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.