The Indicator from Planet Money - What's The Story? Narratives And The Economy

The great toilet paper shortage of 2020 wasn't caused by the virus or by a disruption to manufacturing. It was caused by a story: one that we told ourselves. On the Indicator: how stories can affect the economy.

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Content Keywords: economics

Welcome to the indicator from Planet Money on Cardiff Garcia Patty Hirsch on the other the indicator know you may remember the beginning of the pandemic we had this incredible run on certain items at the grocery store paper goods, like paper towels and toilet paper of dawn cleaning products, like bleach and wipes wipes lights. And the reason isn't people worried there would be a shortage of those goods because of the pandemic but the truth is there was not a shortage Supply chains manufacturing facilities, not really been significantly disrupted, but the very story that there might be a shortage ended up spreading really fast and that story is what ended up creating a shortage at least for a while as people rushed to the store and just bought everything up so we will tell each other and tell ourselves stories about what's happening in the world and our place in it. I'm ghost stories can influence our economy in surprising ways. How do we identify the effects of Stories on our economic behavior?

And how did some stories go viral and end up affecting the whole economy and others don't that is the subject of a book by Economist Robert Shiller called narrative economics, and we talked with Sheila while back about this, but we wanted to share that interview with you again because it sheds light on some of the more bizarre economic phenomena that we've seen play out not just during the pandemic but over the last couple of decades after the break our conversation with Bob Schiller about narrative economics.

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A narrative is a telling of a story that imbues it with emotions with morals with views of the world how it works. Is he a story that we willingly communicate because we think that is useful or is lightning or pleasurable or just just dramatic people of dramatic story. That's true narrative economics. What is that narrative part add to economics that wasn't there before what does knew about this what's new about it is increasingly. We are starting to study how people change their thinking and so if we're going to describe how people make decisions especially for forecasting economically events, like recessions, we have to know how they're changing their thinking and unfortunately, that's not doesn't sound glamorous.

Because we're talking about often naive series that are just half-baked. They sound may be wrong to us. But if people think that way they're basing their decisions on it. Yeah, it does sound unromantic in a way, you know, I mean, we tell ourselves these dramatic stories in part because that's what it is to be human. But when you start bringing in quantitative methods to measure it, it sounds a romantic but you're saying it's still very important. I think it's important that the reason why most Economist didn't forecast the Great Recession 10 years ago was that they weren't listening people were saying just before they were saying a couple of years before it that they were thrilled by stories of people who flipped houses and they were fascinated with the stock market. The stories are about people who got rich quick and then of course the story changed and that impart it seems like what you're saying contributed to the severity of the downturn afterwards that the narrative had changed.

Now there was a new narrative. How did that work? Where do new narratives come from? They come I think from creative minds from people who are looking around further away and remembering things that happened before but the phrase housing bubble came in new just before the financial crisis. I'd say around two thousand five star to take off. So these narratives thread-like epidemics, they become contagious and given the mysterious nature of it. How do you seek to measure the influence that a story is actually having is wrestling real time where it's it's really hard to pinpoint. Well at this point. I'm still relying somewhat on human judgment. I like to do counts on digitized text and I like to not just stop with something like housing bubble and see when that came in. Nobody said that almost. Nobody said that before this recent prices. Yeah. I also go back to the newspapers.

Magazines that I'm searching and read the articles and also you can find article rare indoor sprinkling of articles that might have said housing bubble and ask decades but never took off someone tried it and it didn't work and they can try to reflect on why it didn't work then and maybe maybe you'll have a dim idea have an answer but I think we can back up that judgment with with some science that reveals something we can do weird, Then we can do readings we can get people to classify readings by some Dimension that they understand and that is a bit of science, but they know the human spirit is is likely to stay in affable for quite a while. I'm loading screen of oh, yeah, you say that Economist should still try to predict the future. I think one narrative that's there is a economist or not very good at forecasting and then understanding narrative that cannot

Can help that. This is actually a moral issue a can you explain that further? So I have to defend my fellow Economist. They can go out further than the weather people can I got to tell you but I've never weather forecasters are pretty sharp people, but the weather just doesn't seem to be for Castle Beyond a week or so, can go out at 6 months. It's pretty good. But on the other hand, it would seem that it should be forecast about the next recession. You should see it coming. The problem is it is it has to do with people changing their minds and looking at each other and seeing what other people are talking and thinking about that one other question about forecasting in particular and if you end up incorporating this idea of narrative economics into the forecast and you're able to do so successfully so that the ability of American Economist to forecast improved

Not just six months, but let's say 125 years into the future. Then you have the issue of the forecast itself becoming a narrative and then you're just chasing it all over again, right? That's right. Well this also brings out the self-fulfilling prophecy story and I think that it's it's it's happening right now. Maybe not maybe with the next recession people have heard so much talk lately about the next recession that it sounds like we're talking your way into a recession and my thought on that is absolutely right, but I'm not sure that it's considered contagious enough. So this is not deterministic economic. This is it has a random compound in it, but there's definitely elements of that happening and I think that's happened and offer a recession in the 1929 just before the Great Depression. There was already sort of gloomy talk about high unemployment and about

Haines replacing jobs and somehow was after the crash in 1929 those just immediately charged into the foreground those those narratives. Yeah. I mean, I guess if one person says I think the economy is not going to do well I'm going to hold off on buying something that person might look like a crank but if 60 or 70% people do that, you don't just have a forecast for a recession a consensus forecasts. You probably also have the receptionist has developed over the years and they're not that easy to see and it's because there's a lot of sound like they might be a reason to withhold expenditure, but maybe they're not Salient enough for the not brilliant enough, but not the emotionally charged enough Bob scheller. Thanks so much. My pleasure.

Is episode of the indicator was produced by Leena sanzgiri fact-checked by Nadia Lewis our editors Patty Hirsch. An indicator is a production of NPR.
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