- Robert Shiller is a Nobel Prize-winning economist, a professor at Yale University, and the author of "Narrative Economics: How Stories Go Viral and Drive Major Economic Events."
- Shiller explains how compelling stories can impact actual economic outcomes.
- Shiller says the mysterious story of Satoshi Nakamoto was what really drove the price and popularity of bitcoin.
- He also says the Laffer curve became an important part of tax policy because of the powerful story, not because of an actual basis in economics.
- Shiller says this is the one place where he will gladly praise President Trump. According to Shiller, Trump is great at reading audiences, experimenting with narratives, and he is never boring.
- The Nobel Prize winner explains that these stories matter just as much as or more than the truth. And that these narrative disruptions make it very difficult to make long-term economic predictions.
Robert Shiller sat down with Business Insider during the World Economic Forum in Davos, Switzerland to discuss his most recent book and how it applies to the current economic landscape. Following is a transcript of the video.
Silverstein: So, your new book "Narrative Economics" is a topic that you've been interested in for a very long time. Can you explain to me what narrative economics is?
Shiller: A lot of people think about narratives these days, it's a new trend. But they tend not to be economists or financial analysts. Maybe they think about it, but they don't research it. I think that major economic events, successes and failures alike, are typically driven by stories that went viral. And we don't have a deep understanding of events until we understand, we start studying the narratives.
Silverstein: And can you give me examples of something recent that happened because of a narrative, a strong narrative?
Shiller: Yeah. OK, the, the Great Recession. We named it the Great Recession in honor of another narrative, which is the Great Depression. Now you would think that people would be forgetting about the Great Depression. That was 1929 and well into the '30s. Like 10 years of economic slowdown. But it's a long time ago. You think people are forgetting about it. But they're not. And in fact, in the early 2000s, references to that exploded. I count, I count these things, how often they come back in the news media.
So, and then we named it the Great Recession. It's obviously a reference to the Great Depression. And so people became scared and they stopped spending. They didn't stop spending, but they cut back. You know they think, should we go on a cruise this year? Well, maybe not. You know, I feel a little unsettled. It's going to cost a lot of money. If people cut back on their consumption enough that we have a recession. And these stories impact the economy in a way that otherwise wouldn't necessarily be happening. Yeah. A lot of economists seem to think, want to think, that it must be something about technology, or productivity, or maybe what the central bank did. But I think it's, it's more generated in people's minds.
Silverstein: And what's so strong about the bitcoin story?
Shiller: Oh yeah, I use that as Chapter 1 of my book. It's an example of how good stories create economic events. And in the case where - I think it's clearly traceable to the story. Now I'm not going to even comment on whether bitcoin is a good idea or not. It doesn't matter. I'm just looking at the story.
The story was that a man named Satoshi Nakamoto had an invention which he promulgated on the internet around 2008. And, it's the greatest, most wonderful invention in a long, long time. It ties into stories about anarchism. Anarchists don't like government. Well, bitcoin didn't ask anybody's permission. They didn't go to any regulator to start their bitcoin. And it's not even tied to a country. It's international. We're all cosmopolitans now. It just seems like a good story.
And then they put a little mystery into it. Satoshi Nakamoto has never been spotted by anyone who tells us about these things. How could it be? He's one of the most famous people in the world now. And yet no one has met him. So maybe he doesn't exist. Maybe there is a committee, maybe it's a conspiracy. Who knows? But somebody wrote a nice paper that was, it just has an excitement. I can see people transform. When I bring it up in my class, my students react, they wake up when I bring up bitcoin.
Silverstein: How do you separate out the story from what's real? And how much can the story affect what becomes real?
Shiller: It isn't a single story, every telling of the story is a little different. There's a core idea in the story. And, how do you tell whether it's a real story or not? That takes work. And in the case of bitcoin, it's kind of difficult to think through it. It's not - it's impressive. It's not easy. But you can work at it. The problem is, if you reach a decision about bitcoin one way or the other, it'll never get out, because it can't compete with the narrative quality of the original story.
Silverstein: Can you tell me about the Laffer curve, something that I think a lot of people take to be fact, but you say that a lot of the strength from it comes from this very simple story?
Shiller: Yes, so I'll tell you a story. In 1974, an economist named Art Laffer was having dinner at the Two Continents restaurant, a nice restaurant in Washington DC. And he was having it with Donald Rumsfeld, who was the secretary of defense for the United States - really big shot guy - and Dick Cheney, who would soon become vice president of the United States. So a bunch of the - and also Jude Wanniski, who is a writer for the Wall Street Journal who wrote the story up.
AP Photo
Dr. Arthur Laffer, Economist and professor at University of Southern California, with "Laffer Curve" on blackboard, Feb. 23, 1981.
And in that story, Art Laffer draws a diagram on a napkin, called the Laffer curve, which illustrates, I won't get into the details, but supposedly illustrates dramatically how taxes can hurt incentives and destroy the economy. And that even if you, if you actually cut taxes, you may collect more taxes even though you cut, because people will be so much more affluent, they'll be working and producing. Nice story. It went viral. But not in 1974. It wasn't until in 1978, when Jude Wanniski wrote a book, a best-selling book called "The Way the World Works," and he tells this story about the dinner. And afterwards, people want to know the whole story. They ask about the napkin. The napkin is a visual image that enhances the story.And there it is. It's now many years later - the Laffer curve went through a typical epidemic. It expanded right after 1978. And everyone was talking about the Laffer curve. Same time as Rubik's cube came out. That was another, another such fad. Laffer curve and Rubik's cube were both around that time. They both faded somewhat. But they're both still here. And Laffer is coming back. It has an internal dynamic like that of a disease. I'm not calling it a disease.
Silverstein: How much does narratives impact how the Fed communicates or how the president communicates? How much does that impact the economy?
Shiller: The people who take positions like Fed or Treasury Secretary become intuitive narrative economists even though they weren't taught any of that in grad school, because it's so obvious that the narrative matters.
Customers queue to enter a branch of Northern Rock in Kingston, Surrey, southern England.
So for example, when the Northern Rock bank failed in the UK in 2008, the Chancellor of the Exchequer and the head of the Bank of England reacted immediately because they didn't want, it looked like it was a story about a bank run. This bank was failing and depositors were worried that they wouldn't get all of their money out. There was deposit insurance, but it was only up to a small amount. And people who had their life savings, planning for retirement, panicked, they thought, maybe I'll lose all of it. And so they rushed to the bank, and of course it's a self-fulfilling prophecy. The bank can't pay out all this money at once.
They immediately rescued the Northern Rock bank and paid off all the depositors. So, the reason they did that is they didn't want the narrative to get started. They knew that in the past it was rumor and stories that people went to many different banks and asked for their money right away.
Silverstein: And what about Trump? Is he good at this? Has he been able to -
Shiller: This is one place where I can be lavish in my praise of Donald Trump. He is very good at narratives. He's very good at judging audiences. He experiments. This is a way, the way you launch narratives. You never know whether it will go well. He listens to the audience. He creates a whole story. The story of him at his rally, which is spread by word of mouth. It's a visceral thing. Most of these people had never gone to a presidential speech before. And if they did it would've been boring. He'd be talking about statistics on the national deficit or something like that. Trump is not boring, really not boring. And it started a word of mouth thing that was huge.
Silverstein: And how much has this increase, or is it the same, with social media? Is the impact of narratives bigger or faster, or can we just see it more?
Shiller: Well, the impact of narratives is bigger with social media. But I have to say, I think the mistake people make is more often underestimating how important narratives were long ago. So we have the Latin word rumor, that has the same meaning as it does today. What is a rumor? It's a contagious narrative, right? Which is not fact-checked by anyone, it's just out there. So they knew about this thousands of years ago, and it was a factor thousands of years ago. But yes, it is bigger today. We're living in a world with expanded information technology and ability to communicate. And to communicate with like-minded people. To find each other. Maybe they had computer dating and maybe that helped people find their spouse. But it's much bigger now. They're not just, it's finding someone who has the same political views as you that you can talk with.
Silverstein: And you talk about how difficult it is to predict economic performance in the long term. Is that because of how much narratives play a part?
Shiller: It's hard to predict whether a new movie which hasn't been shown yet will be a success. Notoriously hard. The director might have had successful movies in the past, he has famous actors and actresses, but nothing seemed to click this time. It's when you put the movie in front of the audience and you start to listen to the word of mouth.
Silverstein: And how does that relate to, like, GDP estimates two years out?
Shiller: So when you talk about, oh, yeah, they're not very good at forecasting GDP two years out because the disturbances are, I think, narrative-based. And they don't generally systematically study them. And unfortunately, it does require some human judgment at this time anyway, to understand the importance of narratives.
Silverstein: Is there one big narrative that is happening right now that you think we should be paying attention to or that's dislocating something?
Shiller: Well, a narrative that comes to mind is the artificial intelligence revolution. And we have many stories of neat things. Like your smart speaker, I guess like Amazon Echo that you have. It's kind of, it does seem like the the new world. Something really fundamental has changed. But I don't think it has scared us yet profoundly because we don't have high unemployment. So people think, well, but the economy is strong so, not worry about it now. But I think if we do have another recession, that narrative could come roaring back and become again an obstacle to recovery.