How Stories Shape The Economy : Planet Money Nobel Laureate Robert Shiller talks about his new book, which looks at how narratives drive economic change and may help economists more accurately forecast recessions.
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How Stories Shape The Economy

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How Stories Shape The Economy

How Stories Shape The Economy

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UNIDENTIFIED PERSON: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

CARDIFF GARCIA, HOST:

Hey, everyone. Welcome to THE INDICATOR FROM PLANET MONEY. I'm Cardiff Garcia. Back in the early 2000s, there was a story that people would tell themselves - that it had become easy to get rich quick, that you could buy a house and sell it three or six months later for a huge profit. Everyone was doing it. This story was contagious, and a lot of people believed it. And it probably got mixed in with other stories that people told themselves, like, hey, I'm smart. And if my next-door neighbor can make all this money, so can I. And then, of course, when the housing bubble burst later that decade and dragged down the economy, this story changed.

See, we all tell each other - and we tell ourselves - stories about what's happening in the world and our place in it. And those stories can influence the way we behave, including, of course, the economic decisions we make. But how can we identify the precise effects of stories on our economic behavior? And how do some stories go viral and affect the whole economy, and others don't? That's the subject of a new book by economist Robert Shiller called "Narrative Economics," in which Shiller explains why economics should try to measure these effects - the effects of stories - especially since the tools, like online searches for words and phrases, now actually do exist to track the popularity of stories. So after the break, our conversation with Bob Shiller about narrative economics.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

GARCIA: Bob, welcome to the podcast.

ROBERT SHILLER: My pleasure, Cardiff.

GARCIA: So Bob, I almost don't know where to start. So why don't you just give us a definition? Narrative economics - what does it actually try to measure?

SHILLER: Well, let me first define narrative.

GARCIA: OK.

SHILLER: It's sometime taken as synonymous with story. A story could just be a chronology. A narrative is a telling of a story that imbues it with emotions, with morals, with views of the world, how it works. It's a story that we willingly communicate because we think that it's useful or enlightening or pleasurable or just dramatic. People love dramatic stories.

GARCIA: Yeah, that's true. And in terms of narrative economics, what does that narrative part add to economics that wasn't there before? What is new about this?

SHILLER: What's new about it is, increasingly, we are starting to study how people change their thinking. And so if we're going to describe how people make decisions, especially for forecasting economic events like recessions, we have to know how they're changing their thinking. And unfortunately, that's not - doesn't sound glamorous because we're talking about often naive theories that are just half-baked. They sound maybe wrong to us. But if people think that way, they're basing their decisions on it.

GARCIA: Yeah, it does sound unromantic in a way, you know? I mean, we tell ourselves these dramatic stories, in part because that's what it is to be human. But when you start bringing in quantitative methods to measure it, it sounds unromantic. But you're saying it's still very important.

SHILLER: I think it's important. The reason why most economists didn't forecast the Great Recession 10 years ago was that they weren't listening. People were saying just before - they were saying a couple of years before that they were thrilled by stories of people who flipped houses, and they were fascinated with the stock market.

GARCIA: The stories were about people who got rich quick. And then, of course, the story changed. And that, in part, it seems like what you're saying, contributed to the severity of the downturn afterwards - that the narrative had changed. Now there was a new narrative. How did that work?

SHILLER: Well, where do new narratives come from? They come, I think, from creative minds or from people who are looking around further away and remembering things that happened before. But the phrase housing bubble came in new just before the financial crisis - I'd say around 2005 when it started to take off. So these narratives spread like epidemics. They become contagious.

GARCIA: And given the mysterious nature of it, how do you seek to measure the influence that a story is actually having, especially in real time where it's really hard to pinpoint?

SHILLER: Well, at this point, I'm still relying, somewhat, on human judgment. I like to do counts on digitized text, and I like to not just stop with - I count for something like housing bubble and see when that came in. Nobody said that - almost nobody said that before this recent crisis.

GARCIA: Yeah.

SHILLER: But then I also go back to the newspapers and magazines that I'm searching and read the articles. And also, you can find article - a rare intersprinkling (ph) of articles that might have said housing bubble in past decades but never took off.

GARCIA: Yeah.

SHILLER: Someone tried it, and it didn't work. And they can try to reflect on why it didn't work then, and maybe you'll have a dim idea of an answer. But I think we can back up that judgment with some science that reveals something. We can do word counts, and we can do readings. We can get people to classify readings by some dimension that they understand, and that is a bit of science. But you know, the human spirit is likely to stay ineffable for quite a while.

GARCIA: Somewhat inscrutable, yeah. You say that economists should still try to predict the future. I think one narrative that's there is that economists are not very good at forecasting and that understanding narrative economics can help, that this is actually a moral issue. Can you explain that?

SHILLER: Right. Right. First of all, I have to defend my fellow economists. They can go out further than the weather people can. Weather...

GARCIA: That's setting the bar awfully low, I got to tell you.

(LAUGHTER)

SHILLER: Well, they're both - weather forecasters are pretty sharp people, but the weather just doesn't seem to be forecast well beyond a week or so.

GARCIA: That's what I meant.

SHILLER: Economists can go out six months. (Laughter) That's pretty good. But on the other hand, it would seem that it should be forecastable. The next recession - you should see it coming. The problem is that it has to do with people changing their minds and looking at each other and seeing what other people are talking and thinking about.

GARCIA: One other question about forecasting in particular. And if you end up incorporating this idea of narrative economics into the forecast and you're able to do so successfully so that the ability of American economists to forecast improves to not just six months but, let's say, one, two, five years into the future, then you have the issue of the forecast itself becoming a narrative. And then you're just chasing it all over again, right?

SHILLER: That's right. Well, this also brings up the self-fulfilling prophecy story. And I think that it's happening right now. Maybe not - maybe with the next recession - people have heard so much talk lately about the next recession that it sounds like we're talking our way into a recession. And my thought on that is, absolutely right. But I'm not sure that it's contagious enough, though. This is not deterministic economics. This is - it has a random component...

GARCIA: Yeah.

SHILLER: ...In it. But there's definitely elements of that happening, and I think that's happened in all prior recessions. In the - 1929, just before the Great Depression, there was already sort of gloomy talk about high unemployment and about machines replacing jobs. And somehow with - after the crash in 1929, those just immediately charged into the foreground - those narratives.

GARCIA: Yeah. I mean, I guess if one person says, I think the economy is not going to do well; I'm going to hold off on buying something - that person might look like a crank. But if 60% or 70%...

SHILLER: Right.

GARCIA: ...Of the people do that, you don't just have a forecast for a recession - a consensus forecast. You probably also have the recession itself...

SHILLER: Right.

GARCIA: ...At that point, right?

SHILLER: Recessions develop over years, often. And they're not that easy to see, and it's because there's a lot of narratives that sound like they might be a reason to withhold expenditure. But maybe they're not salient enough, or they're not brilliant enough or not emotionally charged enough.

GARCIA: Bob Shiller, thanks so much.

SHILLER: My pleasure.

GARCIA: This episode of THE INDICATOR was produced by Leena Sanzgiri, fact-checked by Nadia Lewis. Our editor is Paddy Hirsch. And THE INDICATOR is a production of NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

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