PDF Summary:Narrative Economics, by Robert J. Shiller

In Narrative Economics, economist Robert J. Shiller argues that human beliefs and actions, rather than numbers and statistics, ultimately drive economic outcomes. He adds that our beliefs and actions spring from the stories we tell ourselves about the economy and our role in it.

According to Shiller, these narratives play a crucial role in our understanding of economic events by weaving facts and observations into coherent stories that reflect our values. Therefore, he says, we must analyze how popular stories, myths, and perceptions influence events, institutions, policies, and mindsets.

In this guide, we’ll explore:

• How narratives help us make sense of the world—and how they in turn help shape that world
• The factors that contribute to the spread of economic narratives
• Recurring economic narratives throughout history
• The kinds of research that can broaden our understanding of economic narratives

Throughout the guide, we’ll supplement Shiller’s insights with commentary from other economists and explore examples that both support and challenge his ideas.

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Factor #3: Influential Endorsers

Shiller notes that charismatic and compelling storytellers can significantly amplify narratives. Charismatic storytellers possess the power to engage people emotionally and intellectually, making the narrative more relatable and memorable.

For an example of this, we can look to the story of Elon Musk and his companies, especially Tesla and SpaceX. Musk, known for his charismatic personal leadership, has been a driving force behind two major economic narratives. First, he’s propelled the narrative of electric vehicles (EVs) into the mainstream with Tesla and demonstrated a unique ability to narrate a future where sustainable transportation is not only possible but exciting and inevitable. His narrative paints a picture of a world where EVs are accessible, affordable, and environmentally friendly, appealing to both consumers and investors alike.

Second, with SpaceX, Musk has reshaped the economic narrative of space exploration and commercialization. He tells a story of humanity's expansion into space, with Mars colonization as a realistic goal. His charismatic storytelling has captivated the public's imagination and reignited interest in space travel. This narrative has enabled ordinary people to imagine themselves as spacefaring citizens, driving significant new investment in the space industry and garnering support from governments, investors, and space enthusiasts.

Charismatic Authority and the Authority Principle

The power of charismatic and compelling storytellers to amplify and spread narratives may be due in part to charismatic authority, a concept originally outlined by sociologist Max Weber. Weber explains that charismatic leaders gain authority through their personal magnetism, exceptional qualities, or inspirational abilities—and crucially, their followers’ belief in these qualities. With that authority, the charismatic leader often plays a significant role in shaping new realities and narratives for their followers by inspiring change, leading movements, or challenging existing norms and beliefs.

Exploring this concept further, in Influence, Robert Cialdini writes that people are hard-wired to comply with requests that come from an acknowledged and accepted source of authority. Cialdini labels this instinct the “Authority Principle.” In sum, because charismatic storytellers are so engaging, we “elect” them as figures of authority in our minds and obey them as such.

Factor #4: Holistic Explanations

Shiller observes that narratives offering comprehensive explanations of complexities have a strong appeal. This is because human beings naturally seek understanding and meaning in the world around them. People are often confronted with complex and multifaceted phenomena, whether in economics, science, politics, or everyday life. In the face of these complexities, individuals are drawn to narratives that promise clarity, coherence, and a sense of order.

The sustainable development narrative illustrates this by offering a framework that integrates economic growth, environmental preservation, and social well-being. This framework provides a coherent view of intricacies like resource management and climate change, so it resonates with those seeking a roadmap for a better future.

The Appeal of Conspiracy Theories

Shiller notes that narratives featuring all-encompassing explanations have a strong appeal. Others have extended this logic to conspiracy theories, pointing out that such theories have broad and enduring appeal because they also provide a simplified and compelling narrative that claims to unveil hidden truths behind significant events or phenomena. For many people, conspiracy theories can provide a sense of certainty and order in a world that feels chaotic and uncertain. These narratives tend to attribute causality to a specific group or organization, making it appear as if there’s a deliberate plan behind everything, even when events are inherently unpredictable.

Additionally, conspiracy theories often tap into psychological factors, such as the desire for meaning and control, that lead individuals to seek comprehensive explanations for events that may be frightening or confusing. By offering a complete—if often sinister—narrative, conspiracy theories provide a sense of understanding and agency, even if they’re based on unfounded claims.

Factor #5: Human-Centric Focus

Shiller writes that economic narratives that place human beings at their center are engaging and relatable. This is because people are inherently social beings, so they tend to relate better to stories, concepts, and situations that involve human characters or human experiences. Human-centric economic narratives tap into the audience's innate social and empathetic nature.

The narrative of the “gig economy” illustrates this idea. The gig economy narrative offers a compelling story of people ditching the time demands of traditional 9 to 5 jobs and living a more flexible and balanced life without the pressure of having a boss and needing to report to the same place every day. As such, the gig economy narrative emphasizes stories of people participating in short-term, flexible, and often technology-driven work arrangements such as ride-share driving or freelance writing. It tells the story of everyday people who leverage their skills, assets, and time to earn income on their own terms. This narrative showcases the experiences of gig workers, highlighting the motivations, challenges, and opportunities they face.

One of the strengths of the gig economy narrative is its relatability. It resonates with the experiences of many who have participated in gig work or considered it as a source of income. It addresses common concerns such as job security, income stability, and work-life balance, making it highly engaging and relatable.

The narrative of the gig economy has sparked discussions about the future of work, labor rights, and the role of technology in reshaping employment opportunities. It explores the human aspects of work, from the desire for autonomy to the challenges of accessing benefits and protections. This focus on people's experiences and aspirations has made the gig economy narrative a central topic in labor market debates.

The Human Connection and Economic Narratives

Shiller posits that economic narratives that center human beings are engaging and relatable. From a psychological perspective, placing human beings at the center of our stories may be a reflection of deep-seated cognitive and social mechanisms. Several factors contribute to this phenomenon:

Social and emotional connection: Humans are inherently social beings, and our survival and well-being have long depended on our ability to form strong social bonds. Placing humans at the center of stories allows us to relate to and emotionally connect with the characters and their experiences. This connection triggers empathy, a fundamental aspect of social cohesion.

Theory of mind: Humans possess a highly developed "theory of mind," which is the ability to guess accurately at other people’s mental states. This cognitive skill enables us to interpret and predict the behavior of other humans, making us naturally attuned to stories that revolve around human characters and their motivations.

Survival narratives: Throughout human evolution, sharing stories has been a way to convey important information about survival, such as how to find food, avoid danger, or navigate complex social dynamics. Placing humans at the center of these stories enhances the transmission of valuable knowledge and skills.

Part 3: Recurring Economic Narratives

With our understanding of the power and reach of economic narratives and the factors that facilitate their spread, we can now turn our attention to exploring some of the specific economic narratives that Shiller argues have recurred throughout American history.

These narratives tap into fundamental themes that have shaped our collective understanding of past economic events. Because of the staying power and communicability of these narratives of the past, they influenced how people perceived and reacted to subsequent economic events. This, in turn, means that the narratives themselves come to have a profound influence on future events.

Recurring Narrative #1: Financial Panics and Depressions

Shiller observes that the narratives surrounding what we now refer to as “recessions” or “depressions” have evolved over time.

In the 19th century and early 20th century, these economic downturns were labeled as "panics," and the narrative that prevailed was one of fear and loss of confidence. This belief in a narrative of panic shaped what ordinary people and elected leaders saw as the appropriate response. They believed that only great figures, like financier J.P. Morgan, could restore order and quell the panic through single-handed confidence, influence, and decisiveness. This is why Morgan personally assembled a coalition of bankers and financiers to inject liquidity into the banking system during the Panic of 1907.

(Shortform note: Although the great financiers of Wall Street may have been saviors in 1907, it’s worth noting that they were the architects of disaster almost exactly one century later, during the 2008 financial crisis. In The Big Short, Michael Lewis writes that the big banks profited by bundling dubious mortgage loans into complex financial derivatives that they sold off to unwitting investors. In just a few years, these toxic financial products spread throughout the financial system, exposing both Wall Street and Main Street to catastrophic risk. Lewis writes that major players—including investment banks, ratings agencies, and insurance companies—were all culpable in this widespread fraud.)

Recurring Narrative #2: The American Dream

As Shiller notes, the narrative of the American Dream—the concept that America is a land of opportunity, where hard work can lead to the realization of one's fullest potential without interference—is deeply ingrained in the national narrative.

In the United States, the prevailing belief is in a pure meritocracy, where an individual's only limitation is their innate ability and the effort they’re willing to put in. This narrative of opportunity and meritocracy began to evolve in the 1930s, and advertisers and marketers soon seized upon it to promote their products as embodiments of the American dream. Everything, from savings accounts and automobiles to suburban homes and home appliances, was presented as either a tool to help individuals achieve the American dream or a status symbol signaling to others that they’d already achieved it.

Shiller writes that the narrative of the American dream has significant economic consequences. On one hand, it increases consumer demand. The belief that anyone can improve their economic standing through hard work motivates people to strive for better living standards, which fuels spending and economic growth. However, this narrative also has a downside, as it can drive people into debt. Many people feel a pressure to consume, often beyond their means, in pursuit of the American dream. This drive to keep up with societal expectations and realize their version of the dream can lead to financial strain and cumbersome personal debt.

The Relationship Between Happiness and Wealth

Shiller observes that compelling people to spend beyond their means or ostentatiously display symbols of their wealth is a negative byproduct of the American Dream.

Not only can this lead to indebtedness and financial strain, as Shiller writes, it may not even deliver lasting emotional satisfaction. In The Happiness Hypothesis, Haidt writes that according to happiness research, having a high income or a position of prestige and authority doesn’t correlate well with happiness. Haidt acknowledges that impoverished people do become much happier once they acquire enough money to meet basic needs like food and shelter. But after that, each additional dollar adds very little in the way of happiness. Strong connections to other people and a connection to something greater than yourself matter far more.

Recurring Narrative #3: The Gold Standard

Shiller writes that the narrative of the gold standard—a “hard” currency backed by the value of something tangible, like gold—has been a recurring American economic narrative. Different groups have argued over the centuries about the merits and pitfalls of a hard currency system—generally with the wealthy being in favor of a currency backed by a tangible asset like gold, and economically disadvantaged Americans supporting fiat currencies (government-issued money not backed up by a tangible asset).

In the 19th century, according to Shiller, there was a prevailing belief that backing dollars with gold was a way to uphold truth and virtue, essentially extending moral qualities to the currency itself by tying it to something “real” and solid. This gold standard, seen as a bedrock of financial integrity, was rooted in the idea that a currency's value should be directly connected to a tangible asset like gold. The popular sentiment was that "strong money" equated to "strong morals."

The gold standard narrative thus acquired a moral and emotional charge that pitted different classes against one another. Typically, wealthier Americans based in the banking centers of the East, who were often creditors, favored the continuation of a gold standard; poorer Americans, who were often indebted, working in agriculture, and based in the Midwest and West, favored a coinage system that was based on both gold and silver at defined ratios (“bimetallism”).

The bimetallists saw themselves as champions of the common people, believing their monetary policies would enable inflation, which in turn would reduce the real value of people’s debts. In response, the gold standard stalwarts (“goldbugs”) clung to the narrative that straying from the gold standard was synonymous with irresponsibility, shiftlessness, and loose morals. These attitudes drove the “hard money” policies that persisted until the gold standard was dismantled in a series of developments throughout the 20th century.

The Gold Standard and Bitcoin

In the book, Shiller does briefly touch on some parallels between the Bitcoin narrative (which we explored earlier) and the gold standard, but it’s worth exploring this more in depth.

Some writers have noted the similarities between the two monetary systems. Both Bitcoin and the gold standard are characterized by a limited supply: The Bitcoin protocol explicitly defines the Bitcoin supply and the gold standard is limited by the physical supply of gold. This supposedly makes both assets resistant to the inflationary pressures often associated with fiat currencies.

In 19th-century debates about bimetallism, those in favor of using both gold and silver as standards argued that focusing on gold would concentrate wealth in the hands of people who were already wealthy. In today’s cryptocurrency debates, those who are skeptical of Bitcoin tend to put forward similar arguments, while those who favor a “hard” money, limited-currency approach to guard against inflation often find much to appreciate about Bitcoin.

However, there are crucial distinctions: Bitcoin operates as a decentralized digital currency without the need for a central authority, while the gold standard explicitly required governments and central banks to manage the supply of gold. This distinction informs the contemporary debate about whether a decentralized cryptocurrency like Bitcoin can serve as an alternative to traditional fiat currencies controlled by central authorities.

Recurring Narrative #4: The Machines Are Coming for Your Job

Shiller writes that fears of technological unemployment have persisted throughout history, from the industrial age to the present era of AI and automation. Indeed, he writes that the fear that machines will eventually replace human labor is a narrative with deep historical roots, dating back to the ancient Greeks. Throughout history, every significant technological advance has rekindled this narrative, often accompanied by riots and fierce protests as people grapple with the implications of automation.

This narrative gained momentum, Shiller notes, with the onset of the industrial age and continued well into the early 20th century. It reached its peak during the 1930s when many people attributed the Great Depression to technological unemployment. During this period, the fear that machines could displace human jobs was palpable, and it fueled concerns about economic stability and inequality.

(Shortform note: Some commentators agree that fears about the technological displacement of human workers are a recurring historical theme—and that these arguments have been wrong every time they’ve been advanced. Their proponents are typically called “Luddites”—named after a legendary figure in the early 19th-century British labor movement, Ned Ludd, who supposedly led English textile workers to protest against the introduction of labor-saving machinery during the Industrial Revolution. However, critics of the original Luddite movement argue that their resistance to progress was misguided, as the Industrial Revolution ultimately led to increased productivity, improved living standards, and the creation of new job opportunities.)

The Emerging AI Narrative

In the modern era, writes Shiller, computers and AI represent the latest manifestation of this narrative. Just as engines and machines once replaced physical labor, AI and computers are now poised to replace intellectual labor. The concern is that if workers accept this narrative too deeply and come to fear their jobs will be automated in the near future, they may curtail their spending now, anticipating economic uncertainty. This reduction in consumer spending could lead to a decrease in overall demand, potentially triggering a recession. And, in a neat illustration of the self-reinforcing power of economic narratives, a recession might incentivize employers to invest more in money-saving automation as they seek to cut costs, perpetuating the cycle.

Will Technology Create a “Useless Class”?

Echoing the questions Shiller raises about automation, Yuval Noah Harari writes in 21 Lessons for the 21st Century that one of the biggest challenges of the 21st century will be a net loss in employment that creates a “useless class” of unskilled workers. While Harari argues that some workers will be able to get training in a new set of skills, technology will continue to change so rapidly that those new skills could also become obsolete a decade later. Even in fields that introduce human-computer teams, the computers may eventually perform so well that they no longer need their human partners.

Harari draws a contrast with the earlier waves of automation cited by Shiller. Throughout history, observes Harari, each new machine and labor-saving technology created at least as many jobs as it eliminated—for example, a piece of equipment that replaced a human laborer also required someone to operate the equipment and another person to do maintenance on it. Past innovations substituted human workers’ physical capabilities, but not their cognitive abilities.

However, writes Harari, the dual rise of infotech and biotech is creating technologies that truly could replace the need for human workers. New discoveries in neuroscience have revealed that human skills such as analyzing, decision-making, communicating, and interpreting other people’s emotions are the results of specific brain algorithms. Now that scientists are coming to understand how the human brain uses these algorithms, technologists can increasingly replicate those processes with AI. As a result, not only can machines do a human’s job—they may even be able to do it better than humans can.

Part 4: Predicting Tomorrow’s Narratives

Having explored what factors make certain economic narratives “stick” and which economic narratives have had staying power throughout history, Shiller writes that we need to develop tools that help us predict and prepare for the narratives that will take hold in the future. Given the real economic power that narratives hold, it is essential to understand their origins, propagation, and eventual decline. Shiller recommends that economists do this by embracing qualitative (in addition to quantitative) research and by looking for new sources of narratives in traditionally overlooked places.

Shifting to Qualitative Research

Shiller writes that economists must venture beyond their traditional quantitative approaches and pay heed to the emotions and impulses that shape the decisions of the real people who constitute the economy. This shift calls for a more nuanced and multidisciplinary approach.

To gain a deeper understanding of how narratives influence economic behavior, economists should engage in qualitative research methods. This includes conducting interviews with individuals, organizing focus groups, and undertaking longitudinal studies to measure how attitudes and beliefs evolve over time. Collaborating with experts in psychology and sociology can offer valuable insights into the cognitive processes that drive the formation and spread of narratives.

A Humanist Approach to Economics?

Some observers write that there has long been a divide between economists and practitioners of more humanist fields—and call for a more humanistic approach to economics.

These academics argue that traditional economics often focuses too narrowly on quantitative models and mathematical analysis while neglecting the human experience, emotions, and narratives that shape economic behavior. They emphasize the importance of incorporating insights from the humanities, social sciences, and arts to build a more comprehensive understanding of economic phenomena. They believe that by doing so, economists can address real-world economic challenges more effectively.

In addition to reshaping economics, these scholars advocate for changes in education. They argue for a curriculum that encourages critical thinking, interdisciplinary learning, and a deeper understanding of the cultural and societal contexts in which economic decisions are made. Their vision is to train economists who can think critically, appreciate the complexity of human behavior, and apply their knowledge to real-world problems.

Finding New Sources

Moreover, writes Shiller, economists should broaden the scope of their work by analyzing sentiments and ideas found in sources that have typically been overlooked in traditional economic analyses. These sources include anything from sermons, social media posts, pop culture references, and memes to advertisements and historical documents like diaries, land deeds, wills, and newspaper editorials. These diverse sources provide windows into how ordinary people throughout history have thought about and engaged with economic concepts.

Shiller’s call for economists to tap into previously overlooked data sources to better understand economic narratives reminds us that our traditional quantitative sources—government statistics, industry data, official demographics—only began being compiled and published recently.

Qualitative Data and Ancient Economics

Much of what we know about the ancient world relies on data that is largely qualitative. This includes data that’s been inferred and reconstructed through various historical and archaeological sources, including:

• Written records in the form of inscriptions, clay tablets, papyri, and manuscripts

• Archaeological evidence, such as physical artifacts, buildings, and infrastructure, that provides clues about economic activities, the layout of ancient cities, and production facilities

• Ancient coins, which provide insights into the monetary systems of the time and help us estimate economic activity and wealth distribution

• Historical accounts like chronicles, diaries, and writings of historians and travelers that provide anecdotal evidence of economic conditions, trade practices, and notable economic events

• Comparative studies that look at multiple sources and cross-reference them to validate their findings and create a more complete picture of ancient economies

Economists could glean far more insights about the human decision-making that drives the economy by tapping into this rich vein of qualitative data.