It was the classic David vs. Goliath story. A bunch of renegade small time retail traders that got together and took on Wall Street’s big boys, giving the short-sellers a bloody nose. As this story broke, more and more traders got in on the action and joined the bandwagon.
A couple of posts on reddit and you got yourself a herd stampeding on the stock market. Reddit’s Wallstreetbets led to wild gyrations, significantly pushing the share value of stocks such as GameStop upwards. It demonstrated the power of individuals coming together in a group. But what’s the glue that binds these people together?
It’s all about the story
A convincing story. Stories are what brings random people together in a common belief. According to the renowned historian and bestselling author Yuval Harari,
“Homo sapiens conquered this planet thanks above all to the unique human ability to create and spread fictions. We are the only mammals that can cooperate with numerous strangers because only we can invent fictional stories, spread them around, and convince millions of others to believe in them.”
Stories can shape reality. They can drive economies. That’s what Nobel Prize-winning economist Robert Shiller’s latest book Narrative Economics — How Stories Go Viral & Drive Major Economic Events is all about. Published back in 2019, Shiller’s book explains how stories people tell — ranging from housing booms, Bitcoin, or gold — affect economic outcomes. In essence, his book is an urgent appeal to look beyond market fundamentals, statistics and hard economic theories, and pay more attention to how narratives drive economies.
Contemporary economics has failed, in his opinion, to adequately take the power of narratives into account. “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”, he notes. Only by including an analysis on economic narratives can we fully understand economic events and phenomenon. And this actually works also vice-versa, he points out, writing that “new contagious narratives cause economic events, and economic events cause changed narratives.”
Arguing that narratives are contagious, spreading like wildfire, he compares them to epidemics (only two months later, in December 2019, the world would get to know what those are really like). And like epidemics, Shiller notes, economic narratives will also mutate over time, change, adapt “or react to a changed environment to start a new wave of contagion”.
With such an analogy, he puts forth seven key propositions with respect to economic narratives:
- They can be fast, slow, big or small (like epidemics).
- The narratives can comprise a small percent of the population that actively engages in them initially.
- Narrative constellations matter — it matters if your narrative only has one story or if your narrative consists of different storylines.
- The economic impact of narratives may change through time.
- Truth is not enough to stop false narratives
- Contagion of narratives depends on opportunities for repetition
- Economic narratives thrive on human interest, identity, and patriotism. For example, many successful narratives have a Manichaean “us versus them” theme (David vs. Goliath, reddit traders vs. Wall Street), which mobilises people.
Shiller takes these seven propositions, which he describes alongside his introduction to narrative economics in the first 100 pages of his book, and uses them to analyse nine central economic narratives that he has identified. These include, for example:
- Panic vs. confidence
- Stock market bubbles
- Real estate booms and busts
- AI replacing jobs
These nine economic narratives that he describes form the heart of his book. Yet, these sub-chapters are incredibly descriptive including detailed illustrations of economic events. This might be interesting for students of economics or economics-aficionados, but I was struggling to stay interested reading these pages. They were meant to underline his argument that narratives really do play a role in economic events. To me, however, this seems like such a given, that I didn’t need nine detailed examples to be convinced.
The big anti-climax then finally came in the concluding chapter entitled “Future Narratives, Future Research”. I had hoped that these last 18 pages would give some “Aha-moments”, new insights into what’s in store for us with regards to economic narratives, what new narratives could grab hold, what it could mean for society and possibly what it could mean for political economy and regulations. However, I found that these final pages weren’t very substantial.
There was a bit of speculation on how social media could influence economic narratives (hello r/wallstreetbets!) and a single page on how some of these nine economic narratives he outlined could change form over time (not much). In the end his biggest conclusion and recommendation was that we need more research into narrative economics, such as more regular focused interviews of respondents, more focus groups on economic narratives, historical digitized and searchable databases of personal letters and diaries in order to look for economic narratives.
As someone who works in the practical field of politics and political economy, this academic conclusion didn’t find my interest at all. It made me realise that the intention of the book probably was to convince economic professors and students — colleagues so to speak of Mr Shiller. So while the introduction and few parts of the main book found my interest, in the end it certainly didn’t grab me.