Hidden Brain - The Talk Market

Episode Date: November 5, 2019

Can we affect the rise and fall of the economy? This week on Hidden Brain, we talk with Nobel Prize-winning economist Robert Shiller about the powerful ways in which stories and psychology shape our economic lives. He argues that narratives affect not just the purchases we make as individuals, but the fate of our entire economic system.

This is Hidden Brain, I'm Shankar Vedanta. We begin today with the story of an economic bubble, or to be more precise, Armenia. This mania took place in Amsterdam in the 1630s. Picture a city of canals, elegant townhouses, and a populace obsessed with one thing. Tilted to cope, tilted to cope, copied you to tell. Tulips. Tomorrow the double worth, best to buy from you, leaven, tilted to cope, tilted to cope. Amsterdam was the site of a big flowers market.

It still is. People would trade tulips, and there were some tulips that were especially beautiful, they thought. And so people wanted those, and the price started going up. This is economist Robert Schiller and when he says prices started going up, what he means is, they started going up a lot. People were getting rich trading in tulips. One tulip would be the same value as a whole house. One tulip could hold as much value as a house. Now historians say they only found a few examples of this, but even more modestly priced tulips

could sell for what would today be thousands of dollars. From a distance of nearly 400 years, the Dutch tulip mania of the 1630s might seem absurd. But the flowers were away for the residents of Amsterdam to convey that they were cultured and influential. The tulips had great symbolic value. They told an amazing story. This week on Hidden Brain, the powerful way in which stories and psychology shape our economic lives, how narratives affect not just the purchases we make as individuals, but the fate of our entire economic system. Most people think of the economy as following a set of fairly scientific principles. I buy more if things are cheap.

I buy less if they're expensive. The nation's gross domestic product or GDP grew at a stronger than expected rate of two and a half percent of the economy. Or say I run a company. I hire people if it looks like the economy is growing. I cut back if it looks like things are going to tank. The rate of hiring 4 percent accelerated hiring, you can see there mostly just going down. back if it looks like things are going to tighten. If I run the federal reserve, economic indicators tell me whether to raise or lower interest rates. The central bank is cutting interest rates

for the third time since July. It all looks very rational, very mathematical. very mathematical. With this picture and neglect of fundamental aspect of economic life, we live in a world of stories. The stories that we tell in news reports around the water cooler and conversations with friends and family, these stories profoundly shape the trajectory of the economy. Economist Robert Schiller's new book explores this idea. It's called Narrative Economics.

The winner of the 2013 Nobel Prize in Economics, Robert Schiller says his interest in the relationship between stories and the economy goes all the way back to his early college days. He was an economics major, but he took a history course that examined the Great Depression. He was struck by the disconnect between the economic ideas he was learning about, and the stories he read about how people behaved in the real world. People didn't sound like the people described in my economic theory. They seemed to be fetish and vulnerable to crazes and new ideas and then they drop them and forget them. It just seemed like there's a note of reality that has been lost when

we separate out departments. History department has something to offer. So does the psych and sociology department, etc. But we tend to be in academia, we tend to be polarized, or more than polarized, and it's comparmentalized. And all my life, ever since, thought that I wanted to read what these other people were saying, as well as what my economists people are saying. Because of course, there are all just different ways to understand the human condition, right? I mean, psychologists and anthropologists and sociologists and economists, I mean they're all basically trying to understand why people do what they do, they're just using different tools. And political scientists. Yeah. Yeah, so we need all these perspectives. Don't be too

compartmentalized. It may carry you for a while, but if you don't know what's happening in other realms of thought, you might miss the big picture. Robert says these realms of thought can help us decode things that otherwise seem puzzling about the economy. Take for example the story of a paper written by a mysterious mathematician in 2008. The author went by a pseudonym. Satoshi Nakamoto. Satoshi Nakamoto.

Who is Satoshi Nakamoto? Satoshi Nakamoto is a fake name for somebody. He's the myth. I mean, he doesn't know who he is. Some people claim to be Satoshi Nakamoto, but we have not seen any definitive proof. When you ask about the creator, who created this, who invented this, they must be real genius.

Everyone's like, we have no idea. The reason Satoshi Nakamoto created such a stir? This person, whose identity is still unknown, came up with a new type of currency. Bitcoin. The first successful cryptocurrency. The story was that Nakamoto was able to invent a currency that could function without the help of any government, even against the opposition

of any government. Bitcoin emerged as the digital currency that in theory could not be manipulated by a central authority. And it would be smart young cosmopolitan people all over the world who would secure this decentralized system. It's a wonderful story and especially wonderful since nobody could figure out who Satoshi Nakamoto really was. He never can't be found. No one has met him. How did he do that? It's an amazing story. Robert makes the case that Bitcoin's bread because it was a tale with surprise and intrigue. A genius mathematician invents a cryptocurrency and becomes a billionaire.

It sounds like the plot of a movie. If I was making that movie, one sub plot I would include is the story of the singer, Lily Allen. Lily Allen received an offer to get paid for a performance in Bitcoin. She turned it down. That was the most momentous error you can imagine, because she would be a billionaire if she had taken that Bitcoin. And you know, you hear the story, and even if you don't know anything about cryptocurrencies, you ask yourself, am I missing out by not getting in on this?

I mean, the story induces phomo. That's exactly right. And that's a strong emotion. It's regret theory. People are fearful of being regretful that they miss something. It hurts. You don't want to look forward to that pain in the future. So you might as well try.

That's the thinking. What's astonishing is that the craze of a Bitcoin spread, even though very few people actually understand what a cryptocurrency is, or understand its underlying blockchain technology. But these terms very quickly became buzzwords. Here's comedian John Oliver on last week tonight. Problem is, there is down

enough excitement around the very word blockchain that has become a magnet for investment. Reuters found that existing companies that merely added the word block chain to their name saw their stock price on average increase more than three folds, and one of them was particularly dumb. Long Islander's T, renamed themselves long block chain, and guess what happened?

Yeah, there's stock triple. Robert, so you read at one point that the total value of Bitcoin exceeded $300 billion, but Bitcoin has no value unless people think it has value. So something that existed purely in people's heads went from being worth $0 to $300 billion? Yes, it can easily happen if the viral effect is strong enough. Now, the Bitcoin enthusiasts will say, well, what about gold? Gold has no real value, just a shiny metal,

pretty to look at, and yet it has tremendous value, and it has for thousands of years. But I have to say there's some differences. Gold is scarce, inherently scarce. Anybody can start a new cryptocurrency. Gold is in the Bible. It's mentioned over 300 times in the Holy Bible. You know, I was thinking about this as I was reading the book. You know, when I think about real money, obviously real money, you know, has on many occasions bought me real things. but at some level, doesn't real

money function a little bit like Bitcoin in that it requires you and I to both agree that the notes that I have in my wallet have real value. That in some ways, we both agree on the story of what the notes mean and the story is what gives the notes their power. That's right. You've spoken just perfectly about narrative economics. I'll give you another example. Banks.

Why don't banks fail? All it takes is a story. If someone says the bank is going to be bankrupt soon, everybody will rush in and try to take their money out. And the banks can't, they don't have it on hand. They can't pay it out. So that's another example of how, yes, our whole banking system is built on a narrative.

Yeah, because at any given point, the bank might have enough money cash on hand to basically pay out, you know, five or 10% of what its total assets are, it's investing the rest of the money in other projects of everyone asked for their money back at the same time, the bank would simply not be able to deliver. And it happens, and it's supported by visual imagery. Photographers go to the bank and they take a photograph of the big crowd clamoring to

get in, to get their money out. This has happened so many times that the FDIC, Federal Deposit Insurance Company, has a gallery of photos in one of their residences. And so it's become a narrative in itself that we have to watch out for, that it doesn't come back. It's a perennial narrative. So Bitcoin was not just a mysterious new scheme. It tapped into many deep and ancient narratives about ordinary people and elites about

anarchy, about populism. Talk to me about those larger themes that are tapped into. Well, there was a movement that began in the 19th century with the philosopher Prudon called anarchism, which took an extreme statement that we don't need any government. If we just leave the people alone with no government, they will do much better. People are naturally inclined, many people, to anarchism. And so they're so happy to hear Bitcoin. Which was claimed can't be controlled by the government, because Bitcoin is for the whole world. It just sounds so enlightened and brilliant.

And in some ways, if you feel like you're part of the large number of people who doesn't have power, who doesn't have a voice, then you feel like powerful elites are running your life, as many people do. In some ways, Bitcoin is, you know, it's sort of you're throwing a rock against the edifice of the elites. You're basically fighting back in some ways. Right, and when you buy Bitcoin, you feel like you're on the bright side of things. You're an owner of some of this fancy computer stuff in a sense. Yeah. And you're part of it. Yeah, you're one of the disruptors, you're not the ones being disrupted.

That's the hope that it gives you, yes. That's the hope that it gives you, yes. Robert says these underlying currents help explain why a story like Bitcoin took off. If psychology and sociology explain the origins of economic fads, Robert draws an idea from another field, medicine, to understand how such fads spread and when they die. Stories, he says, function like viruses or parasites. They spread only when they have a receptive host. It is really important to understand that things that are popular are the result of contagion.

There is a contagion rate, which varies through time. There's also a recovery rate, How soon people forget about the narrative. This is just straight out of medical epidemiology. The contagion rate has to be higher than the recovery rate and then the epidemic will take off. It'll start small, but it will get bigger and bigger. Until the contagion rate falls down below the recovery rate and then it starts to recede.

It's mysterious because we don't normally think rate falls down below the recovery rate and then it starts to recede. It's mysterious because we don't normally think about the contagion rate and the recovery rate for stories. But that in fact are basic parameters that explain when they get strong and when they fade away. And of course, for the people who haven't invested in Bitcoin, who didn't get in on the craze, you know, those people might listen to this and say, hang on a second, I wasn't affected by the story, but in some ways that's not different from an epidemic, not everyone falls sick when an epidemic is raging.

Yeah, so if you have not invested in Bitcoin, that's not necessarily a sign of your common sense, it's just that you never encountered a contagious person who's spreading the word. Bitcoin is a single story. When we come back, Robert Schiller makes the case that narrative economics can explain larger phenomena, including shifts in the entire economy. Robert, in your book, you write, when we choose to tell a story to others, we base that choice on our perceptions of how people will react to that story in their own minds. We will likely spread a story, whether it

is a story about boom time thinking or about economic despair, if we think that others will like the story enough to want to spread it further. Talk about this idea that part of the reason story is spread, and some story is spread more than others, is that we are actually each of us gauging whether if we tell the story to somebody else, they in turn would want to pass it on. Right, well, it's what psychologists call theory of mind. That is, we are always thinking about what we imagine other people are thinking. That's because understanding other people's thinking is very important for success in

human society. People enjoy conversation. It's part of our species. It's everywhere in the world. Everywhere you go, you'll see people standing, facing each other, engaged in conversation. It's part of our species. It's everywhere in the world. Everywhere you go, you'll see people standing facing each other engaged in conversation. And if you get a translation of what they're saying, they're telling stories. And people, when they hear a story, they turn it over in their mind and say, maybe I could use this story in another conversation. So people evaluate them based on their apparent success in motivating other people.

So yeah, as if people are all trying to go viral. It's not a new thing with the internet. They were going viral thousands of years ago. Nearly a century ago, a powerful story swept the country. It's a story that has echoes in our own time, and the lessons from history are instructive. In the 1920s and 30s, many people feared that technological innovations were going to disrupt the economy and put lots of people out of work. For the majority, it means the interminable line outside factory gates, desperately hoping for a job that will rarely come. It explains some things that got out of hand and bad. The great depression of the 1930s came shortly after the term technological unemployment became popular in the late 1920s

about machines replacing jobs new machines replaced old machines new invention the electric light automobile telephone started as luxuries then as they were made better and cheaper became and when the unemployment rate got high after 1930 people started to think this is it. It's robots replacing our jobs. You may think it's pretty strange that people thought about robots in 1930. That sounds like long before they had computers.

But they did think they had robots. I'll give you an example of what they called a robot. It's the dial telephone. Before that, when you picked up a phone, there was no dial, no keypad. You had to just, there was an operator there and it would say, number please. Number please.

They replaced that operator with a machine. That's called a robot. And it's scared people then. And they thought that maybe we better pull back and save some more money. When everybody does that, it makes the depression worse. So one of the interesting points you make is that stories vanish and resurface like the story you're just telling about technological innovation, displacing workers.

And sometimes these stories vanish and come back over decades or even centuries and that really is analogous to what happens with pathogens that go dormant and then they reemerge sometimes decades later as epidemics. That's right and a pathogen can reemerge because of a mutation like influenza mutates quite regularly and we have to get inoculated imperfectly against those mutations. Or it can change because of some change in our practices. If there's some event that brings people closer together

in an enclosed space, it can spread much more rapidly and the contagion rate goes up. So these are fundamental lessons that I don't hear very often from most economists. They don't talk in these terms. And they don't see the causal impact from narratives to the economy. So it's interesting when we think about stories, if you draw the analogy with pathogens, perhaps then modifications to stories or tweaks in an underlying story might be necessary for a dormant story to come back and become dominant again. Yes, and so sometimes the tweaks are just frivolousous sounding. I'll give an example from my book,

the idea of trickle-down economics where you cut taxes on the rich, on the theory that they will raise GDP, and ultimately enrich the poorer people, was starting to look pretty old by the 1970s. But then a new narrative appeared then, really written by writer Jude Wynisky, about the Laffer curve. And it was basically the same theory

that if you cut taxes, GDP will go up, and tax revenues will even go up. You just have to cut taxes. That was a lovely story, and it was embellished by details, visual images. Like it was said that Arthur Laffer, the economist, presented his idea, a new idea about taxes in the form of a diagram which he drew out on napkin at a fancy restaurant with Defense Secretary Donald Rumsfeld and future Vice president Dick Cheney, putting these names at a visual image of a diagram drawn on a napkin, was all that that narrative needed to get

epidemic again. And that led to, I would say, Margaret Fatcher's ascendance to the Prime Minister in Britain in 1979, and then Ronald Reagan, president of the United States, both tax cutters. So the diagram drawn on that napkin eventually came to be called the Laffer curve. Explain what that curve is. Explain what the very simple intuition is behind that curve that eventually led to fairly significant policy changes on both sides of the Atlantic. Yeah, it's almost a laffer curve story.

It's almost like a joke with a punchline. So what Laffer said is, if we have a 0% tax rate on incomes, how much will we collect? Zero, obviously. But what if we have a 100% tax rate on incomes? What will we collect? Well, it'll be zero again, because nobody's going to work if the government takes all of it. So in between, revenue has to be positive.

So connect the dots, and you have a hump shaped curve. That means that to raise any given amount of revenue, there are always two tax rates, a low one and a high one. You can picture that on my diagram, which I'm asking you to make a mental image of. And so that's a new idea. Nobody's been talking about two tax rates to raise the same revenue. It's clever. It's like a stunt, a trick. It's a magic trick. It's fun. You can have, you'll know that you'll get a rise out of people if you explain it well enough and Tell such a story. So it went absolutely viral not just in the United States. It spread all over the world

It might be hard to visualize this curve, but think about it this way As Robert says the government raises zero dollars in taxes when the taxation rate is zero But also when it is 100%. Think of what would happen if the tax rate was 1% or 99%. In both cases, the government would raise only a small amount of money. When it's 1%, a lot of people would go to work, but the government would get only a small portion of their income. When it's 99%, the government would also get very little, because only a few people would work when 99 cents of every dollar are taken away from them. You can imagine the same dynamic playing out at other levels of taxation.

The intuitive idea here is that they can be two levels of taxation that produce the same amount of revenue. If that's the case, you can make everyone happy by taxing people at the lower rate. You gotta give Art Laffer credit for that. Seems obvious now. And it had big profound effects. It was a big epidemic in the 70s and early 80s. But it's coming back now.

Arthur Laffer is still there and he's still gloating in his great success. That was the best thing he ever did in terms of narrative quality. So is it true that Art Laffer himself has debunked the story about the napkin and the story with Don Rumsfeld and Dick Cheney in the restaurant in Washington? Well, the National Museum of American History in Washington was designing an exhibit on

business history. And they had the idea that it would be good to get the napkin. And maybe, well, Jude Wyniski, the author of the story, had died. They called his widow and asked her, we're looking for a napkin with a diagram drawn on it. Can you look around his things? And then she called back and said, yes, I found an African with a diagram, so she gave it to them. And they proudly put it in their display. You can find it searching on the web.

And they tell you they're very proud to have this exhibit. But there's one problem with it that a reporter later called Art Laffer and asked him about it. And he said, I don't believe that story. He said, I don't remember writing on a napkin, and moreover, my mother taught me, it would be a cloth napkin at a fine restaurant. My mother taught me not to do such things.

Well, I mean, what's fascinating, of course, is that it's such a good story, and it's such a fun story and it's such a fun story that it almost feels a pity to apply the facts to it and debunk it. And that applies to conversation generally. How many people actually fact check their stories when they tell them? The Laffer curve is still being debated by economists. While the curve might make sense at the ends of the taxation spectrum,

it might not describe what people do at realistic levels of taxation. Most governments aren't choosing between a tax rate of 10% and a tax rate of 90%, they're choosing between 25% and 30%. That means drawing implications from the Lafayette curve might not make much sense. But in the 1980s, the story of the Lafayette curve proved irresistible. Cauls to reduce taxation were buttressed by other stories, like this one from President Ronald Reagan, to showcase wastewill government spending. In Chicago, they found a woman who holds the record. She used 80 names, 30 addresses, 15 telephone numbers to collect food stamps, social security, veterans benefits for four non-existent deceased veterans husbands, as well as well as

a couple of other women. So Robert tell me how Reagan's story is about so-called welfare queens intersected with these ideas from the Laffer curve and eventually changed federal policy. Yeah, well Reagan was a good storyteller by the way. So he had great deal of power from that. That kind of story elicits anger. And anger is a strong emotion.

But the problem with that story is it's not a statistic. It's just, in fact, it's the record holder. So that means there's only one like her. But storytellers don't care. They tell anomalous and rare events as if they're common. And if it's contagious like that, it generates fake news. You were talking a second ago about how President Reagan, in some ways, was a marvelous story teller. One of his stories affected not just how individuals and companies act, but perhaps even how nations act. He liked to tell a story about the failures of communism and Soviet Russia, where people had to wait for years to get routine household services.

In one joke he told to many audiences, he described a man who goes to buy a car and is told he has to wait for 10 years. That this man, he laid down his money and then the fellow, he was in charge, said to him, okay, come back in 10 years and get your car. And he said, morning or afternoon. And the fellow behind the car said, well, 10 years from now, what difference does it make? And he said, well, the plumber is coming in the morning. And what is so effective here, Robert, is that Reagan is not saying explicitly communism doesn't work, that message is embedded inside the joke and that's the power of the story.

Yeah, and it also shows an example of the tendency for stories to go viral that are associated with a celebrity. The real author of that story is someone living in Russia, I suppose, who gets no credit for it. It really goes viral when it's connected with someone that we know. And that's just the way we are. Lots of famous quotes in history turn out not to have been first said by the famous person. The famous person was quoting somebody else that he doesn't care about. Yeah, and isn't it also the case that sometimes the stories might not even be true? I mean, we don't even know whether there actually was a specific person in the Soviet Union who came up with this.

There have been questions raised about the welfare queen story that Reagan told, for example. And in some ways, once a story is traveling and it's embedded, the truth is often not sufficient to demolish it. Yes, and this is not a new problem. It goes way back. If you turn on the news these days, there is a powerful story that's in circulation that tells us that a long period of economic expansion is soon going to be over. Although things may look good for now, many Wall Street analysts are concerned about the warning signs ahead.

Recessioning light now is washing for the first time since 2017. As a key predictor of recession, we need to announce the hot market's price. Once again, you've washing that ominous recession warning signal. The economy could be head out of the soil following 800 points. It was in 3% of its value. What do you tell people when they ask you to predict the next recession? And by the way, that's me indirectly asking you

to predict the next recession. My feeling is that we are at a heightened risk of a recession. And having a recession before the 2020 elections in the US might even be 50%. You'll see a clear evidence of a recession coming. But I can't go above that. There will be another recession.

We know that. But the other question that people tend to talk about all or nothing, will we or will we now have a recession? The question is, if there is another question which I like to entertain, if there is a recession, is there a chance that it will develop into a severe recession? And I'm worried about that, even though I can't tell you precisely whether it will be in a recession, and I think there are narratives today that might worsen a recession,

notably the artificial intelligence narrative, which in an earlier form in the Great Depression really did heightened the impact of the depression. We could see that again, people becoming conservative in their expenditure because they're afraid of losing their jobs. I mean, it's already going on in some parts of the country, but it could become big. One point that Robert makes is that the veracity of economic narratives is not the point. Stories can invent their own reality.

One example he gives is the narrative around Japan's last decade, a period of economic stagnation during the 1990s and early 2000s. The last decade story for Japan was particularly impactful since it followed the 1980s when Japan was considered the economic powerhouse of the world. People were saying that nobody can compete with Japan. They've pushed out Western makers of cameras, stereo equipment, they're hammering away at their sales of cars, and there were books written back then about the Japanese miracle. And then suddenly it went sour in the 1990s.

I'm wondering if President Donald Trump might be a fan of your book, whether or not he's actually read it, because he clearly also believes in the power of stories. Here he is talking down the risks of an impending recession. I don't think we're having a recession. We're doing tremendously well. Our consumers are rich. I gave a tremendous tax cut, and they're loaded up with money.

They're buying. I saw the Walmart numbers. They were through the roof just two days ago. That's better than any poll. That's better than any economist. So Robert, given what you say about how talk and shape economic reality is president trump absolutely right to be spinning a positive story

well i i wouldn't use the word absolutely right that's a little strong but he is having an impact i believe uh... it's not just his current spinning of the story he's written many books with co-authors the the the these books uh... his current spinning of the story. He's written many books with co-authors. These books have advice to be like him. He tells you how he did it. He tells you, for example, don't be afraid to boast about yourself because people are maybe a little resentful about boasting people, but in the long run, they believe in them because if you don't

boast, nobody will hear about your successes. This is Donald Trump talking. He's telling you to spread your personal narrative aggressively, and he's been doing that for himself for 50 years. And it's worked. Robert Schiller won the 2013 Nobel Prize in Economics. He's the author of Narrative Economics, How Stories Go Viral and Drive Major Economic Events. Robert, thank you for joining me today on Hidden Break. Shanko, thanks. It was a pleasure. This week's episode was produced by Thomas Liu and edited by Jenny Schmidt and Tara Boyer. Our team includes Parth Shah, Raina Cohen and Laura Quarell. Special thanks to Remco's Svetlot and Laura Beltran via Mitzar. A run-sang hero for this episode is Christian Kutten.

Christian is NPR's financial controller. He and the talented accounting team at NPR make sure that bills get paid, revenues get collected, and the organization follows tax and accounting rules. Christian has helped me on many occasions, think through the financial models for Hidden Brain and the implications of different choices. He is great at seeing the stories behind the numbers and finding ways to tell those stories eloquently.

Thank you, Christian. For more Hidden Brain, you can follow us on Facebook and Twitter. If you liked this episode, please be sure to share it with a friend. It's all like you have a fun show. I like it. It is a fun show. You should subscribe, Robert. Alright.

Take care. I'm Shankar Vidantam and this is NPR.