Narrative Economics: How Stories Go Viral and Drive Major Economic Events

by Robert J. Shiller

a new story correcting a false story may not be as contagious as the false story, which means that the false narrative may have a major impact on economic activity long after it is corrected.

It is usually impolite or rude to change the conversation subject, unless justified by some extraordinary circumstance.

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the birthday party, whose popularity began to grow around the 1890s.

the human-interest stories themselves may not be enough to make a narrative contagious.

Those who aspire to create viral narratives must choose their celebrities carefully because the narratives work best when the intended audience personally recognizes and identifies with the celebrity.

Sometimes, everyday people coin apt or pithy quotes, but those quotes become contagious only after the story is altered to substitute the name of a famous person as the originator of the quote.

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Narratives involving celebrities can suddenly lose their contagion if some event discredits the celebrity, whether or not the ideas in the narrative are true or good.

We have seen seven key propositions with respect to economic narratives:

Disease epidemics tend to recur after a mutation overcomes acquired immunity,

Thus the 1918 flu pandemic, often called the Spanish flu, cost more lives than World War I did.

How Economic Narratives Mutate

In the mid-nineteenth century, people weren’t telling exactly the same stories with the same interpretations that we see today, but the themes are surprisingly similar over time.

In the eighteenth and nineteenth centuries, most people did not save at all, except maybe for some coins hidden under a mattress or in a crack in a wall.

the Keynesian marginal propensity to consume out of additional income was close to 100%. That is, most people, except for people with high incomes, spent their entire income.

The idea that the poor should be taught to save grew gradually over the nineteenth century, the result of propaganda from the savings bank movement.

after the Panic of 1907, the United States passed the Aldrich-Vreeland Act (1908), which created national currency associations as precursors to a central bank, and a successor act, the Federal Reserve Act of 1913, which founded the US central bank, whose purpose was to provide a “cure for business panics.”

A powerful narrative at that time was the story of a celebrity, J. P. Morgan, widely considered one of the richest people in America. In the absence of any US central bank during the Panic of 1907, he used his own money for, and he prevailed on other bankers to contribute to, a bailout of the banking system. This saving of the United States from a serious depression was a truly powerful story, and Morgan’s celebrity only grew. He later built his central office building at 23 Wall Street.

George Washington was sworn in as first president of the United States on the steps of Federal Hall in 1789.

The Federal Reserve System was modeled after his 1907 consortium of bankers. In accordance with the narrative, the new central bank was technically owned by bankers, though it was created by the federal government.

the depression of the 1930s, George Gallup, the originator of the Gallup polls and a pioneer in public opinion measurement, became the first social scientist to survey business and consumer confidence using scientific polling methods.

in the United Kingdom with the Northern Rock bank in 2007, the first banking panic there since 1866.

Charles Mackay’s popular 1841 book Memoirs of Extraordinary Popular Delusions began to attract public attention to crowd psychology.

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suggestibility, which refers to the idea that individual human behavior is subconsciously imitative of and reactive to others.

To achieve success, one must repeatedly suggest to oneself that one will be a success.

We do not know our strength and not knowing we can not use it.

Hitler’s appeal was based in part on the idea that he would inspire the German nation out of the depression into which it had sunk, despairing and insecure, in the wake of World War I. At the time, it was widely believed that the Depression resulted from a loss of confidence and that Germans needed a leader to restore the nation’s confidence.

It seems natural for people to think that if the meteorologists can forecast the winds, then economists should be able to forecast recessions.

the business cycle came during the depression of 1858, and it appeared alongside a reference to weather: Some, claiming to be learned in meteorology, say the seasons ran in decades: it seems also that there is a sort of business cycle of the same length of time; and it happens very fortunately that the decimal panic comes at the same time with the mildest winter. Whether this is a coincidence or a providence, or whether it is a fact at all, I leave for others to decide.9

Leading indicators today include the Department of Commerce’s Business Conditions Developments (now melded into the Survey of Current Business), the Conference Board’s Composite Index of Leading Indicators, and the OECD’s Composite Leading Indicators.

The 1930s represented a turning point in economic measurement. Until then, no statistics reliably measured unemployment.

By the 1930s, the statistics began to focus on the unemployment rate, which measures employment based on the size of the labor force, not on the size of the population.

They have shown that countries that abandoned the gold standard earlier recovered better.

In effect, Friedman and Schwartz argued that the Fed would have done better if it had offset these declines.

we must understand that people hadn’t named the economic downturn the “Great Depression” as it was happening. Instead, they called it “hard times.”

Keynes’s idea that depressions are caused by declines in “animal spirits.”

it was noted during the Great Depression that there was no increase in crime despite the high rate of unemployment.

The higher crime and unemployment rates help explain Hitler’s appeal to many voters.

The numbers tell the tale: sales of new cars by Ford Motor Company, which had adopted many labor-saving mass-production machines, fell 86% from 1929 to 1932.

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In the 1920s and 1930s, blue jeans culture fit in with the poverty-chic culture, the cowboy story culture, and the dude ranch culture. Starting in the 1940s, blue jeans became associated with altogether different cultures, first with Rosie the Riveter during World War II, and then with high school, youthful rebellion, and women’s liberation.34 The blue jeans fashion truly exploded in the 1950s,35 propelled to new heights by the hit 1955 movie Rebel Without a Cause and its handsome star James Dean, who died at age twenty-four, a month before the movie was released, while driving his sports car recklessly.

Ryōkan (1738–1831) is remembered in many stories for his kindness and generosity to the less fortunate.

James Truslow Adams coined the phrase American Dream in the first edition of his New York Times best-selling book The Epic of America (1931).

Adams defined the American Dream as follows: The American dream, that dream of a land in which life should be better and richer and fuller for every man, with opportunity for each according to his ability or achievement … It is not a dream of motor cars and high wages merely, but a dream of a social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and recognized by others for what they are, regardless of the fortuitous circumstances of birth or position.

The phrase American Dream has a ring of truth to it as a statement of American values. The United States is a proud country that has no aristocracy, allows no titles or royalty, announces in its Declaration of Independence that “all men are created equal,” and allows free enterprise to proceed with little government interference.

However, it is also a country that permitted slavery until 1863.

And American blacks have not received equal treatment even long after the abolition of slavery.

civil rights leader Martin Luther King, Jr., used the phrase in his legendary “I Have a Dream” speech, which he delivered during the civil rights march on Washington, DC, to a large crowd stretching between the Washington Monument and the Lincoln Memorial. In that speech on August 28, 1963, he looked confidently forward to a day when “this nation will rise up, live out the true meaning of its creed: We hold these truths to be self-evident, that all men are created equal.”