November 1, 2019 / 4:02 PM / 19 days ago

Breakingviews - Review: Economics can use some story-telling

NEW YORK (Reuters Breakingviews) - Stories can affect people’s behavior. So does how those tales are told. The way people react can be quantified and help economic research, Robert Shiller suggests in “Narrative Economics: How Stories Go Viral and Drive Major Economic Events.” This approach could show whether, say, consumers heeded U.S. President Franklin Roosevelt’s call to spend more during the Great Depression. It’s a difficult challenge, but the shift from hard data is overdue.

People walk by the New York Stock Exchange in New York's financial district March 11, 2014.

Shiller, who won the Nobel Prize for his work on predicting long-term stock market movements, offers a set of tools backed by historical facts. Longer-term focus groups and interviews that shed light on why people make certain financial decisions could help better explain their actions. Comprehensive databases of current and historical diaries, sermons and personal letters could help to show how narratives spread.

People can change their shopping habits based on a story, Shiller explains. Take a generic tale about a looming recession. Reports of a downturn might prompt consumers to tighten their belts. As a result, businesses stop producing as many goods, causing workers to lose their jobs. The story becomes self-fulfilling.

Shiller expands on this narrative with newspaper clippings and what political leaders said before and during the Great Depression. President Calvin Coolidge in the 1920s made statements that were meant to boost the perception of the stock market. After the Wall Street crash of 1929, consumers held off from making purchases because of the narrative that retail prices would fall an additional 20% in a recession. These forecasts were amplified through newspapers.

The thought was that the downturn would be short, like the one the United States had endured less than a decade earlier. In telling people that consumer prices would fall again, economists perpetuated the slump.

After his election in 1932, President Roosevelt battled to encourage spending. He launched the “Buy Now Campaign” during his first year in office, which made it seem patriotic to not wait for lower prices. The Chamber of Commerce urged religious leaders to promote consumption, thus helping employment increase.

Did these stories help America’s economy recover? The short answer is we don’t know. But Shiller suggests that if economists tracked how many times inflation and spending was mentioned in newspapers or sermons, and what people felt about the price of goods, they could find out whether the campaigns helped.

Other academic disciplines – from anthropology to political science - have already developed these techniques. Shiller’s research of key words in a database of academic articles shows the use of narratives has increased in the past 10 years. Finance and economics are far behind. Borrowing from fields like epidemiology, which studies how diseases spread and has created mathematical equations to do so, could lead to more understanding about how narratives survive, are revived, or disappear.

One tale that continues to pop up is how the United States should return to the gold standard because it is superior to a free-floating currency. It resurfaced in 2007 when President Donald Trump, then best known as a reality TV star, advocated the idea.

Other narratives mutate and reappear, like the fear that robots will take over jobs. This has tended to gain traction when there are technological developments, or when robots become prominent in pop culture, as in the “Star Wars” movies during the 1980s. Shiller tracked these stories by measuring the recurrence of certain key words in a newspaper database.

Yet while it’s feasible to track the prominence of narratives, it’s much harder to measure whether they influenced people’s decisions to, say, avoid manufacturing jobs, or put off a house purchase.

Shiller acknowledges the limitations. He explains that collecting data from sermons, focus groups and interviews won’t happened soon. And he admits that that it’s hard to tell the difference between stories that describe economic behavior and stories that help trigger that behavior. That alone could make it hard for narrative economics to catch on.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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