Economics: Theories vs. Stories

In the rubble of the Richard Nixon years, a University of Chicago economist named Arthur Laffer drew a diagram on a napkin to illustrate the hidden blessings of ...

In the rubble of the Richard Nixon years, a University of Chicago economist named Arthur Laffer drew a diagram on a napkin to illustrate the hidden blessings of slashing taxes. He was having dinner at the tony Two Continents Restaurant, in DC, with a couple of behind-the-scenes Republican insiders, Dick Cheney and Donald Rumsfeld, who yearned for new ideas about how to dismantle old institutions. They were both laboring, in a Watergate-soaked capital, to reimagine the American right. What Laffer showed them was that reducing the fiscal burdens on the rich not only made the rich richer—it made everyone richer and could also increase state revenue. Cheney and Rumsfeld, who would go on to infamous Republican careers, listened attentively.

This was 1974. Yes, it was the end of Nixon. But it was the beginning of the supply-side economics revolution, which plunged the United States into a political addiction to budget deficits and deregulation. The napkin would become a legend in the Reagan mythography. The artifact is now in the Smithsonian.

It’s this story of the Laffer Curve—the back-room conversation, not the dry economic analysis—that gave Laffer’s idea (cutting taxes makes everyone wealthier) its incredible power. Or, at least, that’s what Robert Shiller argues in his new book, Narrative Economics. To Shiller, Laffer’s napkin episode is an example of how a well-spun story can go viral, becoming the centerpiece of a larger narrative that sways minds. Even Laffer himself conceded that the equations he scribbled on classroom chalkboards were relatively ineffectual; instead, he quickly learned to seize on anecdotes and simple imagery to capture the imagination of policy-makers.

And, it seems, it worked. When I was an economics undergraduate in the early ’80s, the Laffer Curve was as well known as anything dished out in Paul Samuelson’s classic Econ 101 textbook. The narrative of its creation got picked up in the media as an easy-to-imagine episode, a perfect example of the counterintuitive gospel that would scramble the ideological consensus around welfare and the regulation of market forces.1

It is the power of stories—especially stories about the economy—that obsesses Shiller. Humanists were already obsessed with narratives; they have finally found a famous economist with kindred concerns. But are humanists and economists on the same wavelength? Do economic stories matter more than, well, economic theories? The answer is yes and no.

Oftentimes, when economists cross borders, they are less interested in learning from others than in invading their garden plots.

Robert Shiller is one of the most visible economists on the planet. A Nobel Prize winner in 2013, author of many books, prominent media voice on matters ranging from finance to morality, he stands out as one of the discipline’s great trespassers. For Shiller, economics is an open business; it can learn from others. Shiller reads across disciplinary lines the way a good traveler tries exotic dishes. Medicine, biology, computer science, and, above all, psychology have helped Shiller project an expanded vision of economics.

With Narrative Economics, Shiller has moved his furthest yet into new domains. From the heartland of empirical studies of asset prices, he’s ventured into plotlines, character development, rumormongering, turning points, and accidents—deep into jungles that have, thus far, been the province of the humanist. In crossing into territories far afield from his expertise, has Shiller gone too far?

Oftentimes, when economists cross borders, they are less interested in learning from others than in invading their garden plots. Gary Becker, for instance, pioneered the idea of human capital. To do so, he famously tackled topics like crime and domesticity, applying methods honed in the study of markets to domains of nonmarket life. He projected economics outward into new realms: for example, by revealing the extent to which humans calculate marginal utilities when choosing their spouses or stealing from neighbors. At the same time, he did not let other ways of thinking enter his own economic realm: for example, he did not borrow from anthropology or history or let observations of nonmarket economics inform his homo economicus. Becker was a picture of the imperial economist in the heyday of the discipline’s bravura.

Times have changed for the once almighty discipline. Economics has been taken to task, within and beyond its ramparts. Some economists have reached out, imported, borrowed, and collaborated—been less imperial, more open. Consider Thomas Piketty and his outreach to historians. The booming field of behavioral economics—the fusion of economics and social psychology—is another case. Having spawned active subfields, like judgment decision-making and a turn to experimentation, the field aims to go beyond the caricature of Rational Man to explain how humans make decisions.

Shiller belongs to the big, open tent of behavioral economics. In 2000, he published Irrational Exuberance, a study of investor enthusiasm—some say greed—and the thrill of financial gambling, as well as the havoc it might wreak. In 2009, he teamed up with George Akerlof to roll out Animal Spirits, which argued that financialization awoke an inner beast, which, in turn, required a steady government to keep its hand on the leash. (Now that the beast is the government, Shiller and Akerlof might consider a reboot.) With Narrative Economics, Shiller takes some of his classic themes—subjective belief systems, emotion, and self-delusion—and braids them together into what he calls “narratives.”


Betting on Other People’s Lives

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It is important to underscore how this flips the way we think about economics. For generations, economists have presumed that people have interests—“preferences,” in the neoclassical argot—that get revealed in the course of peoples’ choices. Interests come before actions and determine them. If you are hungry, you buy lunch; if you are cold, you get a sweater. If you only have so much money and can’t afford to deal with both your growling stomach and your shivering, which need you choose to meet using your scarce savings reveals your preference.

Psychologists take one look at this simple formulation and shake their heads. Increasingly, even some mainstream economists have to admit that homo economicus doesn’t always behave like the textbook maximizer; irrational behavior can’t simply be waved away as extra-economic expressions of passions over interests, and thus the domain of other disciplines.

What Shiller has added to the conceptual soup is the power of storytelling in framing the experiences, meanings, and significances of what people want and what they do. For Shiller, narratives do three things: they remind, they explain, and they justify actions and effects. They acquire even more potency when they merge or cluster, when one narrative gets connected to what Shiller calls narrative “constellations.” Then, they become juggernauts that shape peoples’ visions of their alternatives. They generate fears and hopes. They live, die, get reborn, create myths that guide behavior.

They also go viral. This is what really matters to Shiller; it’s why Laffer’s napkin is a vivid exhibit. One can see the scholar of financial bubbles concerned that it is precisely contagious narratives—and not, in fact, information—that fuel the passion-saturated world of the pursuit of lucre. These viruses cause euphorias and dysphorias, bubbles and busts that “form an impression on the human mind” that frames peoples’ expectations and choices. What Shiller wants is a model that helps us understand these narratives—a model that joins emotions to economics and vice versa—so they can be managed.

Having demonstrated for himself the power of affect in public and private affairs, Shiller asks how its excesses can be controlled. Can we create a model to predict the effects of viral narratives and their havoc? At the end of the book, Shiller does so, offering a mathematical model for narrative tracking in the hopes that, especially in financial markets, regulators can get a grip.

One can see the scholar of financial bubbles concerned that contagious narratives—not information—fuel the passion-saturated world of money-making-money.

But all this examination, as well as Shiller’s mathematical solution, rests on an unquestioned assumption: that narratives have causal power. The real, unanswered question of the book should be: How do narratives affect the conception of self-interest, behavior, and outcomes?

Here, the book gets muddled. Shiller claims that stories make events happen by construing their meanings; what exactly happened over lunch at the Two Continents mattered less than the spin that came after. But the book offers little evidence of the causal process from storytelling to social or economic consequences. Instead, most often, readers get anecdotes: often maddeningly random sketches, from Rubik’s Cube to recurring fears of automation and unemployment. Rarely does Shiller connect the dots that make up the theoretical line.

The result is a chronic use of the qualifier “may.” I stopped counting the number of times that Shiller argues that such and such a narrative may have or possibly caused such and such an outcome.

For example: Narrative Economics spends a lot of time on financial panics, such as those in 1857, 1873, 1907, 1929, 2008. In each case, Shiller dishes out an anecdote. For instance, Henry George published a celebrated book, Progress and Poverty, in 1879, in the middle of a malaise. We know that it did have an influence on populist and progressive thinking (one can hear echoes of Georgism nowadays). But was this popular book really a “narrative” that shaped events? Perhaps. Did stories of stockbrokers committing suicide in the fall of 1929 actually turn the crash into a depression? Maybe.

In the place of causal sequences, we get a lot of stories. In between them, Shiller sprinkles data from Google Ngrams and ProQuest searches mapped onto graphs to illustrate the frequency and virality of a word or title. Figure 10.4, for instance, shows a spike in mentions of “Great Depression” in 2008. Did this mean that people had a memory or story—a narrative—of 1929 that compelled them to behave in herdlike ways? Or, rather, did it simply mean that people were groping for a reference, something to make sense of the mayhem after the collapse of Lehman Brothers, on September 15?

One thing we have learned from the boomlet in digital humanities is that distilling the meaning of word frequency is a really complex process. Counting, alone, does not tell the story.

Yes, the Laffer napkin story is cute. But it probably never happened the way the narrative got spun. Laffer claims that his mother would never have allowed him to spoil a perfectly good cloth napkin. In fact, he admits that the Smithsonian napkin is more likely a keepsake made a few years later, once his curve theory was already becoming famous. Even the date of the meal is unclear. Yet, for all the doubt that hovers around the event, and the mounting evidence that the cloth napkin at the Smithsonian was not, in fact, scribbled on at the restaurant, it’s such a good story that Laffer joined Cheney and Rumsfeld for a 40th anniversary of the meal to reenact the whole thing.2 In the face of the narrative’s overwhelming persistence—against obvious factual questions—how else to view it but as something powerful, acting with its own agency on the world?

Shiller wants the Laffer napkin to do more than persuade through simplicity. Instead, he wants Laffer’s act to have gone “viral” and, like a disease, to have infected patients—the unsuspecting consumer-citizens struggling to fill their gas-guzzlers with OPEC oil—with an ideology about government waste. It’s a story that, he claims, made history. But did it? To get that far, we would need more context, more analysis of the narrative playing field, a story about influence and ideology. How do episodic snippets add up to a narrative that shapes events?

It’s not clear. In the end, Shiller’s “narrative” needs to mean too many things in order to carry so much explanatory weight. Sometimes his “narrative” is simply a story, sometimes it’s a more elaborate connection between stories, and sometimes it’s a framework to illuminate plots and characters. It’s a jumble of what needs to be explained and what does the explaining. Story-making fills the grey zone separating events, what we make of them, and their effects.

Thankfully, Shiller concedes the problem. “Ultimately, however,” he writes, “we can give no final proof of causality because these events are so deeply complicated, and multiple narratives are involved.” This is an odd resting place for someone who wants narratives to wield such causal power and yet stops short of showing how they operate.

Shiller is on to something important, something that can appeal to humanists. But he—and narrative economics—need to see more clearly what humanists bring to the table. To unpack the power of narratives, Shiller would have to be more systematic in his analysis of their properties and the mechanisms by which they are sorted into the forgotten or the durable. Categorizing them—as Shiller does—in clusters or convergences, or creating typologies (like “panic” narratives or “confidence” narratives), helps a bit. But only a bit; it just puts them in boxes rather than showing how they work. The vast body of research on narrative properties and their affective powers—how they create emotional involvement, reduce counter-argumentation, and identify audiences with characters—is absent.

This is one place where the humanist can help the economist. If narrative economics is going to help us understand how rivals duke it out, who wins and who loses, we are going to need much more than lessons from epidemiological studies of viruses or intracranial stimuli.

Above all, we need politics and institutions. Shiller connects perceptions of narratives to changes in behavior and thence to social outcomes. He completes a circle that was key to behavioral economics and brings in storytelling to make sense of how perceptions get framed. This cycle (perception to behavior to society) was once mediated or dominated by institutions: the political parties, lobby groups, and media organizations that played a vital role in legitimating, representing, and excluding interests. Yet institutions have been stripped from Shiller’s account, to reveal a bare dynamic of emotions and economics, without the intermediating place of politics.

If we are going to win the war for reason and evidence, if we are going to stop humans from wiping out entire species and cities, economists and humanists are going to need to create more bridges across the disciplinary chasms. The proposal to focus on narratives and their powers is spot on. Robert Shiller gets us going.


This article was commissioned by Caitlin Zaloomicon

  1. In June 2019, Donald Trump awarded the Presidential Medal of Freedom to Laffer, showering him with strange praise. “I know Art has been to the Oval Office, unlike most people, many times. But this is a very special time for you.” Even Trump recycled the napkin story: “I’ve heard and studied the Laffer Curve for many years in the Wharton School of Finance.”
  2. For a hysterical staging of the reenactment, click here.
Featured image: Laffer Curve Napkin (1974?). Natural Museum of History. Gift of Patricia Koyce Wanniski