Narrative Economics By Robert Shiller

Scribbles (kept while reading)

-Narrative contagion is at the heart of narrative economics – spreading of anecdotal experiences that drive economic behavior. Aka a version of “go viral”

-Bitcoin is a seminal narrative story with contagion

-Economic narrative for cosmopolitan class and those who hope to join that class

-Satoshi Nakamoto is the alleged “creator” of bitcoin but no one actually has met him or knows who he is

-part of the Narrative–bitcoin free from govt control (in wake of occupy Wall Street movement), technology taking over our lives component (Luddite narrative)-narrative to be on the “winning” side of technological takeover, pan-national narrative,

-Consilience means the unity of knowledge among academic disciples especially between sciences and humanities

-using narrative to advance knowledge within disciplines and across disciplines

-Deep understanding if history involves understanding minds of those in history

-To understand peoples actions, understand the terms and imagery that energize – example to understand American Civil War, engage deeply with stories like the 1837 story of shooting of abolitionist Lovejoy – take into account t relevancy if emotional narrative.

-Importance of human intentionality

-Study of popular narratives, “narrative psychology” – overriding theme is that when you ask people to explain their overall objective philosophy of life they have nothing t to say, but when you ask them to tell personal stories, it reveals their values.

-According to a source referenced by the author, in all of fiction there are only 20 master plots: adventure, quest, pursuit, rescue, escape, revenge, the riddle, rivalry, underdog, temptation, metamorphosis, transformation, maturation, love, forbidden love, sacrifice, discovery, ascension, descension, rivalry, rigid access

-Epidemiology as consilience

-Key thesis of the book- economic fluctuations are largely driven by contagion of oversimplified and easily transmitted of economic narrative. These ideas color peoples loose thinking and actions. Not everyone is infected like biological contagion.

-Just as the world experiences coepidemics of diseases, we also see coepidemics of narratives, where narratives are perceived as sharing a common theme. Large scale economic narratives are often composed of a constellation of smaller narrative, each smaller narrative is part of the larger story, where we need to see the full constellation to see the full theme.

-Narratives exist in constellations to give each other credibility and to give audience a common baseline of interpretation-storyteller can build in assumed facts of other ones

-Confluence of narratives– narratives that may not be related to one another but they have similar economic effects at a point in time to explain economic events.

-Uncle Tom’s Cabin is an example of narrative power, especially the character within the story of Eliza crossing the ice with her daughter to evade the slave owner Author of this book says that Stowe’s character was replicated in live shows throughout the antebellum north and was a key factor is shifting cultural mindset that ultimately led to decision of North to invade Confederacy after secession.

-Author says that we dream in narratives with story structure and thus must be something inherent to us

-Humans could be referred to as homo narrativus or homo musicous, for the universality if narratives and music to our species and only our species. Author contends that even music has narrative arcs

-Empirical evidence shows that narratives go viral when people observe the reaction of people who are observing the narrative. Kind of makes sense–look to people who are listening to the story and if they like it, it can go viral.

-Laffer curve and supply side economics constellation. Laffer curve went viral likely Bc if the imagery associated with economist drawing curve on back of napkin with DC power brokers, conveying something profound and easy to understand, even if it wasn’t objectively verified

-popularity of brands are not usually Bc of the quality of products, but frequency of logos promote natural links to other contagious narratives

-Beauty contests–how the theory of mind feeds economic narratives. Theory of mind: humans strong tendency to form models in their minds of activities in others’ minds. Thinking about what others are thinking–we relate this to their belief and intentions. Ppl like to hear stories that they can tell to others, and so storytellers like to tel these stories. “Beauty contest metaphor” from Kaynes is an example for him to explain stock market speculation. The example goes like this–paper lists X number of beauty contestants, and you have to pick the top 5. You win if your list most closely matches the aggregate of other people’s’ lists. So you will not choose the ones you think are the best, you’ll choose the ones you think others will think are best. It extends further–you won’t choose the ones others think is best but what others think others think is best. Kaynes says stock market investments work the same. But we have to account for irrationality and incomplete information of the “others.” Maybe this applies to elections, presidential primaries??

-Author of this book extends beauty contest metaphor to fluctuations in business in general: when we choose to tell story to others, we make judgment to tell that story in how others will react to that story in their own minds.

-Fisherian Runaway–explanation of male peacock feathers, for example, that favors certain traits (not necessarily favorable) through sexual selection. Extended to the idea that something is popular (eg selected) for no other reason that it began to be popular

-Narratives are human constructs that are mixtures of fact, emotion and human interest that form an impression.

-Dis-narrativia: abnormal narrative phenomenon.

-Framing–if we can tell an amusing story, it frames a point of view that we can influence. People form expectations on idealiszed story or model. Interesting thoughts for me about application to expectations set for companies and people. One key may be in forming an idealized model to set those expectations

-Recurrence and mutations that allow narratives to persist – 9 perineal economic narratives along with mutations and recurrences that allow them to persist:

• Panic vs. confidence
• Frugality vs. conspicuous consumption
• Gold standard vs bi-metalism
• Labor saving machines replace many jobs
• Automation and AI replace almost all jobs
• Real estate booms and busts
• Stock market bubbles
• Boycotts, profiteers, and evil business
• The wage price spiral and evil labor unions

–Panic vs. confidence:

-Earliest confidence narratives in 19th and 20th century were about banking panics – confidence in bank to make good on their promises. Confidence in banks themselves and in banks’ other customers that they won’t withdraw all at once (FDR advisor): “A depression is much like a run on the bank. It’s a crisis of confidence. There’s a story–if my money is here, I don’t want it. If it’s not here, I want it.”

-Classes of confidence narratives: (1) financial panic narrative (banking crisis); (2) business crisis narrative (slow economic activity not due to financial crisis but due to general pessimism and unwillingness for business to expand); (3) consumer confidence and lack of spending that can bring about a recession

-Since 1800, these narratives form patterns. Duration can last lifetimes. First financial panic, then business panic, then declining consumer confidence. Maybe we are in phase 3 since the Great Depression? Or maybe we’re still in phase 1?

-Notion of suggestabilty – might explain herd like behavior — try to anticipate the herd’s movement and to get ahead of it. Concepts of crowd psychology to understand depressions

-“Psychology of Suggestion” – written in late 1800s

–Frugality vs. conspicuous consumption

-The main idea here is that the narratives of the Great Depression transitioned economic consumption to (forced) frugality and conspicuous consumption (to appear to be frugal–“poverty chique”)

-An aside: Sumptuary laws are ancient laws that limited consumption

-Frugality and compassion in the Great Depression: frugality narratives were particularly strong during the Great Depression due to (1) widespread unemployment and (2) the excesses of the roaring 1920s.

-This “new modesty” stayed high through Great Depression and WWII

-The “new modesty” narrative grew out of not wanting to flaunt wealth when your neighbors weren’t doing well due to economic and military conditions of the time.

-Constellation of human tragedy narratives – (aside: how does this relate to 9/11 and the 2008 recession–what constellations exist now).

-Note: no real increase in crime during Great Depression even though unemployment skyrocketed

-Conspicuous consumption took a back seat because it looked bad to be flaunting wealth. Poverty chique became the new fad.

-The bicycle craze: many people began riding bicycles to work. Those who owned cars decided to keep their cars going longer for fear of the social backlash against conspicuous consumption. Those who did not own a car decide to continue taking public transportation or to ride a bike. People rode a bike because they were unemployed or because they thought they were going to be unemployed. Seeing your neighbor struggle made it obvious that you should not buy a new car. How does this relate to today?

-Visibility index: automobiles are the second most visible consumption category out of 31 categories. The rest of the list is here in an article I’ll probably never read.

-Blue jeans craze: started with the poverty chique movement, continued with Rosie the Riveter, exploded with Rebel Without A Cause movie–over time the ubiquity of blue jeans lost their narrative with economic poverty and the blue jean epidemic continued without it.

-Jigsaw epidemic: people started to buy cardboard jigsaw puzzles instead of wooden jigsaw puzzles. Seen as a cheaper alternative and also a way to spend an evening home with family.

-Bicycles, blue jeans and jigsaw puzzles are examples of how people stopped buying expensive goods during the Great Depression and by extension helped explain (according to author) the length and severity of the Depression.

-Conclusions of this: author proposes that Great Depression started ending because people were spending more because poverty was no longer so chique–this implies that the causes and effects extend to behavior and not just government policy; declining modesty/compassion narratives since the Great Depression can help explain many economic trends–decline in modesty narrative may be a narrative leading to economic inequality, may be related to long term decline in management loyalty to employees,

-Frugality narrative was repeated in Japan during their lost decade of the 90s

-The American Dream narrative ultimately displaced the frugality narrative. The American Dream eventual ended up relating to home ownership.

-Aside, the origin of the phrase “American Dream” James Trusslo Adams coined it in The Epic of America in 1931.

-The idea is that the American Dream as home ownership implies patriotism and justifies high expenditures on home ownership.

-George W Bush’s slogan of the “Ownership Society” tied to the American Dream

-Today the American Dream narrative encourages conspicuous consumption

–The Gold Standard vs. Bimetalism

-Gold standard: defining the nation’s currency in terms of a fixed, unchanging amount of gold, and the government promising to redeem amount of money in gold or to do the reverse on demand.

-Aside: Trump advocates for gold standard

-The world officially abolished the gold standard in 1971, now all fiat systems

-Central banks around the world still own gold even though gold no longer backs currency. Reason: due to long term tradition – central banks worried about stories that would catch fire in public if we stopped storing gold.

-United States went onto the gold standard with the Coinage Act of 1873. The Gold Standard Act of 1900 clarified the standard. Before 1873, the United States was on a bimetallic standard, in effect gold and silver. The 1873 was part of international standarization.

-The 1873 Coinage Act had a deflationary effect which disproportionately affected debtors, including farmers (by lowering price at which they could sell crops and raising price of debts), which led to negative sentiment about gold. This led to renewed debate to return to bimetalism.

-Advocates of bimetalism became known as “silverites”–they were aligned generally with Democratic Party.

-“Gold standard” as a term coincided with years of big economic depressions – 1890s and 1930s

-Idea of bimetalism started going viral in late 1890s.

-Silver standard was seen as a way for US economic freedom–free ability to set internal currency values apart from European nations.

-Easterners favored gold standard, Westerners favored silver standard (akin to any modern day divisions?)

–Concentration of Eastern elites contributed to the national dichotomy btwn gold and bimetalism that extended across geographic and class lines

-Contagion of the bimetalism narrative – book by William Hope Harvey promoted bimetalism with a fictional story of a young man called “Coin” who gets the better of elite class while advocating for bimetalism.

-Analogy to Bitcoin — enthusiasm for bimetalism similar to that of Bitcoin. Author’s suggestion–there is a aurora of mystery around Bitcoin, same like how people in the late 1890s had a mystery around how money was valued and what Gold Standard really meant. Analogy to Harven’s book–idea that young people understand Bitcoin but older people do not. – *one element to contagious narratives*

-Author makes a point that the “silverites” of the 1890s anticipated the election of Donald Trump in 2016 – both in sympathies and contempt that intellectuals held for them. – another element for viral contagion of narratives

-Silverites made the argument that the economic depression of 1890s would go on forever if the country remained on Gold Standard. Though not true, this became an identity issue for silverites, tied up with anti-elitism.

-Gold standard supporters became known as “gold bugs”

-McKinley defeated Williams Jennings Bryan in 1896. Bryan supporters made a joke after defeat — “have you seen the General? Which General? General Prosperity.” Yeah, even I’m not lame enough to recycle that one!

-There has not been a gold standard through much of human economic history – gold as legal tender first came about in 18th century United Kingdom.

-“Cross of gold” – narrative of those opposing gold standard was that of people opposing unjust inequality. William Jennings Bryan elevated this narrative during his acceptance speech at the Democratic National Convention in his presidential run against Williams McKinley in 1896. This was known as the “Cross of Gold” speech, widely considered one of the best speeches in American History. The concluding lines of the speech: “You shall not crucify mankind upon a cross of gold.”

-In 1890, the idea was that gold standard was a way for elites to take advantage of the “toilers”/”workers” of society — idea of business managers tricking ordinary people. The other side to the narrative (the gold bug side) was of the masses getting swept into a populous movement (e.g., the Democratic Party that was running contrary to the party’s traditional values at the time).

–Gresham’s Law: Bad money drives out good. If you have two forms of commodity money in an economy, each having equal legal face value, the more intrinsically valuable one will be driven out of circulation. Silver vs gold–if both are equally valuable under law, but gold is inherently more valuable, it will eventually disappear from circulation. After reading the Wikipedia, the idea is less of a “race to the bottom” which I initially thought and it’s more of an imbalance between overvaluation and undervaluation–if two things are valued equally under the law, but one is more valuable, you’ll only pay fair market value for the less valuable item because you wouldn’t want to risk overpaying. See the lemon car analogy in the Wikipedia. I wonder how this applies to news media/sources? Is there an analogy to be made?

-Gresham’s law would mean that bimetalism would be a de facto silver standard. Contemporary economists at the time thought that this would result in a dramatic reduction in people’s purchasing power. Bimetalism was generally accepted to be a very bad economic idea.

-So how did William Jennings Bryan become so popular and almost win the presidency? He was the culmination of viral narratives of the monetary system, even if people at the time didn’t even understand the gold standard and bimetalism. During that time there was a general confusion in the population since there were both gold and silver coins in circulation that were freely accepted (eg gold and silver dollars) even though the gold content in the coins were worth more on the market than the silver content in the coins. There was added confusion because there were paper dollars that were “paper silver dollars”–people thought, isn’t this a silver standard? Also, you could take your 100 silver dollars and exchange it for 100 gold dollars because the free convertibility of money (both were accepted). What people did not understand was that people could not exchange silver as a material for gold dollars (it was the dollar to dollar conversion that was accepted, not the silver to gold conversion).

-Why then did bimetalism narratives go viral? One explanation – debtors would see their debts cut in half due to the disparity in silver exchange rate. Author says, that idea must have been a redemption narrative. Also, author suggests that bimetalism was often framed as revenge of the gold standard transition of 1873, which was seen as an elitist overtake.

-Author says that the intense contagion came from the fact that the mechanism seemed subtle and not very well understood by masses (much like the cryptography of Bitcoin) and seen as a revenge mechanism against elites.

-The contagion was amplied by L Frank Baum’s Wizard of Oz, which was an allegory for bimetalism (silver shoes [not ruby red] on the yellow brick road). Silver shoes represented silver standard, yellow brick road was gold standard, Wizard of Oz was President McKinley, Cowardly Lion is William Jennings Bryan.

-The end of the Gold Standard: by the 1930s, the narrative changed due to unemployment being at record levels, and US dollar was being devalued due to gold exchange rates. New narrative about gold standard was about new terms changing “devaluation” to “debasement” and “inflation” to suggest that the devaluation of gold was a moral failing. I still don’t quite understand this. Eventually the US moved off the gold standard in 1971. US switched to fiat currency.

–The Labor Saving Machines Replace Many Jobs

-1870s depression originally caused by bank speculation, but extended worldwide due to labor saving machine narrative. 1876 centennial celebration presented examples of modern machinery – led to concerns about jobs. By 1880s the narrative changed

-EM Forster’s The Machine Stops

Automation and AI replace nearly all jobs

-Narrative of post war vacations in 1946 across Western Hemisphere

Half the people in US expected a post war depression. Why? power of Great Depression narrative

-Automation in action in 1950s and 60s

-Kind of zones out during this part of the book…

–Real Estate Booms and Busts

-Authors point- Real estate boom and bust narratives are difference from constellation of narratives around confidence. Real estate confidence is very different from confidence in the state of the economy.

Real estate = personal asset, and also a social asset based on how ppl compare themselves to neighbors.

-Speculation and land bubbles – land speculation has been around for a while.

-1837 land speculation collapsed in 1840.

-Are these cycles of speculation a human condition?

-Florida land boom of 1920s – land sold to northerners

-Narrative is that the land is correlated to home value

-Home price indexes contribute to land value real estate narratives

-Month to month changes in average home prices are inferred from disparate home sales that happen infrequently, contributing to feedback circle that drives up prices/perceived/values.

-Price increases in real estate and associated narratives are often untied to future expectation of value but rather the existing value and perception of asset

-Social perception of asset—idea of “House Lust” prior to housing collapse in 2007

-Hi-five effect. Those invested in real estate are willing to celebrate the rising values of their friends

-House as a retirement plan narrative fuel speculation by encouraging people to buy the biggest house they can afford

-Peak-in-the-window effect: easier to see how much other ppls homes are worth through internet than, for example, how much money ppl make in their jobs

-Home ownership as a patriotic ideal

-Supply constraints time describe home prices

-Housing bubble and crash in Great Recession explained in narratives when people view land and home value as speculative investments. The term “flipper”

-Prices started to rise in 2012 after housing crash

-Trump narrative and housing narrative—it helps/pays off to let ppl know that you’re rich. Counter to the modesty narrative. Counter to the occupy Wall Street narrative. Trump narrative contributed to the upward movement in housing prices.

-Case Schiller survey, people who strongly view house as an investment peak during housing bubbles and nadir during housing busts

Thoughts after finishing

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