In his new book Narrative Economics, Nobel economics prizewinner Robert Shiller cites research that “found that false stories had six times the retweeting rate on Twitter as true stories.” Moreover, he notes, “truth is not enough to stop false narratives,” especially when the latter thrive on identity and “us versus them” thinking.

Some people even enjoy stories that they know are false, much like “pro” wrestling. (We know people realize pro wrestling is fake because few people bet on matches.) “Fake news,” Shiller writes, “seems to be part of the normal human condition.” This book aims to show that “contagious” narratives — both false and true — “are responsible for many of the changes we observe in economic activities.”

What are narratives? / A narrative is a story or other representation that explains or justifies some event or institution and that affects people’s behavior. Economic narratives relate to economic events or institutions. For example, the Laffer curve and the story of its originally being drawn on a restaurant napkin went viral around 1980 and may have influenced voters and politicians.

According to Shiller, neuroscience and neurolinguistics suggest that the human brain is organized around analogies, metaphors, and stories — all the stuff of narratives. In short, people love stories.

Paraphrasing psychologist Jerome Brunner, Shiller writes that “we should not assume that human actions are driven in response to purely objective facts.” This should remind the reader of Friedrich Hayek’s insistence that the “objective facts” of the social sciences include “the beliefs or opinions held by particular people” and that “so far as human actions are concerned, the things are what the acting people think they are” (The Counter-Revolution of Science, 1953). Disappointingly, Shiller fails to cite Hayek in his book.

Shiller is a practitioner of “behavioral economics,” a different school of economic analysis than Hayek’s. Behavioral economists argue that narratives are based on imagined representative situations (“framing”) or emotions. Many random and arbitrary factors are involved in the formation of narratives. Further, individuals are as irrational as the narratives they follow.

Going viral / Shiller argues that economic narratives can affect major economic events when they go viral either online or through other media. But why does a narrative go viral?

The short answer is that we don’t know — but, Shiller emphasizes, we must try to learn more. He theorizes that a constellation or confluence of narratives may be necessary for an idea to catch fire. Other factors, like glamor, may also be required for a narrative to go viral.

Shiller argues that epidemiological models of contagious diseases are useful for understanding the spread of economic narratives. The simple Kermack–McKendrick mathematical model developed in 1927, which measures the strength of an epidemic from its early growth to its peak and eventually its decline, used three equations to show how the infected fraction of the population is equal to the contagion rate minus the recovery rate. This simple and attractive model is said to fit the evolution of internet “memes.”

In a similar pattern, an economic narrative that goes viral starts slowly, increases rapidly, reaches its peak, and eventually dies down — if it does not mutate and get contagious again. For example, the Laffer curve went viral and reached its peak in the early 1980s. Other viral narratives discussed by Shiller show the same evolution as measured by the frequency of related keywords in books.

Influence of economic narratives / Many sorts of narratives can drive the major economic events that are booms and busts along the business cycle. Consider the following examples.

Stock market bubbles feed on narratives of confidence or panic. A massive and decades-old economic literature debates why bubbles and crashes can happen if financial markets are efficient (the “efficient market hypothesis” or EMH), that is, if they incorporate all available information. Without getting into this debate, it is useful to know that Shiller has been a major critic of the EMH. In Narrative Economics he shows that references to the expression “stock market crash” started around 1926 and, reaching epidemic status, may have contributed to the wave of pessimism that crashed the market in 1929.

Narratives that encourage panic may contribute to a recession, while those that favor confidence can boost the economy. From a Keynesian perspective, a recession results from a drop in aggregate demand, leading to declines in production and employment. But it is not as obvious as Shiller believes that an aggregate demand shock is either sufficient or necessary for a recession, yet this notion is very much part of his understanding of the economic cycle.

In this Keynesian perspective, it becomes important to increase consumption during an economic slowdown, at the very time when people have less money to do so. Hence, there is a narrative that frugality prolonged the Great Depression and that conspicuous consumption and pursuit of “the American Dream” after World War II fueled economic growth. Note that the analyst’s theoretical perspective may affect his hypotheses about the causal effects of different narratives or the direction of causality. Perhaps it is because of the Great Depression that consumption plunged?

Another narrative that peaked during the Great Depression was that people cannot buy what they produce, meaning that a capitalist economy is marred by general overproduction or underconsumption. This idea (which had been rejected by French economist Jean-Baptiste Say in the early 19th century) was revived academically by Keynes in his 1936 General Theory of Employment, Interest and Money, but it was already in the zeitgeist of the time. It appeared in Aldous Huxley’s 1932 book Brave New World in the depth of the Great Depression: Babies are conditioned by an untiring whisper, including the mantra: “We always throw away old clothes. Ending is better than mending. … The more stitches, the less riches.”

Yet another narrative that may have contributed to the pessimism of the Great Depression concerns labor-saving machines. The idea that these devices hurt labor was popularized by the early 19th century Luddites and then reappeared during the global depression of the 1870s. Shiller quotes the Philadelphia Inquirer of February 3, 1876: “The steam-power of seven tons of coal is sufficient to make 33,000 miles of cotton thread in ten hours, while, without machinery, this would equal the hand labor of 70,000 women.” He also reports that in Germany in 1933, the worst year of the Great Depression, a Nazi Party official promised to ban the replacement of men with machines.

Similar narratives reappeared after World War II as a fear of automation and artificial intelligence. According to Shiller, this fear may have contributed to the 1957–1958 and 1960–61 recessions, as well as those of 1980, 1981–1982, and 2000–2001. A recent narrative on the dangers of machine learning seems to have peaked in 2016, though it did not cause economic damage.

Likewise, a narrative that single-family homes make good speculative investment took off in the second half of the 20th century. This contributed to the housing bubble of 1997–2006 and, Shiller argues, to the Great Recession of 2008–2009.

Narratives of profiteering and evil business can affect the course of economic events. One such narrative became “highly contagious” in 1918: a report that an anonymous woman in a street car had hit a businessman with her umbrella after the latter was overheard boasting about the money he made from the war. Narratives of war profiteering peaked during the 1920–1921 recession. In 1920, Sen. Arthur Capper declared, “Profiteers are more dangerous than Reds,” and called for boycotting high prices. Still, it’s hard to be convinced by the hypothesis that narratives of profiteering can prolong a recession by preventing people from buying; man does not live by narratives alone.

Perceived profiteers in popular narratives can also be labor unions if they obtain wage increases that result in so-called “cost-push inflation.” This narrative, which went viral just after World War II and again in the 1970s, assumes that the government accommodates these cost increases with an increase in the money supply. Without this accommodation, prices would have to decrease somewhere else in the economy (other things equal, everybody cannot consume more simultaneously), with no net inflation as the result.

Even when central bank actively and directly creates inflation by increasing the money supply, rationally ignorant (if not simply ignorant) voters look for other scapegoats than their own government, as happened in the wake of World War II. “The mass of people … are not very well informed,” Shiller notes, which is one reason why they must base their actions on narratives. During the German hyperinflation of 1917–1923, a contemporary observer, American economist Irving Fisher, noted that the citizens did not blame their own government.

What did we learn? / All these stories are no doubt interesting, but do they really imply that a new “narrative economics” is needed? What do readers learn, exactly, from this book?

Perhaps we learn that viral narratives can have big economic effects, for better or worse. But didn’t we already know that? Prices and resource allocations change if some fad increases the demand for something. The theory of information cascades, where people rationally follow the opinions of people they trust, adds to this explanation. (See “Following the Herd,” Winter 2003.) Aren’t contagious ideas and “memes” just another way to say that individuals, when they make choices, decide on the basis of how they believe the world works?

It’s hard to be convinced that narratives of profiteering can prolong a recession by preventing people from buying; man does not live by narratives alone.

The book does explain how to formalize the spread of narratives with a simple epidemiological model, but is that really useful? Perhaps yes, but the sort of interdisciplinary approach advocated by Shiller has its dangers too. Hayek warned social scientists about the danger of “scientism” — that is, a “slavish imitation of the method and language of Science.”

Another positive danger (“positive” by opposition to “normative”) is to forget that people have conscious minds and intentions, that they are different from atoms and animals. Shiller acknowledges this danger. Moreover, it seems, you can always find some narrative that fits with the events you want to explain.

The normative danger may be worse. It consists in considering some ideas as contagious diseases, just as the public health movement views preferences and lifestyles it dislikes. (See “The Dangers of ‘Public Health,’ ” Fall 2015.) Public health experts and activists call “epidemics” the spread of everything they don’t like, such as smoking, vaping, and guns. Between Shiller’s use of the notion of “thought viruses” and calls for quarantining the bearers of these viruses, the distance may be smaller than the author of Narrative Economics probably thinks.

Shiller’s appeal to qualify economists’ basic assumption of actor rationality is not new either. Hayek, for one, already incorporated such qualifications in his theory. Many standard (neoclassical) economists do so in other ways, although not as radically as some behavioral economists.

Shiller does remind us that it is tempting, and sometimes rational, for individuals to follow viral narratives that end up generating bubbles and crashes. Sometimes they act on the basis of purely emotional narratives and false news. But this typically happens when individuals follow the crowd and have little private incentive to stop and think. When a person privately purchases a car from which he will get all the benefits and pay all the costs, he has an incentive to make a rational decision. At least in a free society, not everything falls under the overwhelming influence of mobs.

That narratives can contribute to major economic events such as booms and busts seems an intuitive idea, and Shiller provides some evidence for it. However, the frequent if not usual presence of a constellation of narratives, sometimes pointing in different directions, seems to attenuate the explanatory power of any specific narrative. Furthermore, the direction of causality is not always clear: is it a narrative that caused an event or the event that generated or fueled the narrative? Often, causality can go both ways. “Ultimately,” Shiller admits, “we can give no final proof of causality.”

Focusing on narratives can lead to neglecting other factors hidden in plain sight. For example, he downplays the role of the federal government in the Great Recession through its active and (often coercive) encouragement of, and participation in, the supply of mortgages to low-income individuals. The author of Narrative Economics overlooks the insights of public choice economics.

A subliminal idea / Assume for a moment that individuals are by-and-large irrational, as behavioral economists believe, and that they follow more or less arbitrary narratives, as Shiller claims. Given this, how can one believe that governments — that is, individuals in their political and bureaucratic roles — will be more rational than private actors? Shiller easily falls into the narrative that government is populated by disinterested politicians who rationally adopt policies proposed by omniscient bureaucrats and consultants. He argues that “policymakers should try to create and disseminate counternarratives that establish more rational and more public-spirited economic behavior.”

This is strange because he previously admitted that government actors are influenced by narratives. Moreover, governments often amplify dangerous narratives and fake news instead of dampening them — not to mention the frequent use of straight propaganda. The Trump administration is only an extreme version of what we are used to seeing in developed countries.

I suspect that most readers will like the numerous illustrations given in Narrative Economics, from charts of viral “epidemics” to fascinating quotes from old newspapers. They may also be tempted by the subliminal idea that the state — the ideal state — should try to control these epidemics in the pursuit of social nirvana. Shiller’s is a seductive theory, but a perilous one.