The Economist Who Wants to Ditch Math
Nobel laureate Robert Shiller argues that gossip, half-baked philosophy, and fake news drive economics — not only numbers. His peers aren’t exactly thrilled.
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.
“The standard statistical analyses are no longer valid.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.”
To say that the field has been cool to Shiller’s latest big idea is to insult the walk-in freezer. For almost three years, Shiller has laid out his thinking in speeches and papers, including to some 900 of the world’s leading economists at the 2017 meeting of the American Economic Association (of which he was president at the time). At such speeches, there has been polite applause. But outside, normally voluble economists have treated “narrative economics,” as Shiller calls his theory, as though it doesn’t exist, and most of those I contacted for this story either did not respond or said they didn’t know enough to comment.
A well-connected “Chicago school” economist told me this would happen. “I think it will be hard for you to get anyone on the record against this for several reasons,” this person said in an email. “(i) We are indeed storytelling creatures and there’s wisdom in what Shiller says. (ii) He’s a nice guy and why pick a fight? (iii) Any skeptical quote would sound foolish and narrow-minded. ‘Economist X at U of Y says, “I’m ignoring narrative economics because it’s not in my toolkit.’” I see Economist X’s point, but the internet would make mincemeat of him.” For those very reasons, this economist also declined to be named. “Stories are important,” he said, “but what makes them economics?”
Shiller has an aw-shucks laugh, a slight hesitation, a shock of big hair, and, at 73, a still-boyish grin. All together, the picture is disarming — and misleading. Shiller, who teaches at Yale, is not lacking in Type A assurance and ends up talking a lot because he is a reflexive contrarian — he himself says he agrees with almost no argument he hears. But he may also be the world’s politest practitioner of Nobel-level economics, serving up his sometimes-cutting quibbles with such quiet, smiling courtliness that it’s hard to be offended.
When I told him that the anonymous peer quoted above had questioned whether he was describing real economics, he became Robert Shiller testy. “I don’t care what you call it. Is it right?” he said. He paused, repeated himself, and if he had stomped his foot, he would have surprised no one. Then he said, more softly, “It is still relevant to study scarcity and the allocation of resources. But you can’t separate out a ‘pure’ economics. It’s not like we should do patriotic economics.”
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.”
There is an opening for such a challenge in a field beset by numbingly bad forecasting. Among the misfires: the unprojected 2008-’09 financial crash, and the fatefully under-appreciated ferment of people “left behind” by globalization, in part responsible for Brexit and the election of Donald Trump. Economics’ miserable record goes back to the beginning of modern forecasting: 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. In an op-ed at the New York Times in September, Shiller argued that the problem is fundamental. The leading economic indicators on which economists rely, such as interest rates and GDP growth, have been better at telling us where we have been than where we are going.
If the Chicago school is so bad at forecasting, how can it possibly be trusted to know how best to structure an economy? So it is that, though rational market advocates may not fully realize it, the times have made them exceedingly vulnerable. “I think of the current decade as comparable to the 1930s and the 1970s in the sense that a dominant approach to economic policy has come to a crashing end,” says Binyamin Appelbaum, author of The Economists’ Hour. “In the 1930s, it was the end of laissez faire; in the 1970s, the end of Keynesianism; in the 2010s, the end of blind faith in markets.”
Since Copernicus five centuries ago, human advancement has been all about replicable facts. The tech you use, the food you eat, the vehicle you drive, your furnishings and clothes — much of the civilization you know — are trackable to the scientific revolution he set in motion by placing the Earth in orbit around the Sun. We want to quantify everything, the faster the better.
But are we excessively wed to data and numbers? A growing number of experts in diverse fields — from mountaineers to investors and economists — say we are: Our math mania has eroded our sense of intuition — Shiller says we are missing time-worn narrative clues to what’s really going on, while other thinkers say our primal “mental maps” have atrophied.
In the French alpine village of Chamonix, below Mont Blanc, I recently attended the Summit of Minds, a conference organized by former senior executives of the World Economic Forum, the annual gathering of elites on the other side of the Alps in Davos. Blaise Agresti, a local climbing guide, stood up at a breakfast devoted to what a moderator called “navigating an uncertain world when the old borders no longer exist.” He told the story of a man, a few weeks earlier, who, carrying a small GPS device, trekked some 9,000 feet up Mont Blanc. Just before reaching a shelter where climbers spend the night on the way to the summit, the man, traveling alone, veered onto a little-used fork and up a gradually steepening and narrowing ridge. There, he fell almost 1,000 feet to his death.
“We love plans, algorithms, scenario planning. But you need full situational awareness. You need to learn cognitive diversity.”
How it was that the man managed to take the wrong turn weighs on Agresti, a retired Army officer who formerly ran Chamonix’s mountain rescue office. Every year, more than 20,000 people use the same path, Agresti said, and if the man was paying attention, there was no way to miss the shelter. He simply did not look around. Instead, Agresti suspects, his attention was “only on his GPS,” and it somehow was wrong, or he misread it. “If you are a mountain guide and you use only technology, you will die,” Agresti told me. “You don’t see the crevasse. You can’t adapt to reality.”
Agresti runs a local firm that, in addition to guiding climbers, promotes high-end retreats above Chamonix. He invites senior corporate executives to be separated from their smartphones and forced to think about their surroundings at altitude — “to rebuild their natural compass” at a time of constantly changing conditions, Agresti said. “Data is a way to map the world,” he said. “But it’s perhaps not the right data, or the right map.”
He told the story of the Norwegian explorer Fridtjof Nansen and a four-year attempt in the 1890s to be first to the North Pole. At one point, Nansen left his crew behind and pushed ahead with a single companion, a team of dogs, a sextant, a theodolite, and two watches, the latter critical to calculating longitude. Soon after, both watches broke, leaving the men lost in an unmapped and to them all-but featureless landscape. It took two years, and they never reached the pole, but they made it out. “Nansen moved on ice floes with nothing,” Agresti said. “He was able to locate his position himself. We’ve lost a lot of these abilities.”
One after another, bankers, investment advisers, and economists responded in unanimity about a world fast becoming unrecognizable to those relying on the usual technologies to make sense of it all. They spoke of a “paradigm shift,” “a movement,” and a “revolution” occurring in response to this disorientation: An open math rebellion.
“People can’t get their minds around the fact that we are on an ice floe,” said David Bowers, an investment adviser with U.K.-based Absolute Strategy. “We love plans, algorithms, scenario planning. But you need full situational awareness. You need to learn cognitive diversity.”
Shiller told me when we spoke later, “There are some economists who think that the economics profession should be a mathematical discipline. To me economics and other social sciences are part of a big picture. If we are trying to stay in the mathematical world, we may become irrelevant.”
Robert Shiller’s fascination with stories goes back to his undergraduate years at the University of Michigan, where, at 19, he read Only Yesterday, an oral history of the Great Depression by journalist Frederick Lewis Allen. The book relates everyday stories of people living through the period prior to the Depression who, in Shiller’s view, provide much insight into why it happened. “But economists never took Allen’s book seriously,” he said, “and the idea of narrative contagion never entered their mathematical models of the economy.”
That nagged at Shiller, who notes that, prior to the Depression, no economist forecast what was about to happen. But the informal story mill was a central actor at the time and after. In the 1930s, the United States plunged into a frugality binge, influenced by a narrative that, even if you had the money, it was almost immoral to spend it on nearly anything beyond bare necessities. As a result, the Depression was deepened and lengthened, Shiller says. But once the war was over, a new storyline took over — that of Americans going on expensive vacations and spending, spending, spending. The country now went on a buying spree, which put an engine behind the post-war boom.
In January 2018, Shiller explained his thesis at Davos. Sitting next to him, Raghuram Rajan, a professor at the University of Chicago but not a “Chicago school” disciple, said that all economic models begin with a story and that economists then use data in an attempt to stand them up. Yet, he said, “when economists hear the word ‘stories,’ they wrinkle their nose and say, ‘This is below me.’”
Speaking next, Hua Jingfang, an economist at the China Development Research Foundation in Shanghai, challenged one of the most broadly accepted narratives of our time — that of an unprecedented Chinese economic miracle. Rising economic superpowers typically call themselves unique, Hua said — Germany in the 19th century, Japan in the early 20th century, and southeast Asia after WWII. All achieved 10%, year-on-year GDP growth, and all did so according to a formula — copying the products, tech, and methods of contemporaneous powers.
That does not mean the Chinese narrative is hollow. The current U.S.-China tension is a clash of locally viral narratives. President Trump’s storyline — perhaps his only major policy accepted by both political parties — is that the United States will no longer be a sucker to China; Xi Jinping’s — equally embraced at home — is that China is never again going to be prostrate and subordinate to the West, as it was after the Opium Wars of the 19th century. It is difficult to see either leader backing down from his story, which helps to explain the foreboding of the best experts on both sides that the conflict.
Trump 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.
A few economists did speak with me, and when they did, one question was whether Shiller’s idea is all that original. Joel Mokyr, a professor at Northwestern, said Shiller is correct about the impact of stories, but that current models already take into account some of his ideas, such as the concepts of self-fulfilling expectations, panic, and crises of expectations. “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.”
Likewise, there is a question of the order of causality: Does an event create a narrative, or the other way around? Again, Mokyr: “In the 1920s, the narrative was laissez faire. Then comes the Great Depression and you have a classic case where events affect beliefs: ‘We need administrators to regulate. The economy is too big to leave to the markets.’ Catastrophic events will change narratives.”
Mokyr says the challenge is not showing that stories matter, but finding out what makes for a viral narrative — why do some ideas take off in contagions, and others don’t?
No one knows the answer with certainty, but Shiller has his ideas. “You have a natural curiosity and want to expand your mental map,” he says. “You are seeking community, self-esteem, history.” In addition, we make stories viral simply because it feels good: Hearing or telling a dramatic story increases levels of oxytocin, sometimes called the “love hormone.”
But the field is nervous because none of this is proven as yet scientifically, and no one knows how to even begin getting there. “Humans think in terms of narratives. Economists do not have any way to incorporate those narratives and their spread into our models. That makes us rather inept at trying to understand a bunch of important things,” said Brad DeLong, a professor at Cal Berkeley.
One bit of promising news is that a number of other social sciences have found ways to marry their research to math. In a milestone 1993 book, sociologists Bryan Jones at the University of Texas and Frank Baumgartner at the University of North Carolina borrow from evolution and ecology to propose that, when big ideas break through and become widely influential, they arrive in a punctuated spurt, all of a sudden, like the mutation of a gene. Rather than “story,” Jones and Baumgartner use the word “framing” to describe what’s going on. They conclude that “things move in fits and starts,” said Amber Boydstun, a professor at the University of California at Davis.
Taking his own stab at the challenge, 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.
It’s a start, says Shiller. The field needs to push forward, even if it takes decades. “If narratives are driving things, I just don’t think that’s what we should do as a profession — ignore it — because we don’t have precise ways of researching it,” he says. “I think we can’t forget the human element in narratives.”
Shiller knows that with his Nobel on the mantle, he has some latitude, when otherwise he might be dismissed as “fluffy or flaky.” He is not dissuaded by the reception thus far. Far from it, he thinks he is onto something new — really onto something. Eventually his peers will recognize that, too. “Scientific revolutions are caused by the opening of different sources of information,” he says. “I don’t want to be grandiose, but it’s in the air.”