How Viral Stories Impact Major Economic Events | Davos 2020

How Viral Stories Impact Major Economic Events | Davos 2020


So, your new book “Narrative
Economics” is a topic that you’ve been interested
in for a very long time. Can you explain to me what
narrative economics is? A lot of people think about
narratives these days, it’s a new trend. But they tend not to be
economists or financial analysts. Maybe they think about it, but they don’t research it. I think that major economic events, successes and failures alike, are typically driven by
stories that went viral. And we don’t have a deep
understanding of events until we understand, we start
studying the narratives. And can you give me examples of something recent that
happened because of a narrative, a strong narrative?
Yeah. OK, the, the Great Recession. We named it the Great
Recession in honor of another narrative, which
is the Great Depression. Now you would think that
people would be forgetting about the Great Depression. That was 1929 and well into the ’30s. Like 10 years of economic slowdown. But it’s a long time ago. You think people are forgetting about it. But they’re not. And in fact, in the
early 2000s, references to that exploded. I count, I count these things,
how often they come back in the news media. So, and then we named
it the Great Recession. It’s obviously a reference
to the Great Depression. And so people became scared
and they stopped spending. They didn’t stop spending,
but they cut back. You know they think, should
we go on a cruise this year? Well, maybe not. You know, I feel a little unsettled. It’s going to cost a lot of
money. If people cut back on their consumption enough
that we have a recession. And these stories impact
the economy in a way that otherwise wouldn’t
necessarily be happening. Yeah. A lot of economists seem to
think, want to think, that it must be something about
technology, or productivity, or maybe what the central bank did. But I think it’s, it’s more
generated in people’s minds. And what’s so strong
about the bitcoin story? Oh yeah, I use that as
Chapter 1 of my book. It’s an example of how good stories create economic events. And in the case where – I
think it’s clearly traceable to the story. Now I’m not going to even
comment on whether bitcoin is a good idea or not. It doesn’t matter. I’m just looking at the story. The story was that a man
named Satoshi Nakamoto had an invention which he
promulgated on the internet around 2008. And, it’s the greatest,
most wonderful invention in a long, long time. It ties into stories about anarchism. Anarchists don’t like government. Well, bitcoin didn’t ask
anybody’s permission. They didn’t go to any regulator
to start their bitcoin. And it’s not even tied to a country. It’s international. We’re all cosmopolitans now. It just seems like a good story. And then they put a
little mystery into it. Satoshi Nakamoto has never
been spotted by anyone who tells us about these things. How could it be? He’s one of the most famous
people in the world now. And yet no one has met him. So maybe he doesn’t exist. Maybe there is a committee,
maybe it’s a conspiracy. Who knows? But somebody wrote a nice paper that was, it just has an excitement. I can see people transform. When I bring it up in my class, my students react, they wake
up when I bring up bitcoin. How do you separate out
the story from what’s real? And how much can the story
affect what becomes real? It isn’t a single story,
every telling of the story is a little different. There’s a core idea in the story. And, how do you tell whether
it’s a real story or not? That takes work. And in the case of bitcoin
it’s kind of difficult to think through it. It’s not, it’s impressive. It’s not easy. But you can work at it. The problem is, if you reach
a decision about bitcoin one way or the other, it’ll never get out, because it can’t compete
with the narrative quality of the original story. Can you tell me about the Laffer curve, something that I think a lot
of people take to be fact, but you say that a lot
of the strength from it comes from this very simple story. Yes, so I’ll tell you a story. In 1974, an economist named
Art Laffer was having dinner at the Two Continents restaurant, a nice restaurant in Washington DC. And he was having it with Donald Rumsfeld, who was the secretary of
defense for the United States – really big shot guy – and Dick Cheney, who would
soon become vice president of the United States. So a bunch of the – and
also Jude Wanniski, who is a writer for the Wall Street Journal who wrote the story up. And in that story, Art Laffer
draws a diagram on a napkin, called the Laffer curve, which illustrates, I won’t
get into the details, but supposedly illustrates
dramatically how taxes can hurt incentives
and destroy the economy. And that even if you, if
you actually cut taxes, you may collect more taxes even though you cut, because
people will be so much more affluent, they’ll be
working and producing. Nice story. It went viral. But not in 1974. It wasn’t until in 1978, when
Jude Wanniski wrote a book, a best-selling book called “The Way the World Works,” and he tells this story about the dinner. And afterwards, people want
to know the whole story. They ask about the napkin. The napkin is a visual image
that enhances the story. And there it is. It’s now many years later –
the Laffer curve went through a typical epidemic. It expanded right after 1978. And everyone was talking
about the Laffer curve. Same time as Rubik’s cube came out. That was another, another such fad. Laffer curve and Rubik’s cube
were both around that time. They both faded somewhat. But they’re both still here. And Laffer is coming back. It has an internal dynamic
like that of a disease. I’m not calling it a disease. How much does narratives
impact how the fed communicates or how the president communicates? How much does that impact the economy? The people who take positions like fed or treasury secretary become
intuitive narrative economists even though they weren’t taught
any of that in grad school, because it’s so obvious
that the narrative matters. So for example, when the
Northern Rock bank failed in the UK in 2008, the
chancellor of the exchequer and the head of the Bank of
England reacted immediately because they didn’t want, it
looked like it was a story about a bank run. This bank was failing and
depositors were worried that they wouldn’t get
all of their money out. There was deposit insurance,
but it was only up to a small amount. And people who had their life savings, planning for retirement, panicked, they thought,
maybe I’ll lose all of it. And so they rushed to the
bank, and of course it’s a self-fulfilling prophecy. The bank can’t pay out
all this money at once. What about Trump? So what I was going to say, Oh yeah, sorry. They immediately rescued
the Northern Rock bank and paid off all the depositors. So, the reason they did
that is they didn’t want the narrative to get started. They knew that in the past
it was rumor and stories that people went to many different banks and asked for their money right away. And what about Trump? Is he good at this? Has he been able to – This is one place where I can be lavish in my praise of Donald Trump. He is very good at narratives. He’s very good at judging audiences. He experiments. This is a way, the way
you launch narratives. You never know whether it will go well. He listens to the audience. He creates a whole story. The story of him at his rally, which is spread by word of
mouth. It’s a visceral thing. Most of these people had never gone to a presidential speech before. And if they did it would’ve been boring. He’d be talking about statistics
on the national deficit or something like that. Trump is not boring, really not boring. And it started a word of
mouth thing that was huge. And how much has this increase, or is it the same, with social media? Is the impact of narratives
bigger or faster, or can we just see it more? Well, the impact of narratives
is bigger with social media. But I have to say, I think
the mistake people make is more often
underestimating how important narratives were long ago. So we have the Latin word rumor, that has the same
meaning as it does today. What is a rumor? It’s a contagious narrative, right? Which is not fact-checked by anyone, it’s just out there. So they knew about this
thousands of years ago, and it was a factor
thousands of years ago. But yes, it is bigger today. We’re living in a world with
expanded information technology and ability to communicate. And to communicate with
like-minded people. To find each other. Maybe they had computer dating and maybe that helped
people find their spouse. But it’s much bigger now. They’re not just, it’s
finding someone who has the same political views as
you that you can talk with. And you talk about how
difficult it is to predict economic performance in the long term. Is that because of how much
narratives play a part? It’s hard to predict whether a new movie which hasn’t been shown
yet will be a success. Notoriously hard. The director might have had
successful movies in the past, he has famous actors and actresses, but nothing seemed to click this time. It’s when you put the movie
in front of the audience and you start to listen
to the word of mouth. And how does that relate
to, like, GDP estimates two years out? So when you talk about, oh, yeah, they’re not very good at
forecasting GDP two years out because the disturbances are,
I think, narrative-based. And they don’t generally
systematically study them. And unfortunately, it does
require some human judgment at this time anyway, to
understand the importance of narratives. Is there one big narrative
that is happening right now that you think we should
be paying attention to or that’s dislocating something? Well, a narrative that
comes to mind is the artificial intelligence revolution. And we have many stories of neat things. Like your smart speaker,
I guess like Amazon Echo that you have. It’s kind of, it does seem like the the new world. Something really fundamental has changed. But I don’t think it has
scared us yet profoundly because we don’t have high unemployment. So people think, well, but
the economy is strong so, not worry about it now. But I think if we do have
another recession, that narrative could come roaring back and
become again an obstacle to recovery.

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About the Author: Oren Garnes

18 Comments

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  4. Hope Davos 2020 will bring the healing the world needs from the tariff wars and disasters just in January this year alone!

  5. What he’s trying to say is that memers are the supreme investors and day traders. Check Tesla, we memed it to a bursting stock.

  6. Of course viral stories has a strong impact on major economic events.

    Many people will assume people forgot about the Great Depression but how could people forget after the economic depression in the early 2000s and arguable still a problem even to this day.

    People in general are not spending as much in fear of not being able to afford to pay the bills later on or worrying about needing money for an emergency situation.

    What's bad is that the cost of living has steadily been going up, but the the wages of people has not been steadily going up.

    Recently I am aware that many states in the US have raised the minimum wage, but companies are hiring less and giving fewer hours to people that work hourly.

    Anyway, trends are always changing so of course it's "…difficult to make long-term economic predictions."

    Therefore the appropriate action would be to learn & understand the trends, keep up with trends, and make decisions based on said trends while accounting for its volatility through constantly changing.

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