![]() For example, we can think of monopolists in search of a narrative to justify their huge actual or potential profits. These groups, whether business or political, out of self-interest might apply propaganda techniques to help a narrative spread. ![]() Shiller’s focus on disease epidemiology and his ignoring or downplaying of money’s role leaves readers questioning his propositions in two ways.įirst, surely there are powerful groups in the political economy whose purposes the spread of a narrative serves well. And there is an elephant in the room that the author ignores totally-the powerful role of monetary disorder, whether in forming the narrative or determining its contagion rate, or as a competitor to the narrative in providing an explanation for economic and financial fluctuations. Unfortunately, the author’s citation of narratives that have played key roles in past economic and financial outcomes is far from convincing. Optimistically, though, he asserts that economic research is already on its way to finding better quantitative methods to understanding narratives’ impact on the economy. Narratives mutate, recur, and are often complex. Shiller does not suggest that this is a simple endeavor. Collecting better information about changing narratives should begin now. To understand both secular and cyclical developments, we must identify the economic narratives that are powerful and active contemporarily, and how they are waxing or waning. Shiller concludes that narrative economics should have a key role in economic theory. Indices and their movement become a trigger to regular storytelling by journalists. According to Shiller, the start of data agglomeration on stock market indices triggered greater contagion and the origination of narratives about equities from the 1930s onward, and he attributes the same role to the Case-Shiller data on US housing prices from the 1990s. The author identifies price index publication as a trigger to narrative creation. Given Shiller’s renowned research into the housing market, the reader will likely be drawn to his analysis here. There is much in the book about the narratives that form in various asset markets. The contagion rate can be greatly lifted by the endorsement of a celebrity (who may in some cases be its originator). The latter in this context means forgetting or losing interest in the presumed facts disproving the narrative. The speed and extent with which a narrative penetrates a population (for example of global investors) is determined by the contagion rate relative to the recovery rate. In Shiller’s own words, “A key proposition of this book is that economic fluctuations are substantially driven by contagion of oversimplified and easily transmitted variants of economic narratives.” He draws on medical evidence about the spread of infectious diseases to develop his thesis. Much of this book is about how economic narratives form, spread, and eventually fade. Shiller gives the example that we judge the danger of an emerging economic crisis by its similarity to a remembered story of a previous crisis rather than by any logic. The book is full of promise, written by an author acclaimed for his pioneering work in applying psychology research about impaired mental processes in decision-making to economic and financial market analysis.Ī well-known proposition of modern psychology, termed the representativeness heuristic by authors Daniel Kahneman and Amos Tversky (1973), is that people form their expectations based on the prominence of an idealized narrative rather than estimated probabilities. Shiller in his new book focuses on an issue of fundamental importance to understanding economic and financial market cycles-the rise and fall of narratives. Recession - housing bubble -monetary policy - narrative economics - business cycleīrendan Brown is a nonresident senior fellow at the Hudson Institute and an associated scholar of the Mises Institute. Ignoring or downplaying money’s role leaves Narrative Economics a disappointment. Drawing on medical evidence about the spread of infectious disease, Shiller argues that “economic fluctuations are substantially driven by contagion of oversimplified and easily transmitted variants of economic narratives.” But Shiller ignores the powerful role of monetary disorder, whether in forming the narrative or determining the contagion rate, or as a competitor to the narrative. Princeton: Princeton University Press, 2019Ībstract: Much of Shiller’s new book is about how economic narratives form, spread, and fade. Narrative Economics: How Stories Go Viral and Drive Major Economic Events
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