Narrative Economics How Stories Go

Viral and Drive Major Economic Events

1st Edition Robert J. Shiller
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narrative
economics
Robert J. Shiller

narrative
economics

How Stories Go
Viral & Drive Major
Economic Events

With a new preface by the author

princeton university press

princeton & oxford
Copyright © 2019 by Robert J. Shiller
Preface to the paperback copyright © 2020 by Robert Shiller
Requests for permission to reproduce material from this work
should be sent to permissions@press.princeton.edu
Published by Princeton University Press
41 William Street, Princeton, New Jersey 08540
6 Oxford Street, Woodstock, Oxfordshire OX20 1TR
press.princeton.edu
All Rights Reserved
First paperback edition, 2020
Paperback ISBN 9780691210261
Cloth ISBN 9780691182292
ISBN (e-book) 9780691189970
LCCN: 2020936098
British Library Cataloging-in-Publication Data is available
Editorial: Peter Dougherty and Alena Chekanov
Production Editorial: Terri O’Prey
Text Design: Leslie Flis
Jacket / Cover Design: Faceout Studio
Production: Erin Suydam
Publicity: James Schneider and Caroline Priday
This book has been composed in Arno Pro text with Helvetica Neue display
Printed in the United States of America
 Contents

List of Figures vii

Preface to the 2020 Paperback Edition ix
Preface: What Is Narrative Economics? xv
Acknowledgments xxvii

Part I The Beginnings of Narrative Economics

1 The Bitcoin Narratives 3
2 An Adventure in Consilience 12
3 Contagion, Constellations, and Confluence 18
4 Why Do Some Narratives Go Viral? 31
5 The Laffer Curve and Rubik’s Cube Go Viral 41
6 Diverse Evidence on the Virality of Economic Narratives 53

Part II The Foundations of Narrative Economics

7 Causality and Constellations 71
8 Seven Propositions of Narrative Economics 87

Part III Perennial Economic Narratives

9 Recurrence and Mutation 107
10 Panic versus Confidence 114
11 Frugality versus Conspicuous Consumption 136
12 The Gold Standard versus Bimetallism 156
13 Labor-Saving Machines Replace Many Jobs 174
 vi Con t e n ts

14 Automation and Artificial Intelligence Replace

Almost All Jobs 196
15 Real Estate Booms and Busts 212
16 Stock Market Bubbles 228
17 Boycotts, Profiteers, and Evil Business 239
18 The Wage-Price Spiral and Evil Labor Unions 258

Part IV Advancing Narrative Economics

19 Future Narratives, Future Research 271

Appendix: Applying Epidemic Models to

Economic Narratives 289
Notes 301
References 325
Index 351
 Figures

2.1 Articles Containing the Word Narrative as a Percentage of

All Articles in Academic Disciplines 13
3.1 Epidemic Curve Example, Number of Newly Reported
Ebola Cases in Lofa County, Liberia, by week,
June 8–November 1, 2014 19
3.2 Percentage of All Articles by Year Using the Word
Bimetallism or Bitcoin in News and Newspapers, 1850–2019 22
3.3 Frequency of Appearance of Four Economic Theories,
1940–2008 27
5.1 Frequency of Appearance of the Laffer Curve 43
10.1 Frequency of Appearance of Financial Panic, Business
Confidence, and Consumer Confidence in Books, 1800–2008 116
10.2 Frequency of Appearance of Financial Panic Narratives
within a Constellation of Panic Narratives through Time,
1800–2000 118
10.3 Frequency of Appearance of Suggestibility, Autosuggestion,
and Crowd Psychology in Books, 1800–2008 120
10.4 Frequency of Appearance of Great Depression in Books,
1900–2008, and News, 1900–2019 134
11.1 Frequency of Appearance of American Dream in Books,
1800–2008, and News, 1800–2016 152
12.1 Frequency of Appearance of Gold Standard in Books,
1850–2008, and News, 1850–2019 159
13.1 Frequency of Appearance of Labor-Saving Machinery and
Technological Unemployment in Books, 1800–2008 175
 viii Figu r e s

14.1 Percentage of Articles Containing the Words Automation

and Artificial Intelligence in News and Newspapers, 1900–2019 197
15.1 “Housing Bubble” Google Search Queries, 2004–19 226
16.1 Frequency of Appearance of Stock Market Crash in Books,
1900–2008, and News, 1900–2019 232
17.1 Frequency of Appearance of Profiteer in Books, 1900–2008,
and News, 1900–2019 243
18.1 Frequency of Appearance of Wage-Price Spiral and
Cost-Push Inflation in Books, 1900–2008 259
A.1 Theoretical Epidemic Paths 291
 Preface to the 2020 Paperback Edition

Since the hardcover edition of Narrative Economics: How Stories Go Viral

and Drive Major Economic Events was published about a year ago, we
have seen the sudden outbreak of a new disease, called COVID-19,
caused by a novel coronavirus. The severe COVID-19 pandemic and the
related mitigation efforts that began in early 2020 have in turn launched a
flood of new narrative epidemics, a pandemic of fear of the disease (and
sometimes of anger at authorities), of empathy for human suffering and
loneliness, and of appreciation of everyday heroism. These topics have
dominated much talk around the entire world, sometimes to the exclu-
sion of discussion of any other topic. In the United States, Italy, and some
other countries, there was initially underreaction to the pandemic—
reluctance to social distance and to wear face masks, for example—since
common narratives then described past epidemics only in Asia or less
developed countries. But then narratives changed, and much talk devel-
oped to remind everyone of the 1918 influenza pandemic that severely
affected then-advanced countries. The inconstancy of these narratives
has led to time-varying public reaction to government mitigation guide-
lines. These narrative epidemics will have multiple economic effects
through time and have already helped produce the most sudden and
sharp world economic recession in history.
After the May 25, 2020, death in Minneapolis of George Floyd, an
African American, under the knee of a white police officer, we have seen
yet another unusual narrative pandemic. It has spawned a rush of pro-
tests against police brutality and racism, not just in the United States
but also around the world. There has also been some vandalism and
rioting, particularly in the United States. The new public consciousness
of police brutality may seem to be unrelated to COVID-19, but it is not
really so, for COVID-19 and the narrative epidemic about it put people
on edge. As argued later in this book, innovations in storytelling, like
 x P r e fa c e t o t h e 2 0 2 0 Pa p e r b a c k E di t io n

mutations in viruses, in the right emotional environment can propel

contagion. The video of the police officer, with a smug facial expression
and his hand apparently casually in his pocket, slowly killing George
Floyd was perfectly awful. In reaction to the horrific video of Floyd’s
death, a contagious narrative emerged: that we are all at a fundamental
turning point where protest is likely to be effective. Police brutality has
been known to exist at times and places for decades, but until COVID-19
there had rarely been a narrative as effective as this one in promoting
collective action. It is too soon to tell, but this narrative may lead to
fundamental economic changes, involving not just police departments
but also labor unions and other institutions, with additional impacts on
inequality and economic growth and welfare. All this was stimulated by
a video capturing reality in a deeply distressing manner.
As of this writing, these pandemics continue. The experience of con-
templating these events as they happen around us makes the ideas about
narrative epidemics in this book all the more intuitive. For all the trag-
edy resulting from them, they reveal the mysterious power of contagion,
whether in disease epidemics or narrative epidemics. It is difficult to
understand precisely what it is about the COVID-19 genome that makes
it so contagious, and it is difficult to know exactly what are the ultimate
drivers of major economic events. But a recognition of the viral phe-
nomena and a scientific approach to studying them can yield better
understanding.
We know that the fluctuations and differences in economies are
substantially driven by swirls of multiple narrative epidemics, and, as
COVID-19 reminds us, sometimes by disease epidemics too. At any
given time, some of these epidemics are expanding in their impact,
some peaking, some fading. It is becoming clear that economic prog-
nosticators must observe this reality.
A key conclusion of this book goes beyond those general notions, to
the idea that viral popular narratives that are plausibly motivating for
economic decisions should themselves be seriously studied and their
time paths over years and decades mapped. Epidemiology suggests a
mode of study for economists. When the first COVID-19 case was found
in December 2019, public health experts already knew how to
 P r e fa c e t o t h e 2 0 2 0 Pa p e r b a c k E di t ion xi

determine, using reverse transcription polymerase chain reaction meth-

ods, that this was a new variant of a family of other RNA viruses and
that it could be identified using a testing kit. They knew how to formu-
late models of contagion and had estimates of the parameters of the
models, estimates that can be revised over time to view the possible
changes in contagion. These models then can be used to design meth-
ods that can fight dangerous epidemics on a rational basis, offering real
hope of eventual success. The models of contagion used by these scien-
tists can be extended to describe the contagion of economic narratives
and to improve economic policy to combat economic instability.
Methods like these seem not to have been much in evidence among
economists. Practically no scholarship attends to such study. There are
courses on the history of economic thought offered in universities,
though these course offerings have been in decline since World War II.1
Even so, the history of economic thought, however valuable, tends to
study the pinnacles of economic theorizing by great authors, not the
popular thinking of millions of people. It tends to study treatises on
optimal government interventions in markets rather than how ordinary
folks every day make economic decisions, driven by alternating feelings
of inspiration or hesitancy.
Yet decades ago, in 1936, John Maynard Keynes argued in the striking
chapter 12, “The State of Long-Term Expectation,” of his General Theory
of Employment, Interest and Money that something called “animal spir-
its”—representing a “spontaneous urge to action instead of inaction”—are
drivers of the economy. But no one has ever tabulated exactly how ani-
mal spirits actually changed through time. The reaction to Keynes’s
theorizing led instead mainly to the study of quantitative expectations.
Survey questionnaires ask people to quantify the rate of inflation they
expect over the next year. Surveyors ask people how much national eco-
nomic growth they expect and put the results into consumer confidence
indices. By the 1970s, a field of study of expectations was well estab-
lished among economists. But it did not seem to capture the breadth of
impact of changing narratives or how and why narratives change.
Keynes’s use of the phrase “animal spirits” did not go viral immedi-
ately on publication in 1936. His name was not attached to the phrase in
 xii P r e fa c e t o t h e 2 0 2 0 Pa p e r b a c k E di t i on

any of the millions of articles cataloged in ProQuest News & Newspapers

until 1958 and then not again until 1972. It was not until the 1980s, and
the earliest beginnings of behavioral economics, that there were more
than ten uses in a year. Economists preferred instead to think of people
as numbers-oriented economic forecasters, like themselves.
The economist Barbara Bergmann wrote in 1981:
For about 30 years, Keynes’s expositors gave a lot of lip service to the
importance of expectations. However, the mathematical models
that were developed for forecasting purposes never contained well-
developed parts that explicitly described the formation of expecta-
tions, or the effect that such expectations had on behavior.
There were two good reasons for this. First, no one had any clear
idea of how to model the formation of expectations. Keynes himself
had emphasized their capriciousness.
Second, and perhaps more importantly, there was a strong belief
that economists’ main stock in trade was their ability to elucidate the
interaction of technologies, tastes and resources in the marketplace.
Putting the spotlight on expectations amounted to abandoning their
dearly bought expertise on the fundamentals to chase the will-o’-the
wisp of moods and spirits.2
But the moods and spirits that she talks about are in principle observable
by the very fact that they are public. If we study the verbal exchanges
between people, we can see the mutations in their narratives, and we
have a front-row seat on their changing virality. Searches of digitized texts
are now allowing real information collection on popular narratives.
The lesson here is that we can’t avoid using our human judgment
about narratives for optimal understanding of economic events. There
is also a need for a science of economics and fact collection to inform
this judgment better. It is a difficult task to achieve this blending of
methods. Most economic recessions are small—with GDP falling on
the order of a few percent from its long-term trend. It is going to be hard
to establish what causes the small amount of hesitancy in spending
during a typical recession. It should be easier for bigger events, like
COVID-19, but these come along rarely. It takes time and real work to
 P r e fa c e t o t h e 2 0 2 0 Pa p e r b a c k E di t i on xiii

come close to disentangling the effect of multiple economic narratives

amidst real shocks.3
This book argues that ideas from other disciplines need to be added
to economics. High on this list of disciplines are the humanities, like
history and literature. Humanists are well aware that the human mind
is something far more complex and inscrutable than any machine that is
programmed to compute optimal expectations for economic quantities.

1. Mark Blaug, “No History of Ideas, Please, We’re Economists,” Journal of Economic Perspec-
tives 15(1) (2001): 154–65.
2. Barbara Bergmann, “The Economics of Expectation,” New York Times, September 20,
1981, F3.
3. See Robert J. Shiller, “Popular Economic Narratives Driving the Longest U.S. Expansion,
2009–19,” Journal of Policy Modeling (2020): forthcoming.
 Preface: What Is Narrative Economics?

When I was a nineteen-year-old undergraduate at the University of Michi-

gan over a half century ago, my history professor, Shaw Livermore, as-
signed a short book by Frederick Lewis Allen, Only Yesterday: An Infor-
mal History of the 1920s, about the run-up to the 1929 stock market crash
and the beginnings of the Great Depression of the 1930s. It was a best
seller when it was published in 1931. After reading it, I came to believe that
the book was extremely impor tant, for it not only described the lively
atmosphere and massive speculative booms of the Roaring Twenties but
also illuminated the causes of the Great Depression, the biggest economic
crisis ever to hit the world economy. It struck me that this period’s his-
tory of rapid-fire contagious narratives somehow contributed to the
changing spirit of the times. For example, Allen wrote an eyewitness ac-
count of the spread of narratives throughout 1929, just before the stock
market peaked:
Across the dinner table one heard fantastic stories of sudden fortunes:
a young banker had put every dollar of his small capital into Niles-
Bement-Pond and now was fixed for life; a widow had been able to
buy a large country house with her winnings in Kennecott. Thousands
speculated—and won too—without the slightest knowledge of the
nature of the company upon whose fortunes they were relying, like
the people who bought Seaboard Air Line under the impression that
it was an aviation stock. [Seaboard Air Line was a railroad, so named
in the nineteenth century, when “air line” meant the shortest conceiv-
able path between two points.]1
These narratives sound a bit fanciful, but they were repeated so often
that they were hard to ignore. It couldn’t have been so easy to get rich,
and the most intelligent people in the 1920s must have realized that. But
 xvi P r e fa c e

the opposing narrative, which would have pointed out the folly of get-
rich-quick schemes, was apparently not very contagious.
After I read Allen’s book, it seemed to me that the trajectory of the
stock market and the economy, as well as the onset of the Great Depres-
sion, must have been tied to the stories, misperceptions, and broader
narratives of the period. But economists never took Allen’s book seriously,
and the idea of narrative contagion never entered their mathematical
models of the economy. Such contagion is the heart of narrative
economics.
In today’s parlance, stories of fabulously successful investors who were
not experts in finance “went viral.” Like an epidemic, they spread from
person to person, through word of mouth, at dinner parties and other
gatherings, with help from telephone, radio, newspapers, and books. Pro-
Quest News & Newspapers (proquest.com), which allows online search
of newspaper articles and advertisements back to the 1700s, shows that
the phrase go viral (and variations going viral, went viral, and gone viral)
first appeared as an epidemic in newspapers only around 2009, typically
in connection with stories about the Internet. The associated term viral
marketing goes back only a little further, to 1991, as the name of a small
company in Nagpur, India. Today, as a ProQuest search reveals, the phrase
going viral itself has gone viral. Google Ngrams (books.google.com
/ngrams), which allows users to search for words and phrases in books
all the way back to the 1500s, shows a similar trajectory for go viral. Since
2009, trending now, a synonym for going viral, has also gone viral. These
epidemics were helped along by the prominent statistics displayed on
Internet sites about numbers of views or likes. Both “going viral” and
“trending now” characterize the rising part of the infectives curve, when
the epidemic is growing. There isn’t as much popular attention to the pro-
cess of forgetting, the later falling part of the infectives curve, though
for economic narratives that will likely be as important a cause of changes
in economic behavior.
Allen was thinking in terms of stories going viral when he wrote his
book, though he did not use the term. He wrote about his “emphasis upon
the changing state of the public mind and upon the sometimes trivial
 xxviii Ack now l e dgm e n ts

influence on me for twenty years. He has always encouraged me to stay

on a true path in my writing, a contribution that has been invaluable to
me. He is now, after leaving the helm of the Press, still giving me editorial
help.
Research assistance was provided by Logan Bender, Andrew Brod,
Laurie Cameron Craighead, Jaeden Graham, Jinshan Han, Lewis Ho,
Jakub Madej, Amelie Rueppel, Nicholas Werle, Lihua Xiao, and Michael
Zanger-Tishler. I am also indebted to other Yale students who made com-
ments or suggestions: Brendan Costello, Francesco Filippucci, Kelly
Goodman, Patrick Greenfield, Krishna Ramesh, Preeti Srinivasan, and
Garence Staraci.
My indefatigable administrative assistant at Yale, Bonnie Blake, read
and edited the manuscript. Much appreciation, too, needs to be acknowl-
edged for my very thorough and detail-oriented copyeditor, Steven
Rigolosi.
Some of the ideas in this book have come from my experience with
writing more than two hundred newspaper columns, the equivalent of
two books by word count. Since 2003, I have been regularly contribut-
ing columns to Project Syndicate; these columns are published in news-
papers around the world, mostly outside the United States. Writing for
Project Syndicate has helped me develop a world perspective and avoid
an excessively US-centric view. Since 2007, I have also been a contribut-
ing columnist for the Sunday Business section of the New York Times. I
thank my editors at these outlets, Andrzej Rapaczynski (Project Syndicate)
and Jeff Sommer (New York Times), who have given me much
attention.
Finally, I thank my wife of forty-three years, Virginia Shiller, for her
continuing support and encouragement of my work.
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