"Stories are more powerful than statistics" in economics. If so, asks Tim Jackson, what's a better story?

Classical economics is under assault from many sides at the moment - see our story archive - and the latest attack on its reductive view of human nature comes from the Nobel Prize winner Robert Shiller, and his new book Narrative Economics (the original essay is here). Here’s the publishers’ blurb:

In a world in which internet troll farms attempt to influence foreign elections, can we afford to ignore the power of viral stories to affect economies? In this groundbreaking book, Nobel Prize–winning economist and New York Times bestselling author Robert Shiller offers a new way to think about the economy and economic change.

Using a rich array of historical examples and data, Shiller argues that studying popular stories that affect individual and collective economic behavior—what he calls “narrative economics”—has the potential to vastly improve our ability to predict, prepare for, and lessen the damage of financial crises, recessions, depressions, and other major economic events.

Spread through the public in the form of popular stories, ideas can go viral and move markets—whether it’s the belief that tech stocks can only go up, that housing prices never fall, or that some firms are too big to fail.

Whether true or false, stories like these—transmitted by word of mouth, by the news media, and increasingly by social media—drive the economy by driving our decisions about how and where to invest, how much to spend and save, and more.

But despite the obvious importance of such stories, most economists have paid little attention to them. Narrative Economics sets out to change that by laying the foundation for a way of understanding how stories help propel economic events that have had led to war, mass unemployment, and increased inequality.

The stories people tell—about economic confidence or panic, housing booms, the American dream, or Bitcoin—affect economic outcomes. Narrative Economics explains how we can begin to take these stories seriously. It may be Robert Shiller’s most important book to date.

Publisher’s site here. Some interesting responses to Shiller’s book include this from Science mag:

Shiller hopes that understanding the influence of narratives will allow leaders to “create and disseminate counternarratives that establish more rational and more public-spirited economic behavior.” He does not discuss the resemblance that such an intervention would have to government propaganda…

And this from Forbes:

the book is less than clear on the dynamic by which one narrative assumes dominance over its rival narrative at any particular time. The account of the competing narratives reads something like a chronicle, with “one damn thing after another.”

In this context, perhaps more attention should be given the work of Carlota Perez in her path-breaking book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages (2002) in which she identifies even larger economic "mega-narratives", which help determine which economic narratives rise and which fall at any particular time. These mega-narratives can help forecast which particular economic narrative becomes dominant at any particular stage in the larger economic cycle.

But the most interesting review comes from Nature, where the sustainability macro-economist Tim Jackson inquires as to whether we can build a even more powerful “mega-narrative” for an economic direction, out of our climate emergency.

Shiller thinks that a great example of an economic narrative trying to defy the economic statistics comes from Franklin D. Roosevelt’s injunction in the thirties Depression, “the only thing we have to fear is fear itself”. People anxiously hoarding their resources in dark times actually bring the dark times on, as spending disappears from the economy.

Yet Jackson pushes back on this. He writes:

Fear is a rational response from people whose livelihoods are under existential threat. So why would a president inveigh against it? The answer is that Roosevelt was painfully aware of the implications of fear. He was addressing what the economist John Maynard Keynes (borrowing from another long-forgotten creative) called the “paradox of thrift”: the tendency of ordinary people to curtail their consumption in the face of economic uncertainty, and put their money into savings instead.

Such behaviour is sensible, admirable even, at the individual level. Perhaps it is so at the planetary level, too: lower consumption might benefit the environment. But economics has a problem with it. As people spend less, demand is suppressed, prolonging the recession. The same thing happened after the 2007–08 crisis.

The paradox of thrift was the foundation for Keynes’s most famous proposal: that governments provide stimulus that could return the economy to growth when people would not. This was the rationale for Roosevelt’s New Deal package of reforms, and the inspiration for the proposed US legislation called the Green New Deal.

Keynes was a pragmatist; his prescriptions were a response to the diseases of the day. But he was also a visionary. In his essay ‘Economic Possibilities for Our Grandchildren’ (1930), he foresaw a time when our society would move beyond growth. It hasn’t happened yet — in spite of economist Kenneth Boulding’s remark to the US Congress in 1973 that “anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist”.

Shiller is clearly not a madman. But in the course of an otherwise fascinating exploration of the power of story, he never once acknowledges that eternal growth is itself just a narrative.

He notes that the logic of relentless expansion conflicts with the logic of human anxiety. But he assumes that it is people who are at fault. Narratives can have clear, moral and prudential foundations, it seems, but they might still be cast as irrational.

Indeed, for Shiller, that memorable speech on the “fear of fear” shows government attempting to “lean against false or misleading narratives and establish a moral authority against them”. Roosevelt’s remark was designed to “create and disseminate counternarratives that establish more rational and more public-spirited economic behavior”.

What Shiller seems to be saying is this: when ordinary human sentiment runs counter to the prevailing logic of capitalism, the state must override it. It is a deeply suspect, potentially dangerous conclusion. But it, too, demonstrates just how pervasive narrative is.

Ultimately, Narrative Economics is an eloquent and accessible exposition of a seductive idea. It’s a particularly compelling hypothesis for Britain, a country still reeling from a public referendum whose outcome was determined by viral confabulations of the most pernicious kind. We are all “tellers of stories and makers of poems”. But neither economists nor politicians can claim moral authority over narrative truth. We must all choose carefully which stories we live by.

We’re struck by the degree to which the work of Katherine Trebeck (often profiled on these pages) is an example of “narrative economics”. Katherine tries to replace the concept of economic “growth” with economic “arrival” - we are able to produce enough for our flourishing lifestyles, and now must manage that with great material and environmental efficiency. Katherine digs into the emotional of “arrival” too - the sense of satisfaction and relief when you arrive at your destination, either a home or a chosen location.

We also notes how the Bank of England, under Andy Haldane, recently brought in artists and musicians to talk about different accounts of what should be valued.

A/UK is very interested in the mega-narratives that could be constructed out of the plethora of economic experiments, and technological transformations, that we explore here. Watch this space.