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20200510 – Narrative Economics

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MAIN IDEA:

Here is how author defines the main idea of this book:” A key proposition of this book is that economic fluctuations are substantially driven by contagion of oversimplified and easily transmitted variants of economic narratives. These ideas color people’s loose thinking and actions. As with disease epidemics, not everyone becomes infected. In the case of narrative epidemics, the people who miss the epidemic may tell you that there was no such important popular narrative.”

DETAILS:

Part I The Beginnings of Narrative Economics
Chapter 1 The Bitcoin Narratives
Author starts it with the statement that he presents a new theory of economic change that introduces new element: contagious popular stories as important factor defining economic behavior. In this chapter he presents example of such narrative: Bitcoin and then discusses its relation to bubbles, its philosophical link to Anarchism, elimination of inequality, and globalization via removing nation-state control over money supply.

Chapter 2 An Adventure in Consilience
In this chapter author looks at consilience as unity of knowledge and presents his idea that it could be build on the basis of narratives. To support this idea, he presents search results in publications from different areas of knowledge:

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Chapter 3 Contagion, Constellations, and Confluence
Here author states that economic narratives are pretty much similar to viruses and then looks at processes of contagion. Once again, he uses Bitcoin as example, comparing it with previous popular economic narrative of Bimetallism:

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He also discusses how multiple economic narratives interact and intertwine between themselves, creating environment that drives econonic events in one direction or another.

Chapter 4 Why Do Some Narratives Go Viral?
Here author looks at why narratives are so important and why anthropologists find them in all human societies, regardless of their levels of development. He also looks at the nature of narratives, discussing difference between story and narrative and then providing example with invention that had significant impact on economy – rolling suitcase and how it could not become viable for about 100 years after it was patented in 1887. It took glamourous aircrews of big airlines start using rolling suitcases for them going viral and becoming ubiquitous.

Chapter 5 The Laffer Curve and Rubik’s Cube Go Viral
In this chapter author looks at another two viral phenomenon, one economic -Laffer Curve, and another just toy – Rubik’s cube. Here is diagram of popularity search for Laffer:

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Chapter 6 Diverse Evidence on the Virality of Economic Narratives
Author starts this chapter by looking at underlying physiology of human brain related to stories and narratives. He then refers to philosophical writings to provide additional evidence that “going viral” is not a new thing, but rather natural condition of human existence that was around forever. Finally, he links it to various examples of impact of narratives on human behavior, including economic behavior. He also discusses heuristics that often define human behavior without any regard to formal logic and even, quite often, completely denying it.

Part II. The Foundations of Narrative Economics
Chapter 7 Causality and Constellations
Author starts this with note that just a few persons create new economic narrative and consequently cause big economic movement only if and when this narrative becomes accepted by many. Then author discusses direction of causality taking for example Friedman’s “Monetary history” and then reviewing the idea of “self-fulfilling prophecy”. Next stop is discussion of impact of random events on narrative including such events as anniversaries. Author also describes a number of experiments when intentional prompting caused change in behavior. The final part of the chapter is discussion of memory and impact of fake news that could cause real change of events.

Chapter 8 Seven Propositions of Narrative Economics
In this chapter author summarizes 7 propositions of narrative economics:

  1. Epidemics can be fast or slow, big or small. The timetable and magnitude of epidemics can vary widely.
  2. Important economic narratives may comprise a very small percentage of popular talk.
  3. Narratives may be rarely heard and still economically important. Narrative constellations have more impact than any one narrative. Constellations matter.
  4. The economic impact of narratives may change through time. Changing details matter as narratives evolve over time. Truth is not enough to stop false narratives.
  5. Truth matters, but only if it is in-your-face obvious.
  6. Contagion of economic narratives builds on opportunities for repetition. Reinforcement matters.
  7. Economic narratives thrive on human interest, identity, and patriotism. Human interest, identity, and patriotism matter.

Part III Perennial Economic Narratives
Chapter 9 Recurrence and Mutation
This chapter is about complex live of economic narratives, how they are created at some point and then move with time, sometimes moving into economic live and them disappearing in shadows, only later mutate and move back to live again. He provides a list of the biggest economic events in American history:

  • A depression from 1857 to 1859, followed by the secession of southern states in 1860–61 and the US Civil War (1861–65). The Civil War was the most lethal war in US history, responsible for more US fatalities than all other US wars combined.
  • A depression from 1873 to 1879 that led to the publication of the best-selling economics book of all time in the United States, Henry George’s Progress and Poverty (1879), which accused the unrestrained free-market system of producing worsening inequality.
  • A depression in the 1890s comprising two NBER contractions, 1893–94 and 1895–97. The extended depression, during which unemployment always exceeded 8%, ran from 1893 to 1899. This depression coincided with an aggressive phase in US history, with the United States launching the Spanish-American War and the Philippine War.
  • A series of three short contractions from 1907 to 1914, starting with the Panic of 1907, which ended only with the heroic advances made by J. P. Morgan and other bankers. These events led to the creation of the Federal Reserve System to prevent such banking crises in the future. These contractions were followed by World War I, which began in 1914.
  • A brief but extreme depression from 1920 to 1921 that included the sharpest deflation ever experienced in the United States.
  • The Great Depression after the 1929 stock market crash, which morphed into a worldwide depression. In the United States the extended depression ran from 1930 to 1941, with unemployment uniformly exceeding 8%. The Great Depression took its name from the 1934 Lionel Robbins book with that title. It comprised two NBER contractions, 1929–33 and 1937–38. The worldwide depression immediately preceded World War II.
  • A severe recession in 1973–75, associated with a war in the Middle East and an oil embargo. Economist Otto Eckstein called this period the “Great Recession” in his 1978 book with that title, inviting comparison with the Great Depression. z
  • A severe recession from 1980 to 1982, comprising two NBER contractions, a short contraction within the year 1980 and, soon after, another contraction 1981–82, associated with a war in the Middle East. At the time, this recession was called the “Great Recession,” again inviting comparisons with the Great Depression.
  • A severe recession from 2007 to 2009, also named the “Great Recession,” once again inviting comparisons with the Great Depression, and this time the name really went viral and has stuck to this day.

At the end of chapter author identifies 9 specific narratives that he specifically reviews in the next 9 chapters.

Chapter 10 Panic versus Confidence
Here author analyzes raise and fall of panic or levels of confidence using search for frequency of use words in contemporary publications:

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He then discusses crowd psychology which causes these movements and how they impact economy.

Chapter 11 Frugality versus Conspicuous Consumption
Here author discusses another somewhat polar narratives: frugality and need for saving that was prevalent before WWII and how it was substituted by the new narrative of “’American Dream” after WWII:

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Chapter 12 The Gold Standard versus Bimetallism
This chapter is about another pair of narratives, this time related to intrinsic value of money, which had 2 picks: one at the end of XIX century with “Cross of Gold” images and later narratives of XX century with Gold Standard as tool to limit government monetary excesses:

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Chapter 15 Real Estate Booms and Busts; Chapter 16 Stock Market Bubbles; Chapter 17 Boycotts, Profiteers, and Evil Business; Chapter 18 The Wage-Price Spiral and Evil Labor Unions;
These all are other long-living narratives, which author traces in similar ways through use of relative frequency of words in news and magazines. They all have intermediate ups and down when a narrative used to explain current events and then fades out when events change and some other narrative takes its place.

Part IV Advancing Narrative Economics
Chapter 19 Future Narratives Future Research
Here author discusses future and makes a number of important points about changes in future forms and circumstances of various narratives and anticipation of new technology changing contagion rates and recovery rates of future narratives. At the end he suggests how his approach should be used in future research and how incorporate narrative economics into general economic theory. He also suggests the great expansion of data collection efforts necessary for application of his ideas and specifies how it could be done:

  1. Regular focused interviews of respondents inviting them to talk expansively and tell stories in response to stimulus questions related to their economic decisions.
  2. Regular focus groups with members of different socioeconomic groups to elicit actual conversations about economic narratives.
  3. A historical database of focus groups conducted for other purposes in years past.
  4. Databases of sermons.
  5. Historical databases of personal letters and diaries, digitized and searchable.

 Finally author suggests to conduct tracking and quantifying narratives in order “to better understanding the patterns of human thinking about the forces that cause economies to boom at times and to stagnate at others, to go through creative times and backward times, to go through phases of compassion and phases of conspicuous consumption and self-promotion, to experience periods of rapid progress and periods of regression.”

MY TAKE ON IT:

I find this book very interesting and I think that author’s approach would be much more effective than quantitative approach to economics that dominated the last 60 years of this field development, consistently providing proves of its inability to predict future developments even for the next couple of quarters. Interestingly enough, this approach somewhat reminds me of Mises’ believe that economics is about human actions and as such is not really good place for mathematical approach based on analysis of global equilibrium and computer modeling. However, it would take tremendous change in thinking of economists on tenure that I do not think could possibly happen, unless tenure is substituted by rewards for correct predictions of future economic developments.

 


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