Want to Hear a Story?

Robert Shiller wants to talk about stories. Narrative Economics: How Stories Go Viral and Drive Major Economic Events is all about stories. Bitcoin, Rubik’s Cubes, Stock Market Bubbles, Social Distancing. OK, that last one isn’t in this book, but it will almost certainly be in the extra chapter added in the paperback version whenever that comes out.

This is one of those books you really read just for the stories Shiller wants to tell. He has lots of stories (so many stories!) about how a narrative goes viral and suddenly everyone believes the narrative. Why? Well, you know the narrative is true because everyone else is saying the same thing, and if everyone believes it, then it must be true, right?

The interesting thing about the narratives that influence public policy making is that sometimes the narrative actually is true. But, not always. Once a narrative gets established in the popular imagination is it very hard to dislodge it. As Shiller notes, “Truth is Not Enough to Stop False Narratives.” Therein lies the problem. Think of all the things you know to be true about the economy. You most likely know these things are true because you have heard multiple people saying similar things. Some of those things you know actually are true. Some are not. How to tell the difference?

Shiller’s argument is that these narrative stories spread much like a virus. He even has an appendix on “Applying Epidemic Models to Economic Narratives.” (Sometimes a book and a particular historical moment just accidentally coincide.) How quickly the economic narrative spreads depends on the contagion rate and the recovery rate (you might have heard about these sorts of models lately). The contagion rate is how easy it is for someone to believe the economic narrative; the recovery rate is how easy it is for someone to stop believing the narrative.

If you think about all those internet stories about some absurd, impossible thing that people send around to each other, you see how this works. The contagion rate is how believable it is to people who want to believe such things. The recovery rate is how long it takes for people to look up the story on Snopes and find out it is yet another crazy story with no basis in reality. Some stories just die right away. Others linger for a very long time.

Shiller tells all sorts of stories about how people become convinced about economic reality. He does try to sketch out a theory on how this all works, but the theory is so cursory that it has zero predictive value. “Epidemics can be Fast or Slow, Big or Small.” Uh, yeah, that about covers all the options. “Narrative Constellations Have More Impact than Any One Narrative.” Well, that is at least an important observation. “Contagion of Economic Narratives Builds on Opportunities for Repetition.” Now that one is actually interesting.

I was talking with a student not too long ago about how quickly the coronavirus narratives spread—not the virus, but the stories about the virus. She noted that on social media, you can see a story and then five seconds later you see another person repeating the same story, and so after a few minutes on social media, you have seen the same story repeated many times. Extrapolate—if you see the same idea repeated every five seconds as you scroll through your favorite social media platform, then after 10 minutes, you have thought about it 120 times. Now that you have thought the same thing 120 times, you know it is true.

Think about product shortages. You read that stores are running out of essential products. You aren’t worried. Then you read it again, and again, and again as people keep sending out the same story over and over. Next thing you know, you rush to the store to buy everything is sight before everything is gone. Suddenly a store does run out of something, and that generates another round of stories and another panic wave of buying. Nothing at all happened to the supply chains here; there never was a real shortage. This is, by the way, exactly the same story as the bank runs of the early 1930s.

Shiller’s book is thus a fun read if you like to watch how economic narratives spread. But, it is also important in another way. There are far too many economists who have lost sight of what an economic model actually is. They look all mathy and exciting, so lots of economists think that an economic model is just a bunch of math giving an excuse to do some statistical work. But, economic models are narratives. They tell a story. If you step back from the math just a bit, you can see the story. And the dirty little secret of far too many economic models is that it is pretty obvious they are false as soon as you translate the story into words. But, most economists never do that.

Alfred Marshall, a first rate mathematician who was part of the move in the early 20^th century which increased the amount of mathematics in economics, once noted:

But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules—(1) Use mathematics as a shorthand language, rather than as an engine of inquiry. (2) Keep them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the Mathematics. (6) If you can’t succeed in 4, burn 3. This last I often did.

That is a lesson far too many economists have forgotten. Shiller is trying to convince economists to pay more attention to how narratives about the economy spread. But, the other important thing a book like this might do is convince economists that they already are looking at narratives every time they look at a mathematical model.