The Power of Economic Narratives

What is the importance of narratives?

The reason why narratives are important in passing on information is because it allows for a sense of legitimacy and authenticity, thus giving more meaning to the message being sent across. It engages listeners and allows them to associate themselves to certain situations, bringing stronger impact and retention. Strong narratives can inspire and influence positive outcomes in an organisation.

In this article, Christian Gattiker, Head of Research at Swiss Wealth Manager, Bank Julius Baer takes us through where they stand regarding some narratives, those recurring, what narratives may drive the future, and ‘the next big thing’.

What are narratives good for?

In their comprehensive outline of how to deal with risk and uncertainty (and how to tell one from the other), UK economists John Kay and Mervyn King make reference to the power of narratives. Along their line of argumentation, narratives allow human beings to deal with the ‘radical uncertainty’ that has been a fact for humankind since its earliest beginnings. Instead of resolving a puzzle, the usual challenge is how to survive in a world where anything is possible. Therefore, the authors criticise social experiments in psychology or behavioural finance for trying to track ‘small-world problems’.

In the big world, humans have been moving around for thousands of years and the rules of behaviour have to be much broader. Narratives have been a viable means to structure this radical uncertainty and give guidance beyond the nitty-gritty of a simple board game.

The evolutionary blessing

Humankind is quite a special species as its ultimate differentiating factor is collaboration. No other species seems to be able to collaborate as humans do.

You might argue that other species do collaborate too – say ants or bees. But Yuval Noah Harari, author of ‘Sapiens’, makes the point that these methods of collaboration seem hard-wired in animal species, which keep working together in similar ways from generation to generation.

In contrast, humankind is unique in that it can change the way it collaborates drastically over time – for instance, developing from hunter/gatherers to farmers to manufacturing to industrial to knowledge-based societies.

How do humans align when working together? Narratives play a major part in this, according to historian Harari, as they convey the key ingredients of how to put individual behaviour into the perspective of the group. Whether you are a Viking fighting in defiance of death, believing Valhalla awaits brave warriors, or you are with Médecins Sans Frontières, putting your life on the line helping the otherwise helpless, narratives define purpose.

The economic factor

Here, at the very latest, economics comes into play. As soon as human collaboration is in the mix, business and finance cannot be far away. Whereas in the barter economy, the narrative is more about ‘one hand washes the other’ or ‘everybody does what they do best’, the monetary economy is all about trust. As John Pierpont Morgan, founder of the eponymous bank, put it: “Gold is money. Everything else is credit.” This narrative points to the counterparty risks that are involved when dealing with transaction means such as money.

Surprisingly, it took economists quite some time to appreciate narratives as a basis of economic interaction. Nobel Laureate Professor Robert J. Shiller undertook a deeper look in his book ‘Narrative economics’ in 2019. In its thoroughness, this is a great introduction to the topic for anyone interested in non-mainstream economics. Fascinatingly enough, Shiller highlighted the contagion effects of economic narratives (long before the Covid-19 pandemic hit the world). He also stressed the effect on economic behaviour as a group.

As exemplified by the tulip mania in the Netherlands during the first half of the seventeenth century, herding can have serious disastrous consequences for the economic and social system as a whole. The narrative turns into a self-fulfilling prophecy by spreading through the whole population before a new narrative eventually takes over and resets the system. Fascinating too is that the tulip mania started after a currency debasement in the 1620s. Tulip bulbs becoming an alternative to traditional money rings a bell with current narratives spreading today. Another narrative that illustrates the mobilisation of the masses through a storyline is the ‘American dream’, where the promise of going ‘from rags to riches’ attracted millions of immigrants to the US –resulting in the promised prosperity there.

“Energy abundance is a serious contender for ‘the next big thing’ crown.”

Christian Gattiker, Head of Research

Pushback from rational thinkers

Perhaps economists share the general discomfort of scholars with such worldly things as storytelling and narratives, and the reason for their pushback may be that everybody uses narratives after all. From politics (‘land of the free, home of the brave’) to marketing (‘taste the feeling’) to sports clubs (‘you’ll never walk alone’), everybody is at it. Let alone religions, counselling, and conspiracy theories that have their specific narratives too. Therefore, the rationalists in science who rely on features such as empirical verification and falsification feel quite detached from ‘main street’ storytelling. That said, the narratives in science are top-notch too. Isaac Newton’s use of an apple falling from a tree to convey the concept of gravity, or Benjamin Franklin tying a key onto the line of a kite to illustrate more about the nature of ambient electricity are so deeply rooted in history that hardly anybody realises they are narratives after all.

Recurring narratives and the next best things

Now, let us bring the concept to life in the present. First, I invite you to take a look at a few recurring narratives in economics as suggested by Shiller and discuss where we stand today. I use some of the tools put forward in ‘Narrative economics’ to make the points (such as Google Ngram, which is a tool that charts word frequencies in Google’s digitalised library of publications, which has entries from as far back as AD 1800). Second, looking at the next best things that may shape the years, if not decades, ahead may be a refreshing exercise for our minds, too.

• Recurring narrative #1: Panic vs. confidence: While neither overconfidence nor deep-rooted panic rule, current mainstream narratives are about scepticism towards paper money and the system. The stories centre around people buying gold, real estate, and eventually equities, as they try to protect their excessive cash holding. The narrative of the ‘Japanification of the world’ points to a similar unease about structural economic prospects, most notably after a decade lost to cleaning up after the Great Financial Crisis, the euro crisis, etc. The frequency of the use of the words ‘depression economics’ shows that this narrative has not receded substantially since the peak after the euro crisis. Yet, it is interesting to see that ‘depression economics’ does not show up in books published during the 1930s. That tells you a lot about how humans build a rationale only (sometimes a long time) after the event.
• Recurring narrative #2: Real estate booms and busts: A narrative that comes around time and again is related to real estate ‘booms and busts’. This may be due to the fact that real estate is an asset that has not only been around forever for people to use as a shelter, but is also a valuable way to preserve wealth. There were lively narratives about the worldwide housing boom in 2004–2007. I remember that the average homeowners of larger properties were reported to be expecting an average price increase on their homes of 16% per annum over the following ten years. Back in a typical boom story for the media in 2006, individuals without regular income other than the rent they received from five apartments they owned, were using these proceeds to finance yet another apartment. Today, the funny thing is that despite prices being where they are, these stories are largely absent. Of course, we hear about housing prices going through the roof, but any euphoria attached to that seems to have evaporated.
• Recurring narrative #3: Robots will take away our jobs: The rock song ‘Domo arigato, Mr. Roboto’ made it to the top ten in many countries in 1983 (remember narratives turn up in the form of songs, too). In fact, it combined the narratives of machines taking over with a latent Japan phobia in the 1980s (the latter quite resembles the Western narrative on China today). It may or may not be surprising that the robot making human labour redundant is a recurring story, too. In line with the band Styx’ robot song, the appearance of the word ‘robot’ spiked in the 1980s and made an impressive comeback in the past decade. While the full replacement of human labour by robots has seemingly not materialised, the dream (or nightmare to many) persists or keeps coming back. At the outset of the 2020s, it seems that the robot story is back ‘en vogue’.

“The impossibility of seeing into the future and ‘radical uncertainty’ have been countered by humankind through the exchange of narratives.”

Christian Gattiker, Head of Research

• The next big thing #1 – The bubble of everything: This narrative goes beyond the recurring theme of a bubble in a specific asset class, but states that ‘everything is expensive’ – cash, bonds, real estate, stocks, collectibles such as art, etc. The only place where this inflation does not show is in the official consumer price indices. When we state that this is one of the next big stories, we are not precluding precedents. Among all previous asset-class-specific bubbles, the historic ‘South Sea Bubble’ was the mother of all speculative excesses. The reappearance of the use of the term suggests that the latest boom in asset prices may not be due to the ‘delusions and madness of crowds’ but a result of excessive monetary support.
• The next big thing #2 – Emerging market boom: If anything has sobered investors up in the past 20 years, it is exposure to emerging markets. Direct investment, at least, suffered from a declining risk appetite and, in particular, from US dollar tightening in the past decade. Hence, this space is about as far away from the suspicion of being in a status of irrational exuberance as it gets. Yet, you could argue that this is nothing new, and I would agree. I still included it here, as there is no particular mention of this in recurring narratives. Personally, I would not be surprised to see a revamp of the BRIC story (the highly infectious narrative around Brazil, Russia, India, and China rocking the global economy during the 2000s) appearing as soon as the pandemic is under control in emerging markets (which may, however, take a large part of 2022).
• The next big thing #3 – Energy abundance: This is a serious contender for ‘the next big thing’ crown. As new energy resources have become competitive and enjoy unequivocal support from governments, a boom in the space is already underway. The question is, of course, what will this do to the overall price level of energy worldwide. Debates about the results of lower energy costs are likely to carry on for many years ahead. Whether the energy story will then have a sequel beyond the sector (e.g. cheap energy leads to a major boost in production, trade, and wealth globally) remains to be seen.
• The next big thing #4 – The great reset: This is a sensitive area, as its narrative circulates in many different forms. The World Economic Forum (WEF), for example, has an initiative under this label that proposes to reshape the world in a much more sustainable way as a response to the COVID-19 pandemic. But there are also variants that go in a very different direction, announcing the end of the monetary system as we know it, or of society overall, which some consider to be outright conspiracy theories. The fact of the matter is that the current system has so far been much more resilient to tipping points than anyone had thought in the past. Let us collect evidence before we say ‘this time is different’.
• The next big thing #5 – A decentralised world: This narrative goes along the lines of new technologies such as blockchain and 3D printing creating a completely different way of running the economy overall. Instead of economies of scale, it is about a highly decentralised system where incumbent industries experience a major disruption in their way of producing. Somewhat similar to the internet shock to the media system, this narrative is now making its way into the brick-and-mortar part of the economy. While the narrative echoes “banking is essential, banks are not” from Bill Gates in the 1990s, there may be something to it, as the range of new technologies may allow for quite a different way of producing goods and services.

Conclusion

‘Que sera, sera… the future is not ours to see’ still holds true as real-life systems are far too complex to make qualified forecasts about, especially for the long run. However, I wanted to raise your awareness to the fact that the impossibility of seeing into the future and ‘radical uncertainty’ have been countered by humankind through the exchange of narratives. And, as some examples such as tulip mania or the ‘rags to riches’ story suggest, these narratives can become self-fulfilling prophecies. In the second part of my article, I explored the storylines circulating today. With these, I not only want to spark your imagination about the future, but also, first and foremost, hope to awaken the ability in you to identify a narrative when you encounter one. As – who knows – you may come across ‘the next big thing’ soon.

For more information on Julius Baer, visit their website.

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