Beyond the macroeconomic data that measures the state of the economy are the stories told over and over again, gaining traction and actually impacting growth and the markets.
Nobel Memorial Prize-winning economist Robert Shiller calls this “narrative economics.”
“What drives the economy substantially are stories,” said Shiller in a talk at the Inside ETFs conference in Hollywood, Florida. “The human mind is oriented to stories, [but] economics is behind most social sciences in recognizing the importance of narrative.” It’s those stories that influence behavior, which has become the basis of behavioral economics.
In an economics paper Shiller published almost two years ago, he explained that “I’m starting now, with my more recent work, to think that we have to look at the humanities as well. … one way to do that is with an approach that I’m calling ‘narrative economics’: taking economics and adding the study of the narratives that people transmit … engaged in conversation.”
At the ETF conference, Shiller gave examples of these narratives: “the Great Depression, the sad story of the 1930s after the ‘29 crash” which people thought would never end, and the Great Recession in 2007-2008, which took its name from the economic upheaval more than 70 years earlier because people were worried about another Great Depression, Shiller explained. These narratives can go viral and did so even before the internet, he said.
“Now part of narrative driving the U.S. is the Donald J. Trump narrative,“ said Shiller, adding that Trump was a major topic of conversation at the World Economic Forum in Davos, Switzerland, that he attended last month.
“Whether or not you like him, you want to hear about him; [Trump] has captured the imagination,” Shiller said. “He’s driving the market substantially and the rest of the economy. Unfortunately, it’s not that stable a situation, and there could be a major correction.”