In Narrative Economics, Robert Shiller argues that Bitcoin cannot stand alone as a replacement for value or economic systems; rather, it’s a myth.
The Power of Storytelling: How Narratives Influence Economic Change
Narrative economics suggests that theory and stories can shape economic decisions and transformations. Bitcoin, as a fascinating economic phenomenon, creates a new narrative of value and electronic economy through its development and acceptance process. It allows value transfer and transactions based on blockchain technology, without a central authority tied to any government or organization.
You may have often wondered why financial and economic markets sometimes behave in puzzling ways that defy simple logic. Amid this erratic and contradictory flow, is there any discernible pattern or rational principle? If you ask industry professionals, they’ll likely say it all comes down to market statistics and that understanding these numbers is key to interpreting the unusual behaviors of financial and economic markets.
Statistics serve as a hidden language in the realms of finance and economics—one that many of us don’t fully grasp. This language unveils complex realities, guiding us toward a fresh understanding of economics and financial markets. In this article, we present a summary of Narrative Economics, a book by American economist and author Robert Shiller. This work seeks to translate the language of economics and offer deeper insights into the intricate dynamics of financial and economic markets.
Shiller discusses influential narratives that significantly shape current economic and political events—factors often overlooked or deemed unworthy of detailed analysis by statisticians. This is where narrative economics steps in, explaining aspects that traditional economists may neglect.
Although Shiller is a known critic of Bitcoin, frequently advocating for traditional financial systems in his writings, his critique focuses on Bitcoin’s inability to establish itself as an independent economic narrative or a replacement for traditional value and economy. To him, Bitcoin represents a fleeting economic myth.
Finally, it’s worth noting that these views reflect individual perspectives. Our goal is to share these diverse opinions without endorsing or rejecting them.
“Bitcoin could completely collapse and be forgotten, and I think that’s a likely outcome, although it could linger for a long time—perhaps another century.” –Robert Shiller
What Is Narrative Economics?
To understand narrative economics, it’s necessary to understand the modern use of the term “narrative.” A narrative can refer to a story or a collective belief shared among people with no clear beginning or end.
One famous example is Donald Trump, who used the “smart businessman” narrative during his presidential campaign to bolster his influence among voters. This narrative helped him win the 2016 election against Hillary Clinton.
Bitcoin: The Story of a Top Cryptocurrency’s Rapid Evolution
One of the most famous economic narratives is the story of Bitcoin’s emergence and the changes it sparked. Bitcoin’s value and importance derive not just from its inherent position but also from narratives created by investors, transforming it into an economic phenomenon.
In 2008, an unknown person using the pseudonym Satoshi Nakamoto published an article titled “Bitcoin: A Peer-to-Peer Electronic Cash System” on a website, which was quickly shared via email. This introduced the first cryptocurrency to the global community.
Bitcoin soon became a fascinating story among the general public and gained widespread popularity, as people used it like cash for transactions.
Though Bitcoin’s inherent value was important in making it a global phenomenon, its rise was driven mainly by the enthusiasm of its supporters. At one point, Bitcoin’s market value exceeded $300 billion, fueled by its popularity among its advocates.
Despite its popularity, Bitcoin has attracted significant criticism. Figures like Warren Buffett, an American investor, economist, and executive, view it as a form of financial speculation. Some compare Bitcoin’s sudden rise in popularity to the “tulip mania” in the Netherlands when tulip bulbs saw massive price spikes before suddenly collapsing.
“Bitcoin is like a gambling token and has no intrinsic value. But that doesn’t stop people from wanting to play roulette.” —Warren Buffett
A Cryptocurrency with an Enigmatic Story: The Hidden Factor Behind Bitcoin’s Success!
Over time, the excitement of Bitcoin enthusiasts has led to a bubble forming around this system. Unfortunately, many people involved in Bitcoin trading lack substantial economic knowledge and are often unaware of its fundamental concepts.
The primary holders of Bitcoin are those who created the blockchain system. They designed a decentralized system for managing and transferring cryptocurrency without governmental oversight. Their actions, which are anonymous and public, give Bitcoin a unique appeal.
Bitcoin was founded with the philosophy of opposing corrupt financial institutions, differing greatly from the chaos often associated with anarchy.
Economic Narratives: More Details, More Believability
Jean-Paul Sartre, the famous philosopher, once said, “We tell stories as much as possible. Humans are always narrators of stories that shape the details around them.”
Sartre’s insight holds true; the human mind constantly seeks narratives and often adds meaning and credibility to storytelling through the details it observes.
In 1985, psychologists conducted an experiment in which they asked participants to act as court judges and make rulings on several cases. The goal was to understand how details could influence their final judgments.
Some case files contained no particular clues, while others included specific details. For instance, in one file, participants were told the defendant had spilled food while committing a crime, an irrelevant fact. Yet, even such simple details led participants to render neither fair nor accurate judgments. This example shows that cases lacking detail failed to form a cohesive crime narrative in participants’ minds.
Thus, the experiment concluded that adding details to a narrative enhances its comprehensibility and believability. The same is true for economic events. In economics, specific details can significantly shape and influence the impact of narratives.
When the 9/11 incident occurred, the American economy was in the midst of a deep recession. The destruction of the World Trade Center and the damage to the Pentagon led economists to predict a further decline in confidence in the economy. While these predictions were accurate, surprisingly, three months later, the recession ended.
How was this possible? It seems that Americans, witnessing the collapse of the World Trade Center as a symbol of the U.S. economy, believed an unpredictable event had caused the recession. Why, then, should they continue to worry and exacerbate the downturn?
One pivotal moment was President George W. Bush’s speech to the nation. Bush assured Americans of their strength and urged them to overcome this fear, continue doing business, travel by air, and enjoy the attractions of the great country. His words struck a chord:
“You are capable of overcoming this fear. There’s no need to worry. Continue your business, fly again, and enjoy the attractions of this great country. You can go to Disney World in Florida and enjoy your recreation. Our country is safe, and we are a strong nation.”
Bush used a detailed, simple narrative to instill confidence and encourage Americans to continue their businesses, reversing the economic downturn. His strong words motivated Americans to sustain their economic activities, eventually ending the recession.
“Blockchain is clever and important, but Bitcoin has no unique intrinsic value because it produces nothing. You can stare at it all day, but nothing will come of it; Bitcoin, at its core, is an illusion.” —Warren Buffett
Economic Narratives: A Timeless and Recurring Nature
In economics, “panic” and “confidence” are frequently discussed themes. Politicians, journalists, and economists often discuss the importance of confidence and the dangers of panic in economic events, urging banks and businesses to remain confident during crises.
A well-known author, Christopher Booker believes all stories share common patterns, including contrasts like moving from poverty to wealth or heroes triumphing over villains. Similarly, economic narratives frequently feature themes like confidence and panic, which follow recurring patterns and are not limited to specific situations.
Our history and memories of past events significantly shape our views and decisions when facing new situations. These past experiences play a key role in forming our mental image of current scenarios.
This historical awareness allows us to make better decisions and accurately interpret current conditions. A deeper understanding of history also aids in predicting the potential impacts of various events and decisions on the future.
In this light, historical knowledge and our understanding of the past are powerful tools for analyzing current conditions and developing better approaches to facing economic and social challenges.
The Economic Impact of Narratives: How Stories Shape the Economy Over Time
We all hold memories of the past that gradually change. Memories related to travels, marriage, or even challenges with others take on new meanings over time. Sometimes, we can laugh at past disappointments or interpret upsetting events with a fresh perspective. This nature of memories leads us to a different understanding of life events as time goes by. Economic narratives share this trait; their meaning evolves over time. For example, the stock market crash on October 19, 1987, still lingers in the minds of investors and economic analysts. On that day, the stock market experienced the largest single-day collapse in history.
Recalling and reconstructing this event has eroded the confidence of many investors, even invoking fear at the mere thought of it. Journalists often refer to that period in their articles, warning readers of the potential for similar crises.
Although historical events do not repeat precisely, if we fail to learn from memories and shift our perspective, similar situations are more likely to recur.
There were extensive discussions about creating a computerized trading system to use specific algorithms to limit investors’ losses during a stock market collapse. These memories resurface over time, influencing investors’ decisions.
They concluded that they should sell as much stock as possible to minimize losses when the stock market is falling. However, interpreting past events incorrectly can lead investors to make poor decisions under current conditions.
Nevertheless, recalling certain memories can lead to wise decisions and prevent people from making new mistakes.
“I tend to view Bitcoin as an experiment—interesting, yet not a permanent feature of our lives. We’ve placed too much emphasis on Bitcoin when we should be expanding to blockchain, which has other applications.” —Robert Shiller
The Role of Study in Preparing for Economic Decision-Making
Economists and researchers need to leverage the extensive tools and resources currently available to better understand today’s narratives. Nowadays, we have unprecedented access to data and insights into societal concepts and attitudes. We can observe public activity on social media through the Internet, join market groups, and analyze public opinions. Financial markets can also be examined to see how different factors affect them. We can access abundant information on a particular concept and prevailing views with a simple click.
Never before in history have we been so exposed to others’ opinions; as a result, it’s easy to understand the common beliefs and sentiments of people worldwide. Economists should use these technologies and tools to identify the narratives within various societies and observe their economic impacts. However, only a few economists currently take such initiatives.
Franklin D. Roosevelt, the U.S. President, understood this well. Even in the 1930s, amid a severe global depression, he urged the public to focus on building confidence. Roosevelt encouraged investors to set aside their fears and reinvest in areas they cared about. Whenever he gave an inspiring speech, the stock market would stabilize, demonstrating the strong impact of a positive narrative on people’s decision-making.
Final Thoughts
Unfortunately, in today’s world, most economic analyses and forecasts rely on numbers and data, often failing to capture the true nature of events. As learned in the summary of Narrative Economics, behind the statistics lie stories that serve as the primary drivers of economic events and future occurrences. These economic narratives resemble an epidemic—initially spread by word of mouth but eventually forgotten as the original story fades from memory. For example, Bitcoin was once a hot topic discussed everywhere but gradually faded from the spotlight.
Throughout history, various events in the stock market and global economic conditions have been memorable for many people. However, as noted in the book summary, recalling economic crises should provide us with a different understanding of these events. Just as remembering our past leads us to a better understanding of those experiences, we should approach economic events in the same way. People love storytelling, and this is not a bad quality. Economists and policymakers should harness this quality properly to influence society’s mindset during crises. Therefore, paying attention to economic narratives and public opinions can do more to improve conditions than relying on dry and sometimes illogical statistics.
