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Three Questions: How Will We Tell the Story of COVID-19?
Robert Shiller on the shared narratives emerging about the COVID-19 pandemic and how they are shaping the economy. 

What We Talk about When We Talk about Stock Market Crashes
In an excerpt from Narrative Economics, Robert Shiller examines how the stock market rise of the 1920s, the crash of 1929, and the Great Depression that followed came to be seen as a tale of recklessness and divine punishment—and how that narrative still shapes our understanding of the stock market. 



TRANSCRIPT

Narrative economics, as I define it, is the study of popular narratives: stories with morals that go viral.

Some narratives go viral because they contain real truth and knowledge and are useful. I’m more concerned with the other kinds of narratives that are story-quality, interesting, stimulating, fun—and travel person to person. They have a high contagion rate. Changes in public thinking are revealed by them and changes in public thinking are important causes of major economic events. 

I’ve been thinking about narrative economics ever since I was a teenager. It started out when I was an undergrad at the University of Michigan and I took a history course and I got a good insight from the history course about why we had the Great Depression. People think of Franklin Delano Roosevelt, the president, saying, “The only thing we have to fear is fear itself.” The Depression is described as some sort of panic.

There were other narratives during the Great Depression that I think were very important. One of them was a frugality narrative. Steinbeck’s book The Grapes of Wrath was a description of life in the Great Depression that was sympathetic to the suffering of that time. 

Economists don’t like to talk about the meaning of life, but it’s in the Depression. In other words, people had a different sense of the meaning. People thought that we’d been living too high in the 1920s. They came back to religion, to modesty in fashion and sympathy for people who were disadvantaged. 

“The narrative about machines taking over our jobs goes back hundreds of years, even thousands of years. Aristotle talked about it. But it has become stronger and stronger and it remains very strong today in the 21st century.”

Another narrative of the Great Depression was a technological unemployment narrative: that machines were now replacing jobs and that the jobs would never be back. That scared people into cutting back their investment expenditures, just as the frugality narrative also encouraged them to cut back their consumption.

Modern Times was a Depression-era movie starring Charlie Chaplin that described the effects of automation. The workers are told in this factory—semi-automated factory—that they’ve decided to automate their lunch to speed things up. So the workers are asked to sit down by a lunch machine that will feed them lunch at high speed. It was a hilarious scene, but it indicated the dehumanization that’s caused by the robots taking over. 

The narrative about machines taking over goes back hundreds of years, even thousands of years. Aristotle talked about it. But it has become stronger and stronger and it remains very strong today in the 21st century. 

Artificial intelligence is fundamentally scary because it replaces us. What defines us more than our brains? We have people who used to think they were safe from being replaced because they had developed high cognitive skills. But we have machines that are doing things like playing chess or Go or other intellectual games better than people can. So who are we anymore? We tend to fashion stories about ourselves that are self-congratulating. But the problem is we have machines that are doing so much better than you could ever do. It creates a sort of sense of  meaninglessness in life. I think it can have the effect of causing an economic recession or depression.

“The housing bubble collapsed when the narrative changed—when people started talking about the foolishness of the investors in it. Suddenly it became embarrassing to have invested in homes.”

The housing crisis of 2007 to 2009 in the U.S., and in other countries as well, followed a boom in home prices that was unprecedented in history. There was practically nothing like it. The home prices doubled and tripled in many cities…and then they came back. Why did they do that? Well, I’ll tell you, it wasn’t low interest rates; they weren’t particularly low at that time. Why did they boom? It wasn’t interest rates. It wasn’t building costs going up. It wasn’t the population surge. None of those things happen. So, what did happen? 

In my book I describe that as the result of a narrative that began about home purchases, about home ownership, about the American Dream. Or the Canadian Dream or whatever else. The narrative spread differently in different countries. But the narrative included an idea that home prices were going to go way up and that there’s a lot of smart people who aren’t stopping with one house, they buy two houses or maybe three houses and they’re making a bonanza. So it was a typical speculative bubble story, but infecting the home market. But it ultimately collapsed, and it collapsed when the narrative changed—when people started talking about a housing bubble and started talking about the foolishness of the investors in it. Suddenly it became embarrassing to have invested in homes, and the narrative changed. The Great Recession that followed was substantially caused by a changing narrative about housing. 

“The American dream,” the phrase, was coined by James Truslow Adams in a book he wrote in 1931 called The Epic of America. The real message of that book that came through was that Americans are somehow different from many other countries in that we celebrate rich people and we celebrate success and we like showy, show-off things, and that there isn’t much resentment of the people who do that. In the book, Adams hinted at a kind of American philosophy that it’s actually good for the country if you buy a big house and a big fancy new car because that won’t so much invite envy as be an inspiration to others. They’ll say, “Well, if he or she did it, I can do it too! And that’s what makes America great.” So it’s a patriotic statement. Buying a fancy car is a statement of your patriotism.

Why is narrative economics important? I believe that human thinking has to be studied if we are going to understand economic fluctuations. We have to understand how people change their thinking through time. People live their lives as fulfilling a story and that’s what matters after one has banished starvation and cold and illness. It becomes the meaning of life—how I fit in to some story of our time. That thinking changes. And it changes motivation in fundamental ways.