banks have evolved practice so that persuasive narratives, issued through carefully chosen words in regular reports, press conferences and speeches, have become a key instrument of policy (Douglas Holmes, 2014 and 2018). Expressed as to-be-trusted narratives of the past, present and future, the aim is to coordinate the different publics in the economy who must enact the policy. It is the central bank’s publics who must keep expecting that inflation will be around target, give or demand wage rises that are consistent, feel confident enough to keep investing and consuming, etc.

To be successful, therefore, a central bank must accurately, credibly and legibly both ascertain and forecast the future of the economy as well as explain its reasons. To do this, the central bank’s narratives must make sense and allow commitment from recipients in terms of their own narratives – only then can they use what the central bank says, believe it and support their action with it. Consequently, the central bank needs to know and contribute to the narratives circulating in the economy and certainly not treat them as irrational. Therefore, monetary policy requires (1) accurate and valid assessments recognisable to relevant publics of what is happening in the economy and the path it’s on; (2) knowledge of the narrative thinking that is driving current economic behaviour; and (3) crafting persuasive narratives so they accurately relate to those of recipients and cause them to align their plans. In this way, narratives are not viruses to be caught, as in Shiller’s argument – although at any moment divergent and disruptive narratives could break out. Rather, they are the fundamental drivers of the macroeconomy, which must be continuously sought out and related to by central bank staff (David Tuckett, Douglas Holmes and Alice Pearson, 2019 conference paper).

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Notes:

  • This blog post appeared first on LSE Review of Books.
  • The post expresses the views of its author(s), not the position of LSE Business Review or the London School of Economics.
  • Featured image by by Eduardo Sánchez on Unsplash.
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David Tuckett is professor and director of the Centre for the Study of Decision-Making Uncertainty at UCL in the Faculty of Brain Sciences, as well as a fellow of the Institute of Psychoanalysis in London.