Stories That Move the Economy
Economist Robert Shiller predicted runaway home prices and the stock market bubble of the late 1990s. Now he’s writing about the influence of viral narratives.
Yale professor and Nobel laureate Robert Shiller is known for his contributions to the field of behavioral finance, which marries the disciplines of psychology and economics. Now, he wants to open the economic tent even wider to bring in the study of the stories that rise to prominence in societies — tales that go viral, in other words — because he thinks they have a lot to do with steering the course of the economy. He calls the new field narrative economics, which is also the title of his new book (Narrative Economics: How Stories Go Viral & Drive Major Economic Events, Princeton University Press, 2019).
Shiller defines an economic narrative as a contagious story that has the potential to change how people make economic decisions — say, whether to launch a business, invest in a volatile asset or tighten one’s purse strings.
The narratives swirling around the Bitcoin phenomenon, for instance, encompass themes of bubbles, anarchism, human interest, fear of inequality and the future, Shiller notes. Fans of the cryptocurrency don’t have to understand how it works to believe in it. “There’s a flash of passion about it, like a hit song or a hit movie,” Shiller told me in a recent interview. “There’s something that touches a nerve. Economic narratives are like that.”
Kiplinger founder Willard Kiplinger plays a cameo role in the book, when Shiller quotes a 1930 Kiplinger publication (presumably The Kiplinger Letter), listing causes of the Great Depression. Among them: “The development of machines which do the work of many men under the direction of a few men.” The modern-day trope for this machine-versus-man showdown is artificial intelligence.
Us or them. For now, artificial intelligence is talked about a lot. But with a full-employment economy, people aren’t scared by AI, Shiller says. Still, like the perennial narrative of the Great Depression, the one about job-eating robots could become more malevolent under the right circumstances. “I worry that if there’s a recession, it might kindle a rebirth of the machines-replace-people narrative, and it could worsen the recession,” Shiller says. “People don’t want to spend money if they think they’ll lose their job forever, and that propels the whole economy into a recession.”
Shiller points out that he has been tracking narratives his entire career. They played a crucial role in his warnings about the stock market bubble of the late 1990s, which burst shortly after publication in 2000 of the first edition of his bestseller Irrational Exuberance. The 2005 edition sounded alarms about the housing bubble, before the collapse of that market precipitated the financial crisis.
As for what he makes of the market today, Shiller says he favors bargain-priced stocks over the growth-oriented fare that has largely driven the current bull market. “I think that you might tilt toward value, even though it hasn’t worked lately. But that’s the time to get in, when it hasn’t worked.”
Is there a narrative circulating today that worries him? “Low, long-term interest rates, especially in Europe and other places, suggest a sort of bubble in the bond market,” says Shiller. “It seems like there might be a big correction there and that’s an asset class that’s traditionally thought to be the safest. It’s not clear that it is.”
Whatever Shiller figures out about the bond market, he’s clear about the need for policymakers to pay attention to the lessons that economic narratives have for us when it comes to reading the tea leaves about financial and housing markets. Writes Shiller: “Stories and legends from the past are scripts for the next boom or crash.”