Steve LeVine, The Economist Who Wants to Ditch Math, Marker, Nov. 5, 2019.
Two decades ago, before the dotcom bust, economist Robert Shiller told peers that the stock market was vastly overpriced. A few years later, before the financial crash, he warned that housing was fated for a massive correction, too. Now the rabble-rousing, Nobel laureate professor has a new message for them:
Put down your calculators. It’s time to listen.
And what will his fellow economists hear when they do? An epidemic of chatter, says Shiller — stories told and retold at home, on social media, at workplaces, and just about everywhere else people gather. The skinny may be about new money pouring into Bitcoin, or the Chinese trade deal really about to happen this time. Before long, collective mobs of people will be moving their money around, sending the Dow to new highs.
In short, after four decades of a religious-like fixation with mathematics, mainstream economists may learn that the gossip, whispers, half-baked philosophy and “news tips” passed human to human since cave days drive economics. True, fake, it hasn’t mattered — such talk has spread and commanded surprising influence over economies. Shiller regards this as no small matter. In a new book, he argues for a profession-wide, decades-long study of viral stories as a path to much-needed improvement in utterly flawed economic forecasting.
Self-interested creatures of reason no more:
Coming from Shiller, Narrative Economics, his highly readable, compelling book, is a broadside against the Chicago school, the mainstream, rigorously math-based philosophy that has dominated capitalism since the 1980s. Pioneered by Milton Friedman, the Chicago school tells us not to second-guess the market — humanity, disciples argue, is made up of rational, self-interested individuals whose systematic actions fully explain the larger economy. Governments should stand back and let the science of economics get on with its thing.
The Chicago school's crowning moment arrived with the election of Ronald Reagan and Margaret Thatcher, moving the unregulated, unfettered market to the center of economic policy. But just as the Chicago acolytes were taking Washington and London by storm, a few voices were beginning to sow doubts. Psychologists like Danny Kahneman and Amos Tversky, and economists like Shiller himself, were pointing out that emotion seemed to influence economic decisions in ways that very few people would call mathematically grounded. A few years ago, the Nobel committee signaled its agreement, awarding the field’s biggest prize to a string of “behavioralists,” including Shiller, in 2013. A tense peace settled in between the Chicago and behavioral schools.
Now, Shiller is upsetting the ceasefire with his new thesis. “We are developing a new side of economics,” says Dennis Snower, president of the Kiel Institute for the World Economy in Germany, who collaborates with Shiller. “The standard statistical analyses are no longer valid. They assume that we know the probabilities with which everything will occur. In reality, we are almost never in that position.”
Time after time, when it comes time to predict what'll happen, the numbers didn't add up. As we all know, most economists were caught flat-footed by the 2008 crash.
Of 469 recessions around the world during the last three decades, the International Monetary Fund foresaw just four by spring of the prior year, Bloomberg reported. Private sector economists did no better: From 1992 through 2014, they projected just five of 153 recessions.
On Trump, he is
...an epidemic all his own, says Shiller — “a 50-year epidemic.” “He is a very good observer of human emotions and seeing what works.” Why don’t Trump’s fans mind his tenuous relationship with the truth? In his book, Shiller cites a 2018 study in Science showing that false stories are tweeted six times more often than true ones. This is not because people prefer falsehoods, but instead that they have “the urge to titillate and surprise others,” he writes.
However, Northwestern's Joel Mokyr says:
“What he calls ‘narratives’ other people call ‘expectations’ or ‘beliefs,’” Mokyr said. “The word ‘narrative’ puts old wine in new bottles. We have always known about certain beliefs about the economy, and that people operate on those beliefs. That is hardly a revolutionary insight.”
Epidemiology?
Shiller suggests using medicine as a model. In 1927, two Scottish scientists — William Kermack and Anderson McKendrick — proposed a model for the spread of disease. They asserted that, for an epidemic to begin, the rate that people catch a disease must exceed the rate people recover. If it doesn’t, an epidemic cannot take off. That was simple enough, and with it, Kermack and McKendrick revolutionized the study of contagion.
Plotting the eruption of viral stories on the internet, Shiller found that they follow the same Kermack-McKendrick pattern. “It’s like being an epidemiologist but in the world of ideas,” he said.
Now we're in the realm of cultural evolution, where epidemiology has been a leading metaphor for decades, hence Richard Dawkins' 1991 essay, "Viruses of the Mind" and Dan Sperber's epidemiology of representations, which he laid out in Explaining Culture (1996).
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