[00:00:00] Host Create clip 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?
[00:00:07] Host Create clip A lot of people think about narrative 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 are like are typically driven by stories that went viral on way. Don't have a deep understanding of the events until we understand we start studying the narratives.
[00:00:40] Host Create clip And can you give me examples of something recent that happened because of a narrative? A strong narrative?
[00:00:47] Host Create clip Yeah. Uh, okay, 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 into the well into the thirties, 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 in the early two thousands references to that exploded. I account accounting. See how often they come back in the news media. So and then we named it The great Recession is obviously a reference to the Great Depression. And so people became scared and they stop spending. They didn't stop spending, but they cut back. You think? Should we go on a cruise this year? Well, maybe not. You know, I feel a little unsettled across a lot of money. People cut back on their consumption enough that we have a recession
[00:01:51] Host Create clip and his story is impact the economy in a way that otherwise wouldn't necessarily be happening.
[00:01:58] Host Create clip Yeah, a lot of economists seem to think I want to think that it must be something about technology or productivity. Or maybe what? The central bank, Uh, but I think it's it's more generated in people's minds.
[00:02:15] Host Create clip And what's so strong about the Bitcoin story?
[00:02:17] Host Create clip Yeah, I use that as chapter one of my book. It's an example of It's ours. Good stories create economic events, and in the case where I think it's clearly traceable to the story now, I'm not gonna even comment on whether Bitcoin is a good idea or not. It doesn't matter. I'm just looking at the story. The story waas that a man named Satoshi Nakamoto had an invention which he promulgated on the Internet around 2008. On uh, it's the greatest, most wonderful invention in a long, long time. It ties in to 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 bit kind. And it's not even a tie. Do a country. It's international. We're all cosmopolitans now. It just seems like a good story. And then they put a little mystery. Intuit 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? Somebody wrote a nice paper. That was It just has an exciting I can see people transform when I bring it up in my class.
[00:03:54] Host Create clip My students react. They wake up when every Bitcoin
[00:03:58] Host Create clip How do you separate out the story from words, Really, and how much can the story affect what becomes, Really,
[00:04:04] Host Create clip it isn't the singles to every telling of the story is a little different. There's a core idea in the story, Uh, and how do you tell whether it's a real story or not? That takes work, and in the case of bit kind, it's kind of difficult to think through it. It's not me, it's impressive. It's not easy. You can work at it. The problem is, if you reach a decision about bit corn one way or the other, it will never get out because it can't compete with the narrative quality of the original story.
[00:04:42] Host Create clip Can you tell me about the Laffer curve? Something that I think a lot of people take us to be? Fact. But you said that a lot of the strength from it comes from this very simple
[00:04:49] Host Create clip story. Yes, so I'll tell you a story. In 1974 a economist named Art Laffer was having dinner at the Two Continents Restaurant, Nice Restaurant in Washington, D. C. And he's 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 bunch of and also Jude Wanniski, who is a writer for The Wall Street Journal, who wrote the story up. And in that story, Art Laffer, uh, draws a diagram on a napkin famously called the Laffer Curve, which illustrates I won't get into the details. But it supposedly illustrates dramatically how taxes can hurt incentives and destroy the economy. And even if you if you actually cut taxes, you may collect more taxes, even though you cut, because people will be so much more effort to be working and producing. Nice story. It went viral, but not in 1974. It was until in 1978 when Jude Witness, he wrote a book best selling book called How The Way The World Works, and he tells this story about the dinner.
[00:06:10] Host Create clip 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 you. Many years later, the last record 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 there was another another such fad, Laffer, Curve and Rubik's Cube were both around that They both faded somewhat. But they're both still here, and it's laughter is coming back. It has an internal dynamics like that of a disease. I'm not calling it a disease.
[00:06:48] Host Create clip How much does narrative impact how the Fed communicates or help? The president communicates? How much does that impact the economy?
[00:06:55] Host Create clip The people who take positions like federal 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. Looks 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 had their life savings planning for retirement. Panic, 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.
[00:07:50] Host Create clip What about Trump Trump?
[00:07:52] Host Create clip What I was gonna say they immediately rescued the Northern Rock bank, Uh, and paid off that of all the depositors. So the reason they did is they didn't want the narrative to get started. They knew that in the past it was rumor and stories that people went off too many different banks and asked for their money right away.
[00:08:12] Host Create clip And what about Trump? Is he good at this? Is he had been able Thio.
[00:08:15] Host Create clip This is one place where I could be lavishing my praise of Donald Trump. He is very good at narratives. Uh, he's very good at judging audience. That he experiments is the way. The way you launched near, you never know whether it will go well. He listened 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 have 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's said a word of mouth thing that was huge.
[00:08:58] Host Create clip And how much has this increased? Or is it the same with social media? Is the impact of narratives bigger or faster? Can we just see it more?
[00:09:07] Host Create clip Well? The impact of narratives is bigger with the social media. But I have to say I think the mistake people make is more often underestimating how important narratives were long ago, that we have the Latin word rumor. It has the same meaning as it does today. What is a rumor? It's a contagious narrative, right? I was just not fact checked. Anyone is 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 the world with, uh, expanded information technology, an ability to communicate and to communicate with like minded people to find each other. Maybe they had computer dating. Maybe that help people find their spouse, but it's much bigger now than not. It's finding someone who has the same political views as you that you could dark with,
[00:10:00] Host Create clip 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,
[00:10:10] Host Create clip it's hard to predict with whether a new movie which hasn't been shown you, 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.
[00:10:33] Host Create clip And how does that relate to, like, GDP estimates two years out?
[00:10:37] Host Create clip 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. Uh, and unfortunately, it does require some human judgment at this time, anyway, to understand the importance of narratives.
[00:10:58] Host Create clip Is there one big narrative that is happening right now that you think we should be paying attention to her? That's dislocating something?
[00:11:05] Host Create clip Well, a narrative that comes to mind is the artificial intelligence revolution. Uh, and we have many stories of neat things. Uh, like you're smart speaker, I guess. Like Evan 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 really scared us yet. Profoundly, because we don't have high unemployment. 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.
