Dusseldorf Robert Shiller is something of the fortune-teller among economists. The Yale professor has predicted both the New Economy bubble and the US housing price crisis, and has become famous the world over.
How could he make these predictions? By analyzing the behavior of economic agents – especially the behavior that emerged from recounting popular stories. Like such stories, “narratives” Shiller calls them, to be created and how they spread, he has now written down in a book. It has recently been published in English, with the German version coming on the market next year.
“I've always had the impression that economists forget something in their calculations: that people never just accept incidents, but always interpret them,” says Shiller in an interview with Handelsblatt. It was an essential fact that people wanted a story, a narrative.
Why such narrative could go viral, is shown particularly well in the cryptocurrency Bitcoin. The story that you can get rich with Bitcoin easily, has emerged from a kind of idealism. “Narratives often have a political or patriotic tone. The fear of artificial intelligence and the loss of jobs due to machinery has been particularly acute in recent years, “says Shiller.
Read the complete interview here:
Professor Shiller, do you own bitcoins?
No. And I will not invest in them either.
But you can wonderfully get rich with it, you can hear it again and again.
Well, I'm not focused on getting rich. And if you can get rich with Bitcoin so easily, just because that's the story everyone talks about, that's another question.
The Cryptocurrency is one of your favorite examples in your book “Narrative Economics”, ie narratives in economics. How do stories emerge in the pay-loving world of the economy?
At the age of 19, I started thinking about narrative. At that time I got to know economic models. I have always felt that economists forget something in their calculations: that people never just accept incidents, but always interpret them. And that is an essential fact. People want a story, a narrative.
How did the Bitcoin story spread so successfully?
That came out of a kind of idealism. Narratives often have a political or patriotic tone. The history of Bitcoin conveys a sense of identity. The fear of Artificial Intelligence that lost jobs due to machinery has been particularly pronounced in recent years. As a way out, people now want to somehow get involved in this new world.
Joining the Bitcoin community is an easy way to do that, you can easily buy the coins online. The owners are proud of it and identify with the urban, hip tech scene. People think they have discovered a new, freer world. I am no longer just a member of a country, but a member of a cosmopolitan community of ingenuity capable of changing the world. This rhetoric is so powerful that it does not stop and is always spread.
Why are such narratives a problem?
They do not have to be compulsory. But I think that people who want to predict something must try to gauge the power of the narrative. Narratives have a big impact. One must try to understand these stories in order to understand phenomena behind them. And you can not separate economics from these stories because there is so much motivation in them.
Nevertheless, they can cause problems.
Sure, think about the Laffer curve …
… a financial hypothesis, according to which the tax revenue increases with increasing tax rate, then fall again after reaching a maximum.
Ronald Reagan relied on Laffer during his time as US President and lowered income tax because he believed it would increase tax revenues. Exactly the opposite has happened. If Laffer had not packaged his theory in such a popular narrative, Reagan would never have been able to do so because no one would have believed that effect. It is said that Laffer sketched his whole theory on a napkin in a restaurant. As a brainstorm from nowhere. Since people tell to this day, who can shake something like that, who must be such a genius that the theory is right.
Robert Shiller – To the person
So economists have to orientate themselves to the humanities rather than mathematics and statistics to understand narrative?
Mathematics is also a useful tool for the study of the humanities. There are some methods used by people in the humanities to understand the power of the narrative. Right now, thanks to the digital revolution, these fields move closer together.
Narrative does not mean that you can not research them statistically. And the bigger the mass of data, the better the research results. Artificial intelligence and big data give us today the chance to understand economic narratives much better.
Does not this lead to a dilution of economics?
I think we just have to keep up with reality. There is a famous anecdote about an economist standing under a street lamp looking for his wallet. When asked if he had lost them here, he replied, 'No, I left them somewhere else, but the light is better for searching here.' There are analytic techniques that would work very well, but only if you do the environment really understands.
Are “Narrative Economics” currently experiencing a particular hype about US President Donald Trump?
Yes, that's certainly true. And that's fascinating to see how much Trump dominates. He is on the front page every day.
Another politician of the caliber sits with Boris Johnson at 10 Downing Street.
I once heard Boris Johnson talking at a dinner, he is – like Trump – an excellent speaker. And for both of them – which makes up their similar narrative – they also do not care if they doubt them. They do outrageous things. The most important thing to achieve a high level of political power is to bring a good story. And not what you do, but how.
I always felt that economists forgot something. Robert Shiller (Nobel Prize Winner)
The narrative of the wealthy maker is not necessarily new, we have talked briefly about Reagan. Why is Trump working so well anyway?
You have to understand that he has managed to establish himself as a self-made billionaire. He was fortunate to inherit $ 400 million in today's prices from his father. But Trump himself lies about it. He claims that he himself has come to his own wealth. He has created his own story. He had a good sense for the power of the narrative and was not afraid to write his own story. Among other things, in a number of books. And the genre of self-help to become rich and successful is very tempting. Many people love books that tell them how to become a dealmaker. Another thing is the element of chance: the name Trump. That sounds like a winner in a card game. The latter also fits a bit to his political approach.
How do you profit from the economic narrative? Many people do not see you simply as an economist, but as an economic prophet based on your predictions of the Internet bubble and the subprime crisis.
Sure, that will play a role for me, too. But you can not compare that to Donald Trump. That's fine with me too.
Mr. Shiller, thank you for the interview.
An English version of the interview can be found here.
More: Economics Nobel Laureate Robert Shiller warns of a collapse in the stock markets. A major threat for him is a “cornered” US President Trump.
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