Skip to Content

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

Narrative Economics (2019) describes how popular narratives influence the way economies behave. From Bitcoin’s sudden rise to stock-market crashes, Narrative Economics looks beyond the statistics to the collective human stories that drive these events.

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

Content Summary

Introduction: Discover how narratives drive economic events.
Narrative economics considers the collective stories that change economic behavior.
The rise of Bitcoin illustrates the power of narrative in economics.
The study of epidemics can tell us a lot about economic narratives.
Narratives often occur in constellations with other narratives.
Economic narratives often hinge on particular, vivid details.
There are perennial economic narratives that occur again and again.
The economic impact of narratives may change through time.
Research into narratives can help us prepare for economic events in the future.
Final Summary
About the author
Video and Podcast


Economics, Macroeconomics, Marketing and Consumer Behavior, Medical General Psychology, Finance, Business, History, Science, Politics, Sociology, Social Science

Introduction: Discover how narratives drive economic events.

Have you ever wondered why financial markets and economies sometimes behave in strange ways? Well, many economists will tell you that it’s all about numbers and statistics. The only way to understand the economy, therefore, is by interpreting these statistics.

But here’s the thing. The people who drive our economies – the consumers, the businesspeople, the politicians – are more complicated than any set of statistics can reveal. They have their own passions, biases, and belief systems. Simply put: they have their own stories – stories that change the way they behave, in turn impacting the way that money behaves.

When these stories become popular, they’re instrumental to economic outcomes – whether that’s by causing panic during a stock-market crash or leading rookie investors to load up on Bitcoin. However, stories are generally absent from economic analysis.

Narrative economics is a new way of taking these collective stories into account. In these summaries, we’ll take a closer look at this concept and learn how popular narratives drive economic events.

In these summaries, you’ll learn

  • what epidemics can teach us about viral stories;
  • why Bitcoiners think they’re special; and
  • how investors behaved differently during the two world wars.


Prominent economist Robert J. Shiller argues that, to truly understand the economy, he and his fellow dismal scientists need to look beyond the usual data points. Stories are what really drive economic activity, the Nobel laureate contends in this important and insightful text. He says that economists pay too much attention to hard facts while giving too little heed to the stories that consumers and investors tell themselves and each other. Shiller breaks down how narratives work through examples spanning the Great Depression to the bitcoin craze. So if you’re looking for a good story, pull up a chair…


  • Stories, not data, are the most powerful force in economic behavior.
  • Like diseases, economic narratives are contagious.
  • Determining which stories will go viral and which will disappear is a difficult task.
  • A “constellation” of narratives can converge to create a forceful overarching story.
  • The Great Depression remains a compelling economic tale.
  • In the world of narratives, fiscal austerity and conspicuous consumption wage a constant battle.
  • Economists largely overlook the power of economic narratives.

Narrative economics considers the collective stories that change economic behavior.

When you watch an economist on TV, you’ll notice that they’ll nearly always speak in figures. You’ll hear them use terms like “GDP” or “inflation” describing a past stock-market crash or an impending recession.

In an economist’s world, it can often seem as if the economy lives independently from the rest of the world, on a purely numerical plane. Economists rarely, if ever, try to explain the economy by referring to people’s fears, hopes, or prejudices. And they’ll often leave out our messy human stories, which are just as crucial to understanding big economic events. That’s where narrative economics come in.

The key message here is: Narrative economics considers the collective stories that change economic behavior.

First, to understand the phrase “narrative economics,” we need to consider the modern use of the word narrative.

Rather than simply referring to something with a beginning, middle, and end, a narrative can describe a collective story or belief shared by a group of people. Take the “shrewd businessman,” a popular narrative in the United States. In fact, Donald Trump capitalized on it to appeal to voters. Whether or not Trump is a shrewd businessman doesn’t matter – he successfully hitched himself to this narrative and played up his credentials as a tough, wily operator who’d get the best deal for the country.

And, of course, that particular narrative had a real effect. It helped Donald Trump get elected president.

Now, take the stock-market crash of 1929. In the years before the crash, there were lots of popular narratives flying around. There were stories of ordinary people gambling all of their savings on a particular stock and becoming enviably rich. Of course, this led more and more people to make bad investments, culminating in the big crash on October 24, 1929.

Narratives should form part of our understanding of any big economic event, but often, they don’t. While economists have rarely focused on stories, there has been one notable exception – Cambridge economist John Maynard Keynes. Rather than simply refer to figures, Keynes made a note of public feelings at play. In his book Economic Consequences of the Peace, he predicted that Germany would become deeply embittered by the heavy reparations they were required to pay after World War One. No purely quantitative analysis could’ve told us that.

The rise of Bitcoin illustrates the power of narrative in economics.

In late 2008, someone calling themself Satoshi Nakamoto posted a link to a paper that they’d written called Bitcoin: A Peer-to-Peer Electronic Cash System. From that moment, excitement grew around this mysterious innovation. While Nakamoto’s true identity has never been revealed, their invention – the cryptocurrency Bitcoin – has become a phenomenon.

Bitcoin has a complex and impressive mathematical theory behind it. But rather than the precise technical achievement that underpins the cryptocurrency, it’s mystery and excitement that drives interest in it.

The key message here is: The rise of Bitcoin illustrates the power of narrative in economics.

If you were to approach most Bitcoin investors and ask them about the technology behind the cryptocurrency, like the “Merkle tree” or the “Elliptical Curve Digital Signature,” it’s likely you’d be met with blank stares.

Instead, what excites most Bitcoin investors is the narrative around it. It’s the promise of a new way of doing things – far removed from the old currencies, displaying their dead kings, queens, and presidents.

In short, it’s the promise of the future. These investors believe that if they invest in Bitcoin, they’ll have a stake in this future, which promises to be dizzyingly futuristic. Just by buying into the cryptocurrency, they feel that they’ll be among the enlightened and technologically astute, rather than being left behind with everyone else.

Another popular idea attached to Bitcoin is the notion of a currency that’s outside the control of big banks and governments. This appeals to an anarchic streak in its investors, who believe that these institutions have become corrupt and inefficient. And as the currency doesn’t belong to any one country, it appeals to an idea of internationalism. “Bitcoiners” think of themselves as savvy, future-orientated citizens of the world.

From the mysterious founder to the complex math to the idea of a futuristic new world embodied in a currency, Bitcoin is an attractive story. And without this story, it’s unlikely that the cryptocurrency would have been as contagiously successful, attracting millions of investors. It’s the perfect illustration of the power of narrative in the world of money.

The study of epidemics can tell us a lot about economic narratives.

Think of all of the different departments at a university: anthropology, literature, physics, mathematics, economics, and so on. All of them highly specialized, all unearthing wonderful insights in their respective fields.

But this over-specialization can be an obstacle – a narrow focus. Instead, by working together, these different departments can enrich one another. And one area from which economics could learn a great deal is epidemiology – the study of epidemics.

The key message here is: The study of epidemics can tell us a lot about economic narratives.

By looking closely at how diseases spread, we can gain some insight into narrative “epidemics.” Take a contagious disease, like Ebola or a strain of coronavirus. There’s a contagion rate, a recovery rate, and a death rate. When the epidemic is rising, the contagion rate – which counts all of those newly infected – outnumbers both the recovery and death rates. And when the epidemic is dwindling, this process is reversed, and those recovering or dying outnumber new cases.

This pattern can also be applied to contagious economic narratives. Contagion occurs from person to person through conversation, whether through face-to-face contact, social media, or other communications technology. It also spreads through news outlets, talk shows, and the whole media ecosystem.

At first, the rise occurs rapidly. Then, just like a disease epidemic, there’s a slowing process. But rather than recovery or death, people lose interest or forget. When these people outnumber those who are “contagious” – those spreading the narrative – the story dies quite quickly.

Bitcoin, again, provides a great example of the parallels between a disease epidemic and contagious economic narrative. If you look at how frequently the word “Bitcoin” has been used in news and in newspapers across the world over the last ten years, you see a rapid increase around 2013, then a sudden spike and peak in 2018, before it falls away again. Although we haven’t seen the end of the Bitcoin story yet, the graph shows us a rapid rise and decline that looks very similar to the shape of a disease epidemic, even matching the secondary “waves” that occur after the initial spike.

So disease epidemics and narrative epidemics follow a similar shape. What’s the use of knowing this? Well, by studying the pattern of epidemics, we can get ahead of certain contagious stories and model our economic and political responses accordingly.

Narratives often occur in constellations with other narratives.

Sometimes, a story only gains momentum when it connects with other stories that relate to it.

For instance, let’s say that your next-door neighbor is an anti-social grouch who puts spikes on their garden fence to deter cats. If a cat in your neighborhood suddenly went missing, the narrative that your neighbor hates cats would suddenly seem more important. You might begin to notice other relevant details about your neighbor that would feed into your overall impression of them as an essentially miserable person – regardless of what had happened to the cat. This is because narratives rarely happen alone: they’re often part of a wider net of related stories.

The key message here is: Narratives often occur in constellations with other narratives.

Take the example of the Laffer curve, a theory associated with the economist Arthur Laffer. It’s a diagram that shows an upside-down U, demonstrating that lower taxation yields more tax revenue than higher taxation.

However, when the idea was first suggested, it didn’t gain momentum. It took a famous incident at a restaurant in 1974 for it to take off. At this dinner, Arthur Laffer reportedly drew the famous diagram on a napkin and showed it to Republican politicians Donald Rumsfeld and Dick Cheney. This story of the economist urgently wanting to share his idea stuck with people.

Then, the simple, tax-cutting logic of the Laffer curve fed into the popular idea that governments and bureaucracies were inefficient. The mistrust of big government was skillfully stoked at the time by conservative politicians like Ronald Reagan and Margaret Thatcher, who jumped on the opportunity Laffer presented.

The Laffer curve also became well-known at the same time that the books of Ayn Rand were gaining popularity. Her best-selling novel Atlas Shrugged told the story of a group of business leaders and other productive individuals who disappear in protest against the government – a government which they believe restricts their innovation with heavy taxes and regulations.

In relation to the politics of Reagan and Thatcher and the novels of Ayn Rand, the Laffer curve made perfect sense. Each of these related narratives lent weight and context to the others, bolstering the idea that government interference and taxation was a negative thing.

All of this means that when we seek to understand one popular narrative, we must always be careful not to miss the constellation of related ideas that surround it. Otherwise, we’ll only see a tiny part of a much bigger picture.

Economic narratives often hinge on particular, vivid details.

We can’t help it – we look to form narratives whenever we can. As the philosopher Jean-Paul Sartre wrote: “a man is always a teller of tales…he sees everything that happens to him through them.” In other words, our minds shape everything into narrative. But to form narratives, we need to hang them on particular human details.

Take the example of a controlled experiment conducted in 1985 by cognitive psychologists Brad E. Bell and Elizabeth F. Loftus. Participants took on the role of jury members. The goal was to see if particular, vivid details had any bearing on the way court cases were decided. So, fictional cases were presented with and without vivid details.

In one of these cases, the accused was said to have accidentally “knocked over a bowl of guacamole onto the white shag carpet” during their crime. That detail, seemingly irrelevant, helped obtain a conviction from the experimental jury. This image allowed them to form a concrete picture of the whole crime “narrative,” which would’ve been a dry, colorless account otherwise.

The key message here is: Economic narratives often hinge on particular, vivid details.

In economic terms, particular details can help build narratives that have dramatic effects. Think back to the terrorist attacks of 9/11. At the time, the US economy was in the middle of a recession. And when the World Trade Center was destroyed and the Pentagon badly damaged, many economists feared that this would further erode confidence in the economy. It seemed certain: all of the indicators pointed to further pain. However, by November, astonishingly, the recession was over.

What happened? It appeared that the American people, having watched the vivid spectacle of the attack on those symbolic buildings, had taken the seemingly inevitable narrative of a further recession and turned it around. One significant event was when President George W. Bush addressed the nation. He encouraged people to move past their fear: “Do your business around the country. Fly and enjoy America’s great destination spots. Get down to Disney World in Florida.”

Rather than accept continuing recession, the American people had built their own narrative around these vivid details. US businesses and the whole economy responded accordingly. The dramatic attack and George W. Bush’s rousing speech had spurred them on to resist the seemingly inevitable economic slump.

There are perennial economic narratives that occur again and again.

One very common economic narrative is that of panic versus confidence. You’ll often hear journalists, politicians, and economists talk about confidence – confidence in businesses, banks, and the broader economy. For economies to thrive, confidence in other people is essential.

Just as author Christopher Booker theorizes that stories follow one of seven basic plots – such as “rags to riches” or “overcoming the monster” – there appear to be economic narratives that crop up time and time again.

The key message here is: There are perennial economic narratives that occur again and again.

So, let’s get back to the narrative of panic versus confidence. Where did this story originate? In the United States, there seems to have been a financial panic in 1857, in the run-up to the US Civil War, where the idea gained popularity. Then, the use of the word panic to describe financial crises peaked after the famous Panic of 1907, involving the celebrity banker J.P. Morgan, who used his own money to help bail out the banking system.

The obvious flipside of a collective panic is one of collective confidence. The importance of confidence as a developing narrative can be seen in the statements of President Calvin Coolidge. In an attempt to bolster public belief in the stock market in the 1920s, Coolidge would give optimistic public addresses about the state of the economy, even when, in reality, things weren’t looking so good.

Since these early beginnings, the panic versus confidence narrative has remained a part of the economic story. Think back to the economic crisis of 2008 – you could argue that a historical memory of previous panics was a key factor.

A related narrative is the stock-market crash. It was the stock-market fall of 1929 that gave us the notion of the crash. Before that point, the phrase “boom and crash” was only used in relation to, say, the sound of thunder or the dramatic music of Wagner. But the dramatic impact of the 1929 crisis employed the word “crash” to refer to the plummeting stock market.

The stock-market crash narrative came back with a vengeance in 2007-2009, during the Great Recession. Just as with the 1920s, the idea that the crash was the inevitable punishment for a period of reckless speculation returned.

These narratives, which have their roots in events long ago, shape current events. If we’re to have a better understanding of what’s happening now, we need to recognize that what we’re experiencing is often a mutation of one of these perennial stories.

The economic impact of narratives may change through time.

We all have memories that subtly change over time. A distant birthday party. A summer road-trip with friends. A drunken holiday. These memories can reappear to us throughout our lives, subtly different, and cause us to reappraise them completely. So that dreadful time you sprained your wrist while bowling becomes a wonderful evening.

And as with life, so with economics. The collective narratives around economic events can change through time, altering our whole understanding of them.

The key message here is: The economic impact of narratives may change through time.

The memory of the October 19, 1987, stock-market crash still lingers. It was the biggest one-day crash in percentage terms in history. Recalling it is enough to dent the confidence of even the most bullish investor today because what happened before could always happen again. And journalists are still writing lengthy articles and think-pieces about it, especially on its anniversary.

However, the real event and the memory of the event are different. Because at the time, there was a great deal of discussion about a computerized trading program called portfolio insurance. It used algorithms to limit an investor’s loss from a plunging market. Narratives around this led many people to consider selling their stocks at the time, worsening the decline. Because of these particular circumstances, the crash of 1987 bears little relation to market conditions in the present day. Yet, many people forget this, and by spooking investors, 1987 still manages to affect us in some way.

Similarly, the memory of World War One mutated into something different at the beginning of World War Two and caused people to act differently. At the start of World War One, investors responded with panic and irrationality. European investors, for instance, shipped massive amounts of gold out of the United States, even though the United States wasn’t yet a part of the war, and the stock market began to fall steeply.

However, as World War Two began on September 3, 1939, the S&P stock-market index rose by 9.6 percent. Why? By this time, a very different narrative about World War One had become popular. Many people believed that those who’d held on to investments during the war had become rich. So between 1918 and 1939, a completely changed narrative of the First World War had caused people to act in a dramatically different way.

Research into narratives can help us prepare for economic events in the future.

As we’ve learned, narratives are important when it comes to the economy. To help predict downturns, boom periods, and anomalies alike, it’s necessary that economists take them seriously. It’s simply not enough to use statistics.

So, economists and researchers should use tools available to them now to understand narrative better. We’re able to access unprecedented volumes of data and see what occupies the minds of people all over the world. We can trawl through internet searches, see what people are saying on social media, and learn from focus groups and other types of market research. Never before has so much in the way of opinion, feeling, and personal preference been recorded. Technology allows us to search books and newspapers for key words and phrases at the click of a button.

By using tools that can find patterns in this ocean of data, economists should be able to identify prominent narratives that may have a causal effect on the economy.

The key message here is: Research into narratives can help us prepare for economic events in the future.

However, it’s important that real rigor is applied when using narratives to theorize about economic events, just as more quantitative economists do. Otherwise, the process will just be lazy, unscientific speculation. To do this, lessons can be learned from other disciplines that specifically study narrative, like the humanities. Narratives can also be analyzed by learning from developments in neuroscience, psychology, and artificial intelligence.

So, what can be done with all of this new information? By better understanding narratives, policy-makers will be able to shape people’s behavior in times of great stress. President Roosevelt understood this, even in the 1930s. During the Great Depression, Roosevelt knew that a collective lack of confidence was an important factor for the economy. In response, he addressed the nation in a series of “fireside chats” where he asked people to set aside their fears and go out and spend money. By doing this, he took control of the narrative, and it seemed to work – each time he addressed the nation, the markets steadied.

If policy-makers are able to read the constellation of narratives around an approaching or present economic event, they can get a great head-start. And from that vantage point, they can be active participants in events rather than hapless bystanders.


Stories, not data, are the most powerful force in economic behavior.

When human beings dream, they don’t conjure images of charts, graphs or data; they dream in stories. Story telling is deeply ingrained in the human brain. Economists have long overlooked the power of stories, but examples of economic narratives abound. Tales drive booms and busts in real estate and stocks. Narratives that focus on fear and suffering can deepen economic depressions, while expansions feed on the infectious optimism that often underlies greed.

“An economic narrative is a contagious story that has the potential to change how people make economic decisions, such as the decision to hire a worker or to wait for better times.”

Bitcoin, which launched in 2009, offers an example of the power of economic narratives. The mysterious founding of the cryptocurrency is part of its appeal: An otherwise-unknown person who went by the name of Satoshi Nakamoto created the virtual currency. Backed by imposing mathematical work, bitcoin relies on additions to public ledgers to create a digital version of money. Amid a yarn about the development of a currency untethered from government, bitcoin soared in value to $300 billion in just a few years.

“People have been spinning narratives since time immemorial.”

Proponents of bitcoin usually can’t explain how it works, because the narrative has moved far beyond any technical advances to become a human-interest story. One need not be an expert programmer to enjoy the fable of a mysterious creator. The bubble surrounding bitcoin also helped drive the narrative: People became fascinated by bitcoin because others were intrigued.

Like diseases, economic narratives are contagious.

Economic narratives spread from one person to another through conversations, whether they’re in person, by phone or via social media. The press also spreads these stories. Contagions aren’t always bad. Consider the example of wheeled suitcases: The first patent was filed in 1887, but the invention went nowhere. Entrepreneurs tried throughout the 20th century to market wheeled luggage, but the concept flopped. It was only in the 1990s, when a Northwest Airlines pilot invented the Rollaboard, a suitcase with wheels and a retractable handle, that the product finally took off. Airline crews loved the new bag, and they spread the story by effortlessly pulling their luggage through crowded airports full of potential consumers. In short order, a long-dormant idea went viral.

“When authors want their audience to remember a story, they should suggest striking visual images.”

The Laffer Curve is another instance of an economic narrative becoming contagious. Arthur Laffer is an economist who espouses lower taxes as a way to spur economic growth. At a dinner in 1974, Laffer famously illustrated his concept with a chart on a restaurant napkin. His theory gained credence when president Ronald Reagan and prime minister Margaret Thatcher used it to support large tax cuts. Trickle-down economics had been around for decades when Laffer drew his curve, and no one even knew about the restaurant episode until Jude Wanniski, an editorial writer at The Wall Street Journal, described it in a book published in 1978.

“Given its presence over the centuries and millennia, fake news seems to be part of the normal human condition.”

However, Laffer insists the napkin story never happened. The 1974 dinner took place at a steak restaurant with cloth napkins, and Laffer says it would have been unseemly to draw on the eatery’s property. No matter – the imagery of an economist doodling on a napkin was so memorable that the story spread. This episode illustrates that a narrative need not be true to go viral.

Determining which stories will go viral and which will disappear is a difficult task.

Narratives could help to explain the economy and provide a framework for economic decisions. Some common themes emerge:

  • Contagious narratives follow no predictable pattern – Some stories, such as bitcoin’s viral growth, move fast. Others burn slowly. Many fade out and then are rekindled in a new form.
  • “Constellations” of narratives are more powerful than single stories – The background to bitcoin’s technology is just one narrative. Others drive the cryptocurrency’s rise, such as the notion of feckless management by central banks. Another powerful tale revolves around missed opportunity: In 2009, singer Lily Allen declined to accept payment for a concert in bitcoins. If she had accepted the virtual money and held onto it, she would have been a billionaire, or so the story goes.
  • Contagion builds through repetition – The more an economic topic is discussed, the more likely it is that the underlying story will go viral. In the 1920s and ’30s, Americans began following stock prices, a tendency reinforced by casual conversations and news coverage. After the 1970s, the same scenario unspooled in regard to the housing market. The media play an important role in furthering “narrative epidemics.”
  • Identity and patriotism are crucial ingredients – The tale of president George Washington and the cherry tree is an example of how human interest can propel an innocuous story into legend. An 1806 book written shortly after Washington’s death related the tale of six-year-old George using his hatchet to chop down the family cherry tree. When questioned by his father, the boy replied, “I can’t tell a lie, Pa.” The story has taken on outsized importance as a symbol of the value of honesty in both American politics and business dealings.

A constellation of narratives can converge to create a forceful overarching story.

The Laffer Curve was just one story that led to the rise of supply-side economics and laissez-faire regulation during the 1980s, when Reagan slashed taxes. The popularity of author Ayn Rand’s novels also propelled the narrative of too much government, too much regulation and too much taxation. Rand’s first novel, The Fountainhead, found few readers initially, but her 1957 book Atlas Shrugged attracted a wide audience. Both books conveyed the idea that a few strivers contribute to society and the economy, and that government gets in their way.

“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.”

Meanwhile, celebrities help perpetuate narratives, and Reagan, the former Hollywood star, glibly seized on the big-government theme. In one memorable passage in a 1986 speech, Reagan summed up the public sector’s economic policy: “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.” Reagan, with his folksy style, grasped the power of humor and plain words in reshaping a narrative. Similarly, media coverage of economic data tends to use emotionally loaded descriptions, the better to garner attention.

The Great Depression remains a compelling economic tale.

The stock market plunge of October 19, 1987, marked the largest one-day collapse in equity prices in US history. However, there seems to be little in the way of apocalyptic economic narratives surrounding that event. It was the smaller single-day crash of 1929 that proved to have more staying power.

“The people who make economic decisions against a backdrop of narratives do not usually explain their decisions.”

One compelling narrative held that the crash that heralded the Great Depression led to a spate of suicides. But popular tales of rampant suicide seem to be inaccurate. In a best-selling book written 26 years after the crash, economist John Kenneth Galbraith reported that the actual number of suicides wasn’t remarkable. Yet these stories lived on for decades. In his 1970 book Hard Times, author Studs Terkel quoted several Americans who lived through the crash. One interviewee recalled “suicides, left and right.” Another recollected “people jumping out of windows.”

“The Great Depression and its causes (after a period of euphoria, loss of confidence) remain a powerful narrative.”

The suicide narrative is just one of many stories surrounding the Great Depression. Another thread concerns the booming decade of the Roaring Twenties, followed closely by the widespread misery of the 1930s – the now-familiar boom-and-bust tale. Other details, including mass unemployment, runs on banks and a general mood of hopelessness, loom large. America’s fruitful Great Plains region turned into the Dust Bowl in the 1930s, a catastrophe immortalized in the book and movie versions of The Grapes of Wrath. All these stories are embedded in the American psyche and continue to color popular thinking about the economy.

In the world of narratives, fiscal austerity and conspicuous consumption wage a constant battle.

During tough times like the Great Depression, Americans generally agree that it’s wiser and more moral to live frugally and humbly, well within one’s means. And during prosperous times, they believe that consumption projects success and happiness. These two narratives are in never-ending tension.

“The idea that the human mind is suggestible is diametrically opposed to the concept of economic man who is a rational optimizer, who acts as if guided by careful calculations.”

Depression-era consumers saw wasteful spending as a moral failing. During the 1930s, Americans all but stopped consuming. Even those who could afford cars opted for bicycles or public transportation instead. The instinct was understandable. With layoffs soaring, even those who had jobs reasonably feared the unemployment line. However, when consumers postponed spending, the effect was to intensify the Depression. From 1929 to 1932, Ford Motor Co.’s sales plummeted 86%.

“Today, the American Dream narrative justifies conspicuous consumption and the ownership of a pretentious house, in stark contradiction to the frugality narrative that was popular during the Great Depression.”

The pendulum swung over the decades, and by 2005, owning a big home was part of the American Dream, although the housing crash and the global financial crisis in 2008 tarnished that dream. But the US housing bubble was decades in the making; in 1919, realtors resorted to taking out newspaper ads to urge Americans to borrow to buy homes. “Don’t let the idea of a mortgage scare you,” one blandishment read. By 2006, on the cusp of the crash, housing was such an obsession that Americans would log onto the websites Zillow and Trulia to see how much their neighbors’ homes were worth. And it’s not just everyday consumers who worry about the frugality-vs-consumption question. Some Silicon Valley executives avoid buying splashy houses for fear of sending the wrong message to investors. Meanwhile, Donald Trump rode his image of conspicuous consumption all the way to the White House.

“Narratives about stock market bubbles are stories about excitement and risk-taking, and about relatively wealthy people who buy and sell securities.”

Another enduring economic narrative involves the threat technology poses to workers. In the 1930s, ditch diggers, steel workers and newspaper printers lost their jobs to machines; traffic lights replaced traffic cops; dial telephones displaced phone operators; films with sound rendered movie-theater musicians redundant. Such fears lived on for decades, with films like Blade Runner and The Terminator depicting the dark side of robotics. Today, driverless cars symbolize the fears of mass unemployment wrought by technology.

Economists largely overlook the power of economic narratives.

Dismal scientists can delve into a variety of data, including GDP, wages, interest rates and taxation levels. The abundance of statistics doesn’t explain motivations, however. That’s the purview of economic narratives, which are notoriously difficult to pin down.

“Economists must make more serious efforts to collect time-series data on narratives, going beyond the passive collection of others’ words toward experiments that reveal meaning and purpose.”

But that doesn’t mean economists should continue to ignore the power of stories. They should begin collecting data on economic narratives and how they affect behavior. Some starting points include:

  • Employ “listening as a research method” – Researchers should regularly ask people to explain their economic decisions. A few prominent economists have dipped a toe in this pool, asking executives how they set prices or wages. That’s a good start, but those were one-time studies. Economists should repeatedly query individuals about their understanding of economic narratives and how those stories influence them.
  • Conduct routine focus groups – This research technique brings together people from varied backgrounds to discuss their opinions about diverse topics, such as political candidates or consumer products. However, economists have shunned focus groups. They should embrace them and then record and digitize the sessions so that they can track contagious economic stories.
  • Analyze religious sermons – Pitches from the pulpit are another untapped resource. Sermons explore values and meaning, which change over time. Economists should collect sermons from churches, synagogues and mosques to scrutinize shifts in thinking.
  • Digitize personal letters and diaries – Economists should solicit donations of old letters and journals, and then digitize the content and analyze them with databases. This is another way to delve deeply into motivations that aren’t reflected in the economic data.

Final Summary

The key message in these summaries is:

Economic events like stock-market crashes and sudden investing crazes are often driven by popular narratives. These narratives occur together in constellations, with each one reinforcing the others. By considering narratives as part of our economic analysis along with more traditional economic data, we can be better prepared for what the future might throw at us.

About the author

Robert J. Shiller is a Nobel Prize–winning economist, the author of the New York Times bestseller Irrational Exuberance, and the coauthor, with George A. Akerlof, of Phishing for Phools and Animal Spirits, among other books (all Princeton). He is Sterling Professor of Economics at Yale University and a regular contributor to the New York Times. He lives in New Haven, Connecticut.

Robert J. Shiller | Yale Economics
Robert J. Shiller | Twitter @RobertJShiller
Robert J. Shiller | Email

Video and Podcast

Book Summary: Narrative Economics