0:33 Intro. [Recording date: December 6, 2019.] Russ Roberts: Today is December 6, 2019 and my guest is author, economist and Nobel Laureate Robert Shiller of Yale University where he is the Sterling Professor of Economics. He appeared on EconTalk in September of 2008 to talk about housing and bubbles. His latest book and the subject of today's conversation is Narrative Economics. Bob, welcome back to EconTalk. Robert Shiller: My pleasure.

00:58 Russ Roberts: What do you mean by "Narrative Economics"? Robert Shiller: For me, Narrative Economics is the study of popular narratives that relate to economic behavior. People change their thinking about economic issues through time. And this causes events, economic events, I believe. And the form that their change of thinking takes is stories. They don't write down equations or draw diagrams. They tell stories, narratives--stories with a bit of morals to them or lessons in them. And then, if those stories go viral, we see economic changes. So the idea is to study them--to catalog narratives, group them, look at their history--where they occurred before. How have they changed? That's the idea. Russ Roberts: Along the way you talk about, a little bit, about the neuroscience of this idea and that certainly we as human beings like stories. We're attracted to stories, we're more likely to remember stories. Robert Shiller: That's right. And this has always been true. A book I can recommend is the Roman Senator, Cicero's, book written 2000 years ago, On Rhetoric--I'm sorry, it was On Oratory. And he tells you how to make your speeches into a story. And I think that good speakers have learned how to stimulate audiences so that they'll talk about it and remember it. That's going viral. You could go viral in ancient Rome. They did. Cicero did; we still remember him. Russ Roberts: This is true. I'm reminded of Deirdre McCloskey's series of books on the transformation of the world standard of living, where she argues that the belief-- the belief that it was okay to be bourgeois, the belief that it was honorable to lead a, what we would call a middle class or successful life--it helped create the conditions that led to more and more people having that standard of living. And I'm a little bit skeptical with that argument, but that's the kind of argument that you're making throughout this book. Robert Shiller: Yes. That's one example of a narrative. That's a peculiarly American narrative. This country was founded on people who were refugees from economic and other stresses and who heard about this country that there's no royalty over there. They don't believe in aristocracy or any of that nonsense. It was a powerful narrative and it's still with us and it still helps define America. Russ Roberts: Well, interestingly her narrative begins in Europe, with Smith and others who created this idea of growth and prosperity as what you might call and you refer to this idea a number of times in the book as a self-fulfilling prophecy or a self-fulfilling narrative. And certainly there's a set of psychological theories that, if you believe strongly enough in something you raise the chances of it happening for yourself, confidence in yourself. I'm a little bit skeptical about all these arguments they tend to abstract from or dismiss underlying, what would be traditional economic arguments for economic change and economic events. I guess the question that came to my mind in reading your book is: How do we know that these stories that we tell ourselves and that become shared stories, which is crucial for--this becomes a national story in the case of America as you're talking about--how do we know they're not just what we tell ourselves? That our beliefs are just sort of window dressing to what we actually do and care about, as opposed to causal? Robert Shiller: First of all, I'm not dismissing traditional economics. I'm adding an element to them. Secondly, yeah: If you doubt causality, what modern economics does is look for natural experiments or do controlled experiments. In that regard, I can tell you that there is many controlled experiments that show that narratives affect human behavior; and these controlled experiments are not macro-economic experiments, because those are very difficult to do--ethically problematical. But they are experiments that show that people respond to stories. In fact, outside of economics, that's--in marketing or in journalism and in communications, other departments--it's just, it's perfectly natural. At one of my book talks, a woman came in who was a journalism person; in her questions she said, 'Why isn't all of this obviously true?' So, it's--I don't think it's completely obvious. But, we ask what is really changing through time? Yeah. Sometimes, when they invented locomotives, that was a technological thing that had economic significance and it produced a railroad industry. But on top of that, there was also the--those trains were the coolest thing. People wrote poems about it when they first came out. 'Amazing. I think it goes 75 miles an hour and it seems to be perfectly safe. Just amazing. This is the future here.' So the narrative was also a part of the story and why we had bubbles in railroad stocks when they first appeared.

7:12 Russ Roberts: That could be true, that last part of that. I'm not sure that that's true. I don't doubt, I think everyone would agree that the products we buy can be affected by how we perceive their relationship to our identity. For example, what they say about us. And that's certainly part of our personal narrative, right? I mean that's--I agree with that. But I think the broader claim you're making, although you say you're not dismissing standard economic things, you write in the book: A key proposition of this book is that economic fluctuations are substantially driven by contagion of over-simplified and easily transmitted variants of economic narratives. That's a strong claim, right? That goes against what most macroeconomists believe. I'm interested in the claim. I think it could be true, but most macroeconomists would say, 'Are you out of your mind? It's fiscal policy, it's monetary policy.' I mean, some people might say it's mostly monetary; others might say it's mostly fiscal. But that's the debate: the idea that it's somehow driven by, say, Keynesian animal spirits, which we like to quote. But we don't really believe. Robert Shiller: I wrote a book with that title, by the way. Russ Roberts: Yeah, I know. Robert Shiller: With Akerlof. Russ Roberts: But what's your response to those macro-economists who say, 'Come on. It's not what people or what's in the newspaper about stories that people come to accept. It's all about the economic forcing variables of taxes and money supply growth or contraction. It's about spending.' Robert Shiller: Yeah. Well it's difficult to embrace all of these theories. But my first thought to answer that would be to say, We are undergoing a data revolution now and it's going to change some of our thinking. We now have digitized text, newspapers, books, magazines, diaries, sermons, legal briefs, all kinds of things you can search. And we're developing tools from computer science that enables us to search these more.' So that means now, going forward, in coming decades, this data will be dominant in new economics because we can finally find out what people are thinking. When Milton Friedman said, 'Don't ask people why they do things,' that was in another day. That was in another era of information. It looked back then that if you talked about those stories, it looked kind of frivolous because you can't prove anything, or you can't develop a concrete database of knowledge about those stories. But, you technically could. You could go to the library and ask for the microfilm room and you could spend years trying to find out what newspapers were saying by reading them without any ability to search them. But that didn't happen. But I'm thinking going forward, we're going to see more and more--it's going to take decades for economics to fully embrace--this is the new thing. I think it will be the new thing and it will change the way we think about. There's another new thing, which I don't stress as much in the book and that's neuro-economics and the human brain. As we learn more how it works, we don't have to build such abstract models of how people actually make economic decisions. We'll have more direct information. That's starting to happen, too. Russ Roberts: Let's stick with the first part, the increasing data we're going to have on what people said about various advances captured in newspapers, sermons, etc. Aren't we really just learning about what people say they think matters? I mean, to defend Milton Friedman for a minute. I think he would argue that, and I know George Stigler liked to point this out as well, that when people do things, they might say why they do things, but that often isn't what actually motivated them. And I'd argue more importantly, we don't even--it's not so much deception of others when I answered that question: I deceive myself all the time. So if survey data say, what you refer to a little bit in the book--it's not the main point--but survey data, for example, that asks Why did you do X, Y, or Z? Why did you buy a house? Were you motivated by a speculative motive or not? How much?' And those are interesting. They teach us something about what people say motivates them. Does it really teach us what actually motivates them? Robert Shiller: Well, I wasn't actually proposing that we ask them, 'Wwhy did you do this?' Although actually, I think that's a useful first step. Admittedly, yeah, people won't be able to tell you, why didn't you buy a new car this year when car sales have fallen? They can't quite say. They'll say something like, 'The old one is still working. I can keep it going. I didn't get around to it.' They don't remember exactly. They can't articulate. Milton Friedman was right on this. They could probably say definitively that something wasn't on their mind, and 'I've never heard of that.' But, in terms of what actually--that is hard to explain sometimes. Or, why right now at this time in history, they say that U.S. consumption demand is high. Yeah, it gets into psychology or maybe even into psychoanalysis. Now, psychoanalysts don't believe that the first explanation you give of your behavior is right. That's anathema to psychoanalysis. That you have deep subconscious thoughts that--and so, I'm just thinking, this isn't in my book at all. Freud wrote a book called Interpretation of Dreams. Okay. Russ Roberts: Right. Robert Shiller: So, why did he look at dreams instead of looking at what people say? It's because he believed, along with Milton Friedman, that you can't trust what the ostensible reasons they give. You have to listen to their stories. Dreams are stories. Here's another piece of information why--evidence why narratives matter. Because they come to us in our dreams, in our most undefended moments and they take the form generally of human-interest stories about people. That's what you dream. You don't dream equations or geometrical shapes. So, there's something about the human brain that is very attuned to stories and deriving lessons from them. But the lessons might be hard to articulate and we have to work at it. So I'm not averse to letting some psychoanalysts into this game, too.

13:57 Russ Roberts: Well, let's think about macroeconomics and in particular the beliefs people have to say about the state of the economy or, I was thinking of Ed Leamer's macroeconomic textbook. He says, I think at the very beginning of that book that human beings are pattern-seeking, storytelling animals. And we have all these stories we tell about the economy both as everyday people but also as professional economists. And there's not that much evidence that they're true. Just to take the example that he points to, if you step back and you look at say the evolution of GDP [Gross Domestic Product] over the last 75 years, it goes up and down and up and down, but mostly it's a pretty steady up between 2% to 3% a year. Every once in a while there's a recession and that gets back, typically on track. The 2008 Great Recession may be an exception to that, but in general, the economy just bumps along. It bumps along at the pretty much the same rate regardless of whether there's high tax rates, low tax rates, loose money, all kinds of different--it seems to be very invariant to the things that economists are obsessed with. And our narratives--we have our own narratives. It's not clear they're correct. So I'm not sure--I thought of your book more as--I know this isn't your main focus, but I thought of it as illuminating the way we as professional economists have these somewhat absurd views of what makes the world tick on the Left and the Right. We have different narratives depending on where our ideology is, but it's not obvious to how we know whether they're right or not. I don't think we're very good at that. Robert Shiller: Well, I think we are affected as economists by narratives, as well. So, there is the recession narrative that has been popular ever since the 1937-1938 recession. You don't say the D-word, 'Depression,' because that's considered like shouting fire in a crowded theater. But it's okay to talk about recessions. But you're absolutely right. If you plot Gross Domestic Product back to the beginning and the official numbers--that's 1929--you see that most of the time it's just, yeah, it's growing along, if you do it on a log scale, it's growing along like a straight line with little wobbles around it. Russ Roberts: Yeah. Yup. Robert Shiller: That is forgotten. Newspaper writers have to keep generating news. Okay. So they don't like to point out that this is kind of not that big a deal. But if you look at the whole plot, you do see GDP made some major swings right at the beginning with the Great Depression. And then the hugest expansion of all was the Great Depression returning into the World War II. This reminds me of why it isn't a particularly good idea to take GDP as a sign of human welfare, because World War II, we wouldn't want to go through again. Russ Roberts: Absolutely. Robert Shiller: But it was a very high time for GDP. So that was a story. Why did we have World War II? What a stupid thing to do, right? It didn't do anything good. It was because of Mr. Hitler's stories. He was a totally dishonest and angry man. His entertainment value--it's fun to look at some of his speeches. I think that's which--well, people don't recommend that you do that because they're afraid you might like it. Okay. But, I think you can see how it was amusing. The guy was a showman and he kept performing his art in rallies. So, World War II was this. So the biggest expansion of all from the Great Depression to World War II was dominated by stories, the stories of the Great Depression and then the stories of live -or-die in this horrible war. Russ Roberts: World War II and the Great Depression is an interesting example. I often point out on the program that, the cause of the Great Depression and the cause of its end--there are bunch of narratives about it. They're all interesting. They all have maybe something to say about them. Was the Great Depression caused by a run-up in the--the crash of the stock market? Was it caused by the bank runs? Was it caused by the forfeiture of mortgages and farms and its impact that spread outward? Was it caused by Smoot-Hawley's tariffs? Was it caused by a contraction of the money supply? Was it caused by the failure of the Fed to respond to that? So on, and so on, and so on. And then you have similar--why did it end? Well, for a long time people thought, Well it ended because of the New Deal. Then, economists looked a little closer; that narrative didn't hold up so well. So then it was, 'Oh, it ended because of the war.' And I view that narrative as not so convincing; as you point out, it wasn't a particularly prosperous time. Forget the death--that's obviously a bad side of it. But just, there's a huge measurement problem. After the war, excuse me, during the war, as the war came to an end, economists like Paul Samuelson and others said we're going to have a major contraction, a depression again-- Robert Shiller: Right; right. Russ Roberts: because U.S. spending, government spending is going to collapse. Which it did, but depression didn't happen. Robert Shiller: Yeah. Russ Roberts: So we told another narrative that was: pent up demand for vacations. Or you talk about: there was pent up demand for appliances. Well--this is just, again, to me it's just storytelling. I don't think we have a good idea of what actually caused or ended the Great Depression. Robert Shiller: Okay. So, my take on that. It's true there will be many stories. They're all part of it. We have to do an accounting. So this sounds like an academic thing, but we want to do it because we're scholars. Right? So, it seems to me that those narratives, each had a contribution, some going the other way. And we're trying to understand the phenomenon, right? Of--the Great Depression is the important phenomenon to try to understand; the war which might've been generated in response to it. In fact, when Hitler took over in Germany, it was a time of high, very high unemployment and dissatisfaction-- and anger in Germany about the employment situation. So my thought is that we have to understand that we're living in a jungle of narratives. There's just so many of them. Some of them more prominent than others. And some of them having different economic consequences. But we have to start classifying them, and chronicling them, and understanding that evolutionary dynamics, epidemics, going viral matters; and it will always be a little difficult to do the summation and to explain how much various stories affected the economy. But that's the only way to really approach an understanding of economic fluctuations. You have to look at all the things. This is macroeconomics, it's the sum of everything.

21:24 Russ Roberts: So, let me take a modern narrative that's increasingly common that the current state of the U.S. economy. I just interviewed Binyamin Applebaum about his book, The Economists' Hour, and in that book--that episode hasn't come out yet, but it will by the time this one airs that we're having. In that book, he argues as a number of people do recently that somehow, free market economists came to dominate public policy and that explains the slow growth rates in the United States in the last 50 years--the slowing growth rate. It explains the rise in inequality. It explains the death of unions. It explains the mediocrity of the standard of living for a large group of Americans. Russ Roberts: And I listen to this narrative and about four-fifths of it rings false to me, factually. But okay: How would we know whether that narrative, which is coming in many media sources, whether that narrative is, first of all whether it's true. And secondly, does it matter? Is it going to make it more or less likely that, say, a different kind of policy is tried in the United States? Or it's just entertainment? It's just something we tell ourselves and like to talk about because it's drama. Robert Shiller: Well, I'm arguing that it's not just drama--it's revealing human patterns of thought. And economists have to pay attention to it: Is this realistic, when we say people are maximizing expected utility, taking account of the time series properties of interest rates, etc. It starts sometimes to sound like storytelling also. People are not forecasting interest rates with any care or diligence. They never read the paper; they'd never read the interest rate. They don't even know what it is now. So, to say that those stories are dominant over stories that people actually talk about seems to me a mistake and that we can correct it. But it will involve--the macro-economy is sufficiently complex that we won't have certainty as to this accounting of stories. We'll have, I think, better insights into what drives things. But, it's a tough problem to understand economic fluctuations because it's--there's millions or billions of people involved. It's more worldwide now. And to me it's really just so striking how narratives spread. So I'm thinking of the Donald Trump narrative. He is the most famous man in the world; and it happened suddenly and it has economic consequences. And, where did he come from? Well, he was around for 50 years before that and we weren't paying any attention to him. Or how about Greta Thunberg? She's 16 years old and suddenly she's exploded to one of the most famous--maybe she is the most famous woman in the world now. I'm not sure. Russ Roberts: Certainly the most famous 16-year old woman. Robert Shiller: I'm sure of that. And she has an economic message, which is to cut back on spending and return to an earlier time. To say that that is not relevant and that the idea that people are optimizing their consumption in respect of interest rates--I bet more on Thunberg than the interest rate. Now I don't mean to diminish it: the interest rates matter, especially for home purchasers. They look at the monthly payment and then that affects how much they think they can own. So it definitely matters. But that's old. I'm just trying to bring up what we haven't understood so far.

25:29 Russ Roberts: So let's try to home in on this a little more precisely. It's December 6th today. It's a Friday. It's the first Friday of December. So, the employment numbers came out a couple of hours ago. And to the surprise of some economists--forecasters who make a living or try to make a living doing this--employment was unusually, unexpectedly robust. It increased by 266,000. The unemployment rate fell to 3.5%; and I haven't seen it, but I'm sure President Trump's going to trumpet--if I may say so--these numbers. And he's going to tell a story that this is due to him. And I have to say that, I have no idea if that's true. You could make a claim. I've heard people make this claim. Smart people, actually,I should add that, 'Yes, he deserves credit because he's deregulated some parts of the economy that shouldn't have been regulated as much and that stimulated investments.' Some people would credit his tax cuts. But other people would point out, 'Well, gee, the biggest thing he's done is he's put tariffs on.' That usually, we would suggest, slow down economic activity. And yet, the economy is bubbling along. So, I think the question for you, that--I want to try to pin you down a little bit here--the question is: If you wanted to understand why the economy is growing so well, many months into what is a very long expansion now, is that you think due to beliefs that people hold or is it due to actual policy and changes in economic incentives? Robert Shiller: Well, the answer you might expect from me is: It's both. Russ Roberts: Well, I knew you'd say that, but go ahead. Keep going. Robert Shiller: It's just not a simple world that we live in. But I think that we don't want to assume that the Trump's effects are mainly through taxes and tariffs and the like. That's an economist's fixation, to dominate that. I think that also it's just a general sense of life that he gives. That he's a success story that obviously people will want to emulate. He's the most famous man. And one thing that he stands for is ostentatious living. He boasts about his glamour hotels and clubs and the like. He writes books that are motivational, inspirational books. He tells you, 'Don't be afraid of boasting because, realistically people won't hear about your successes if you don't boast about them. So go ahead and do it.' That will annoy them and--I'm sort of not exactly quoting him, but it's something like this: 'It might annoy them to hear your boasting, but it will be a good thing. Do it.' That's what he says. And maybe he's right. Millions of us are probably reconsidering. 'Have I been too modest and why have I tried to live a modest life?' The success story is to go for the glamor. And I think that sort of thing might be more important than the tax cuts in affecting the stock market. Russ Roberts: So, I'll come back to that in a minute, but I'll just ask the simpler question. How would you know? Robert Shiller: Well, people ask us for our opinions, okay, as economists. And I think opinions are part of the human--well-considered opinions about the economy or politics are difficult to pin down. Nobody can prove what's going to happen. But, wiser people are people who have studied a number of different elements of drivers in history, and who are not fixated on one model that is thought to be glamorous. And, the model itself is a narrative. One among many. So yeah: Economics is not an exact science. That's what Alfred Marshall said over a hundred years ago. Russ Roberts: He was[?] a smart man. Robert Shiller: Yeah, he was. His textbook, Principles of Economics, it's pretty good. I was thinking of assigning it now. That was 1890 when he wrote that. It's a good book. Russ Roberts: A lot of insight in there for sure. It's on our website. I'm pretty sure it is. We'll put a link up to it. You can read it today, without charge, on the web.

30:17 Russ Roberts: But I guess the question I'm asking is that--here's my skepticism. I am comfortable with the idea that a president like Trump could encourage people, say, to be less modest and more boastful. You're making a bolder claim. You're saying, 'It's just not just that he affects the culture--and of course they're going to be a bunch of people who are going to start living in huts, in shacks and in thatched roofs--because they really don't like President Trump. They're going to go the other way.' But, I understand that his cultural attitudes could affect our culture. You are suggesting it affects our economic behavior. It affects our decisions about whether to spend, invest and that that in turn affects business fluctuations. Correct? Robert Shiller: Right. So how do you decide whether to buy a new car? And on top of that you have to decide whether to buy a glamor car or a cheap car, right? Russ Roberts: Yup. Robert Shiller: What goes through your mind? You're thinking about how your family will react, whether their children will be proud of their parents. I don't know. What the neighbors will think? Russ Roberts: Yep. Robert Shiller: You can't deny that--and, so I was arguing particularly about the Great Depression. In the Great Depression from 1929 to 1932, Ford car sales dropped over, I think, it's about 86%, I think. Close to a 90% drop. Now, you might say that's just the multiplier effect. It's a durable, so you can avoid it. But I look what people were saying, and it seems like there was a change in attitude brought on by the Great Depression. People love to talk about that change in attitude since. They'd say you were walking down the street, you can get a different vibes. They didn't say 'vibes'--something like that. That, the women's skirt lengths went down. This is a famous story. I know it sounds crazy, but the Roaring Twenties were short skirts and women drinking and frolicking. In the 1930s, they started going back to church. Russ Roberts: Yeah. Robert Shiller: That was their story about their time. We're a more sober time. And some people said, 'You know, people are just nicer now.' Part of the reason you don't buy a new car in the Great Depression is the family next door, the breadwinner is unemployed. The children come over to your house asking for food. You're not going to buy a glamorous new car at that time. That just doesn't feel right. So I know I can't prove it, but economists do so many things that can't be proven already. I think this goes into the mix. Russ Roberts: Well, I like that. And I also very much like the idea that we're very sensitive to how we're perceived and our reputation. What our neighbors think of us. And I do think that's been neglected. It's all in The Theory of Moral Sentiments by Adam Smith, by the way, as my listeners know all too well. Robert Shiller: It's a great book. Russ Roberts: Yes it is. So I have no--I certainly agree with that and I certainly think we've neglected those phenomena, our social connections and, I would say also just the stories we tell ourselves about our identity. I think the bigger challenge for the stronger claims in the book is that it's not obvious how we would distinguish these explanations from more traditional ones and what's causal versus reacting. You're aware of that, obviously. I'm not suggesting it's not in the book. Obviously you understand that. But you're pushing this as a way to get us to explore this. And a lot of what's in the book, I should let readers know, is treating narratives as epidemics of beliefs, shared beliefs, that we can track via, in modern times via Google. We can see how frequently words show up at least in books; certainly on the web. And that that tells us something important about, at least, how we see ourselves. That's where I'm certainly in agreement with you. Robert Shiller: Well, okay, so no where to go from here. Russ Roberts: Well, that's okay. Robert Shiller: I think that professions swing over a decade. There was a mathematical economics--more than one decade--where General Equilibrium Theory was the hot stuff. And then, you know, it's itself an epidemic within the academic community; and then it either started to fade. And I think another thing that is happening and it's coming back reflected by the Nobel Prize this year to Duflo, Banerjee, and Kremer is experimental economics. They could have done that a hundred years ago, but I can't think of a single example from more than 30 years ago. Isn't that right? Russ Roberts: Well, Vernon Smith was doing some, I think in the 1950s. But certainly not in the first half of the 20th century, that, again, as I know of. But what Vernon Smith was trying to do is a little bit different than what the Nobel Laureates are doing in terms of Development Economics, trying to understand what might be effective. Smith [Vernon Smith] and others were trying to figure out sort of one of the fundamentals of human behavior, which is, it's unclear whether we can generalize. I think there's an underlying narrative that we're not talking about, which is that economists think they're scientists. And that precision that you point out is often missing is, it makes most economists very uncomfortable. And so they have a narrative about themselves that they're doing something akin to, quote, "real science." Robert Shiller: So, I tell my students to take risks--not necessarily in the direction of Behavioral Economics. But there's a lot of prejudices in academia. Russ Roberts: Yup. Robert Shiller: And you don't want to be the mild-mannered guy who doesn't disagree with anything. That's not a route to your success. Russ Roberts: Yeah. I mean this book is, once you have a Nobel Prize, you can certainly take a few more risks without bearing as many costs. So this is a risky book, certainly in that sense.

36:43 Russ Roberts: Let's talk about one of the narratives in the book that you spend some time on that I think about a lot, which is automation and its effect on jobs. You point out that this is a very old narrative of fear that automation, robots, technology will eliminate human employment and lead to, therefore, social crisis and disruption. Explain--tell us a little bit about the evolution of that narrative over time and where do you think it stands now. And again, why it's important? Robert Shiller: Well, the narrative goes back over 2000 years to Aristotle. It's only in one paragraph in all of his works, but he does say that--he doesn't use it. Well, actually I do use the word automation, but that goes back to--I'm sorry I'm being a little discursive here. It was Homer in his Iliad uses the word 'automato,' 'automateo,' I guess, in Greek, to describe some devices called the Tripods of Hephaestus. They were a little bit like robots. They were in netbook[?]. That's amazing. Russ Roberts: Yeah. Robert Shiller: But then Aristotle also talked about a mechanical loom, if of the future. But I don't think it was a dominant worry. It was a weak narrative in the ancient world. Starting with the--the turning point came in the early United Kingdom where again, it was loom people who, Luddites, they were called, who staged a protest against the mechanization. And then it went under the title of neighbor-reducing machines or devices. And then it got changed to technological unemployment. And then it got changed to automation and then it got--these are different words describing the same thing. Now, the term that is most viral is 'artificial intelligence' or 'machine learning.' But they are all referring back to the same fear that people have about being replaced. Or, you might say a fear of not being able to find some other work that is even puts them in an even better place. So, all along people would point out that when you lose your job to a machine, who is to say you won't find something even better in a more rich country? So, that's been a competing narrative all along. But it's not as powerful or as interesting, not as contagious. So, we tend to get thrown off by the more contagious version. Russ Roberts: Yeah. The Frankenstein narrative is the variation on that, right? Right? It's that human creations, human interference with nature will lead to destructive, unintended consequences that we won't be able to control, that will spiral out of control.

39:54 Russ Roberts: So this narrative, the one you're talking about with automation, would, you say--it's a very old narrative. It's at least, you could argue it's thousands of years old, but certainly at the front of many, many people's minds, it's hundreds of years old. And I believe it's a false narrative. Okay? I might be wrong, but I think it's a generally, until now it's been a false narrative. It has not been the case that automation has reduced the number of opportunities available to human beings. Certainly it's reduced the opportunities to some types of skill at any point in time. But it's been a false narrative. So here's, here's my question: I don't think it's a narrative that has much significance except as an entertainment--the equivalent of, say, a horror movie. People at horror movies, they like to be scared. They like to be--imagine the worst. I'm not quite sure why that's true. I'm sure there's some good books written on that, but I don't know them. But I don't think it's affected, had much of an impact on economic policy. I don't see more outcomes. Right? The human impulse to create is unabated, continues to go forward. Technology continues to advance. And, even though people are scared about driverless cars, which I think are unlikely in the way that people at least imagined them even five years ago, but people are worried about them because of what it'll do to cab drivers and others: Not stopping and going forward. It just keeps going. So, does that narrative matter other than as an entertainment? As a way for us to scare ourselves? The equivalent to reading say Frankenstein by Mary Shelley? Robert Shiller: Well frankly, I don't want to talk about Frankenstein, which seems more--the idea that I might be replaced by a machine is not always prominent, and I don't think it's particularly prominent now despite all the talk about artificial intelligence. But it does at times seem to affect people's judgments about whether to spend or invest. Notably the Great Depression. That was a period when there was a lot of fear of robots replacing jobs. And as I show in my book, lots of people thought that was a real thing. It obviously was not. But if you look at newspapers of the day, that was a dominant story. And then, let's get back to thinking about decisions. If you interpret the high unemployment of the Great Depression as possibly due to a technological unemployment, isn't that going to--why wouldn't that affect your decisions? Whether to--let's take a big vacation right now or buy two cars instead of one. You would want to save more, because you think you have a bigger cushion. That's a rational response to such a narrative. So, we know that the narrative was prominent. And we know what a rational response would be to the narrative. So, why are we doubting that it was important at that time? And I think now the artificial intelligence narrative may become more ominous. If we hit another recession. Then there will be people saying it's due to machines; and then there won't be any way to prove they're wrong. Russ Roberts: Well, I guess, I guess one way to look at it as you're suggesting is that, 'Well, it might not affect public policy because that's more complicated, but it will affect people's attitudes towards their future,' and that will in turn affect their decisions to investors or save. And I suppose that's true. I guess the other thing to think about--I know you know this because you're a teacher--one of the most shocking things as a teacher is that students will not be able to answer a question that you've talked about sometimes more than once. And you say, 'Well why didn't you get that right?' 'Well, I never heard it before.' You think, 'Well, yes you did. I told you three times.' But it never went in. Robert Shiller: Yeah. Russ Roberts: It just didn't go in. It's like some people listening right now, they've heard the name of your book, you've mentioned it at least once, maybe twice. It's called Narrative Economics. I want to thank, by the way, Plantronics for providing Robert Shiller's headset today. And some listeners have wondered, is EconTalk now taking money from Plantronics? Which would be kind of nice. We're not. But we are accepting their headsets, which we are then shipping out to guests when we're not doing a face-to-face interview; and this is being done via Skype. And I'm grateful for that, instead of having to spend the money on the headsets, we can use that money to spend on other things. So for those who've been wondering about that, that's what that is about. Robert Shiller: In the third edition to his Principles of Political Economy in the 1830s, David Ricardo was one of the dominant economists of that time. In his Preface to the book, to the third edition said, 'I am now adding a new chapter on machines.' And he said, 'I've been thinking about since the Luddite,' this is like 20 years after the Luddites. I've been thinking about it. I used to think that economic progress for all really was for all. That there was a reason to believe that.' But he said, 'I'm thinking that it might not benefit everyone equally.' And I think modern economics has to agree that it might not. Russ Roberts: Oh, sure. Robert Shiller: And that there could be income inequality replacing, say, the most simple forms of labor. Or, it just--it's a concern even though we don't know whether it will happen.

45:48 Russ Roberts: Well, and that's a perfect example because, what I was going to say before is that, even though I've mentioned the name of your book a couple times, there are thousands of people listening right now who not only have forgotten the name of it, but they've forgotten who my guest is. They might get your first name wrong, they might get your last name wrong, but it is Robert Shiller, and his book is Narrative Economics. But we understand, and in marketing they know this very well, that people forget stuff. They don't see stuff. And the Ricardo example is a fantastic example, Bob, because he's one of the least-read people in human history who is important intellectually. Robert Shiller: Yeah, that's right. Russ Roberts: He's not a great writer. We have all of his books available. I think we have his collected works available online in some fashion at a website for Liberty Fund either in the Online Library of Liberty or the Library of Economics and Liberty. But, he's not a great writer. He isn't read much. I've never heard of that chapter. I'm looking forward to trying to dig into it now But my point, which is a little bit roundabout, sorry it took so long, is that, even if stuff showed up in the 1930s in his papers about technological unemployment and fear of being replaced by automation, how many people really noticed? I mean, how do you--that's another problem with your theory unfortunately, which is that: What's published and what goes in, what is absorbed by people in their decisions is a whole 'nother question. Robert Shiller: I actually raise that question in my book. I talk about a New York Times writer, Pulitzer Prize winning writer, Arthur Krock, who said in 1932--this is the worst time of the Depression: 'I'd like to go off on a tour of the United States and just talk about the Depression and let people talk back to me; and what do they say? I want to hear America.' And so he came back and he wrote for the Times a story about what he heard. And one thing that he said, 'Hardly anyone told me about a book they were reading or anything solid. It was all just offhand remarks.' So, for example, a taxi driver volunteered to him. He said, 'You should go out in the alley behind those restaurants over there late at night and you'll find unemployed people eating garbage that the hotels, that the restaurants throw away.' End of story. That's the way it goes. People in the 1830s generally didn't read David Ricardo, either. It's all filtered through by little stories like that one, by Krock. Maybe the "academic scribblers" to quote Keynes, have influence, but it's not direct influence. It goes first from the book to a scholar; and then it goes to some imagery and a story that illustrates it; and then it has its influence. Russ Roberts: Yeah. I'm thinking about the fact that, I think a lot of Americans who pay attention to this think that--it's a small group still--but that FDR [Franklin Delano Roosevelt] listened to the General Theory of Keynes and then decided to increase government spending. And the fact is, he didn't particularly--he met Keynes once I think--he didn't particularly, at least he said he wasn't much taken by him. He didn't spend that much more. It wasn't like this enormous response. But that's a narrative that we tell: that Keynes helped the United States get out of recession because his book taught politicians about what to do. You talk about the Laffer curve in your book, and I thought you didn't mention the Keynesian multiplier; but both of those, the Laffer curve and the Keynesian multiplier, are stories that economists tell and that politicians love because they both suggest that a free lunch is possible. Robert Shiller: Yeah. Russ Roberts: Supply-siders believe: limited evidence for this. Robert Shiller: Right. Russ Roberts: But they believe that: if we cut taxes, what--we'll stimulate the economy and get--in fact, we won't even lose money. We'll have more revenue. And then on the other side we have Keynesians who believe--and again, I think the evidence for this is limited--but they believe, as a narrative, that if we spend more, we'll get it back in the form of higher taxes because the economy will grow; and there won't be a big--it won't grow the deficit. It'll take care of itself. And so on and so forth. And both those narratives are extremely dubious in my view. And certainly in any magnitude that's precise. And yet economists treat them like they're facts. Robert Shiller: Yeah. Those are--by the way, in both cases, they aren't entirely original. Okay. Keynes's multiplier has antecedents. And so does Laffer curve. They had people going back to--in fact, Laffer says this. He refers to an Arab scholar like close to a thousand years ago who pointed out that taxes will reduce economic activity. Russ Roberts: It's not that--that's it's not that profound. Yeah. Robert Shiller: But they were a story well told. So why is Keynes so famous? Well, first of all, he was a good writer. Russ Roberts: Yep. Robert Shiller: But beyond that-- Russ Roberts: Charismatic guy. Robert Shiller: he had a sense of marketing. So he entitled his famous 1936 book, the General Theory of Employment, Interest, and Money. First of all, to say the general theory--that sounds pretentious, doesn't it? Russ Roberts: Yeah. Robert Shiller: On top of that, 'the general theory' generally refers to Einstein who was at that point at his peak popularity. Everybody adored Einstein. So he created it. And then he married a ballerina, a beautiful ballerina who was a star, and he hobnobbed with the Bloomsbury Group. So he kind of had an idea how to promote himself. Most economists don't do that. Why don't they do it? They have to read Donald Trump to learn some better lessons about self-promotion. Russ Roberts: You know, marketing matters. And I've often--even though I'm an enormous fan of Adam Smith, he's another example where a lot of his ideas were not original. They were in other people who wrote before him who've been forgotten, or literally ignored. But he was a great writer. And he's still readable today: he wasn't just a great writer of his time. His peers, many of them wrote in ways that were not accessible to us today--the style is very alien to us. And he was also a great storyteller, which is consistent with your theme. The pin factory--which is his narrative about specialization, the division of labor. It turns out--I think it's true that it's not particularly accurate. He didn't spend the whole time collecting data on pins. But, it's an enduring story because it captures something that's important. And it appeals to our brains. Robert Shiller: And it has visual images. I can picture people making a pin in 1776. Russ Roberts: Cutting the wire. Yeah.

52:59 Russ Roberts: Let's turn to a different aspect of this which you don't spend much time on the book, which I actually find, I confess given my skepticism, you'll understand. But I confess I find this may be a little more appealing than the application to economic fluctuations. Which is: Personal fluctuations. Personal choices we make--is sort of the microeconomics of micro, super-micro. How I see myself, how I decide what to do with my life, how to choose a career path, and so on. And I wrote a story awhile back called "The Story of My Life"; and I think a lot of us tend to see ourselves as the star of a great film. That we are the, in some sense, the script-writer: We can see that there's some other people involved in the script, but they all take an ancillary role to our stardom. And I think that's a very powerful human experience that most of us have. I might be wrong about that. It alarms my wife sometimes when I confess this publicly, because it might be just peculiar, but I think it's somewhat true. And that that particular focus of seeing ourselves as the star may not always be so helpful: that it might be better, sometimes I suggest in this essay, that we see ourselves as part of an ensemble, that we're not always the star, but that our natural impulse is to put ourselves first; and that we would profit and the world would be better perhaps if we saw ourselves as more of a part of a larger cast. What do you think about that idea of thinking of the narrative issue in our personal lives? Robert Shiller: Well, I haven't actually pursued advising people not to do it. I think that it's built into the human brain that somehow--I wonder about animals, dogs, do they have a narrative in their mind? Maybe they do. They don't know that they're going to die. They don't know about basic reproduction. They don't know why they're attracted to a female dog if they're male. But maybe they do have narratives. So, it's such an ancient thing. I read about Jane Goodall and her chimps. Now, they don't seem to have language, but they do seem to have a social life and they probably think something like that as well. I think of it as too ingrained and built in. Somehow our society is built well around people who think they're the center of the universe. Each of them think that some way or other. And it creates a sense of some kind of morale that drives a successful human race. Russ Roberts: Well, no, even though I push back on a lot of the ideas in your book, I do think that narratives are extremely important. They are how we think of ourselves--our identity, our role in our families, our role in our country, our role in the world, our role in history. They are central. So, I don't--that part I like and what I love about your book because it forces you to think about that. And I think it's undeniably true that storytelling isn't just about going to the movies or reading fiction. It permeates a lot of how we see ourselves in it. And then of course it affects our behavior. I mean, I had Yuval Harari on the program talking about his book Sapiens. Things I didn't like about that book either. But it is correct that, obviously, that book's about the myths we tell ourselves that we share. And again we can debate about how important those myths are and actual behavior versus what we just believe and think. But it's a big part of life, for sure. Robert Shiller: Yeah. It's central to our feeling of self-worth or achievement. Or a me: What is the meaning of life? Russ Roberts: Yeah, no, for sure.

57:03 Russ Roberts: So, this book has been out a few months. The part I like about the book is--besides this idea that I do think narratives are important in life--the other part I like about the book is the understanding that economics is not so precise. Other economists probably dislike all of that. What kind of reaction have you been getting from your fellow peers and colleagues? Robert Shiller: Well, this book started out three years ago at the 2017 Annual Meetings of the American Economic Association. It was my Presidential Sddress. So, I presented it first to the assembled. I had a big audience of economists only, and I was a little apprehensive. Russ Roberts: Rightfully so. Robert Shiller: Heard that[?]. Nobody booed. Russ Roberts: Oh, okay. Robert Shiller: Not one. And I got applause afterwards-- Russ Roberts: Tap it. Tap it.[?] Robert Shiller: Maybe it wasn't a standing ovation, but it was applause. So, I--yeah. I think that academia is like that. People who say something interesting will always be controversial. So you take Milton Friedman, for example. He brings in strong feelings and he might've been right about some things and wrong about others. But he was a--came up with interesting thoughts. And that's the best I can hope for. Not to be that great maybe, but to be provocative. Russ Roberts: Yeah. And that's a--it's an interesting narrative, of course, we could tell about ourselves, about our career and what we think we ought to be doing.