From Narrative to Crisis: The Future of Economic Thought

Three recent books explore important changes in the way we understand the economy. Robert Shiller focuses on the need to bring in ‘narratives’ that circulate within the economy or that can be borrowed from other disciplines; Thomas Philippon asks why America gave up on free markets and looks again the importance of regulation in relation to market competition; and James Gerber examines the influence of financial crises and the lessons we learn in their aftermath. Together these books tell us a lot about where economic thinking is headed. The novel coronavirus pandemic has done little to change the direction of travel and much to accelerate the pace.


Narrative Economics: How Stories Go Viral and Drive Major Economic Events. By Robert J. Shiller. Princeton: Princeton University Press, 2019.

Stories influence behavior. Indeed, that is why people tell stories in the first place. If the story was not going to generate some kind of reaction, what would be the point of telling it? Therefore, it is worth noting that most economists leave stories out of the list of important influences in their models for economic performance. The usual excuse is that such models need to be parsimonious to be tractable. More important, perhaps, simpler models allow for more sophisticated forms of statistical analysis. If parsimony and sophistication come at a cost of ‘completeness’ in capturing the world around us, the advantages they offer to economics as a scientific discipline are more than worth it. At least that is the conventional wisdom.

Robert Shiller disagrees. He believes that stories – or ‘narratives’ – are an essential part of economics as a social construct. Narratives capture how people perceive the world around them and, in turn, they shape how people will respond. Since those responses make up economic activity in the aggregate, it makes no sense to leave either the narratives or the responses they generate out of economic analysis. On the contrary, given the huge advances made recently in the digitization of books and articles and in the elaboration of models for harvesting and analyzing narrative components (or word combinations) as data, there is no excuse for economists to side line such powerful influences on economic performance.

Shiller lays down the gauntlet, not only arguing that economists should learn from other disciplines but insisting that ‘collaborative research between economists and experts in other disciplines holds the promise of revolutionizing economics’ (p. 17). He highlights the insights from epidemiology as particularly important and uses those to frame much of the rest of the argument in his book.

That analogy is not as strong as others that Shiller could have chosen. Although ‘contagion’ works as a metaphor, ideas are not like diseases in two crucial respects: they do not need physical proximity to spread, and human beings control their mutation (or, put another way, ideas do not mutate without human involvement). These differences do not rule out the comparability with disease transmission, but they do mean that the underlying causal mechanism is different no matter how similar the statistical graphs for phrase repetition (idea spread) and case infections (disease spread) may appear.

There are closer models that Shiller cites in his list of references and could have used more effectively. One comes from the study of how ideas influence economic policymaker – Mark Blyth’s book on Austerity; the other comes from the study of viral marketing – Jonah Berger’s book, Contagious. These references do not show up the main body of Shiller’s text or notes, but they should. So should the wider schools that inspired these works – including Charles Kindleberger’s classic Manias, Panics, and Crashes.

If economists really want to revolutionize their discipline, they need to read Blyth’s book in the context of Peter Hall’s work on the spread of Keynesianism and Kathleen McNamara’s work on the creation of the euro. They should read Berger’s book in the context of the Heath brothers’ Made to Stick and Malcolm Gladwell’s Tipping Points. Finally, they could bridge the two traditions by looking at Ben Clift’s study of the strategies used by experts within the International Monetary Fund to put pressure on conventional wisdom within their own institution by promoting their ideas in the wider conversation. Shiller is absolutely right to insist that economists look outside their own discipline to bring in this narrative dimension; they should not have to look far to find the inspiration they have been missing.


The Great Reversal: How America Gave up on Free Markets. By Thomas Philippon. Cambridge: Belknap Press, 2019.

Believe it or not, Europeans have cheaper broad band access, better health care, stronger protection of data privacy, and more efficient banks than Americans do. Why? Because European markets are more competitive. Ironically, European markets are more competitive because Europeans built their competition policy based on lessons learned from the United States. The United States used to have the most competitive markets on the planet. Somehow during the past twenty years or so, American politicians and policy makers threw that all away.

Thomas Philippon offers an amazing narrative – borrowing from Robert Shiller – with widespread impact on economic performance. Importantly, moreover, Philippon builds the case with a compelling mixture of patience and data. Each chapter adds a new layer onto the argument, starting from the impact of market power at the firm level on economic performance in the aggregate, passing through the complex political economy of regulation, and winding up with a close analysis of finance, health care, and the major players in the gig economy. Philippon says at the outset that this could be a textbook as well as a commentary; he is not kidding. The book was built for coffee table and classroom alike.

Like any narrative, however, Philippon’s tale is wrapped in other stories – what Shiller calls narrative constellations. These need to be disentangled in order to avoid confusion. For example, Philippon relies heavily on the notion of ‘free’ markets, which he describes as free from arbitrary interference and artificial protection. None of those modifiers are helpful for understanding because each is wrapped with narrative implications that Philippon rejects time and again in his own argument. Nothing in the marketplace is ‘free’ and everyone who participates is either producer, consumer, or product. Politics is always motivated, not arbitrary, you just have to follow the money. And economics is a social arrangement, which makes it organic and not artificial: there is no ‘right’ policy because policymakers are only human and therefore prone to mistakes.

The most troubling narrative in Philippon’s book is about regulation. Sometimes, on the surface at least, he seems to accept the conventional idea that regulation is like an on-off switch that turns either to regulation or deregulation. Regulation stifles competition; deregulation unleashes it. This impression is strongest when he sketches the history of telecommunications and airlines. But dig into his argument and you see that the choice is not between regulation, yes or no, more or less. The real choice is between regulation that allows for or even reinforces the concentration of market power, and regulation that promotes the diffusion of market power. It is also about regulation that ensures that no single player or group of players can take over the regulatory process.

The distinction here is vital insofar as Philippon’s argument is that European markets work better than American markets today because they are better regulated and because the regulatory process is better insulated from monied politics. This is a liberal argument insofar as it implies that only rules can create freedom. America did not give up on ‘free’ markets; Americans embraced a narrative within which freedom means there are no rules or, if there are rules, those rules should be kept to a minimum. This story of American freedom is what exposed the country and its citizens to the accumulation of market power in the hands of an ever-smaller group of individuals who have in turn highjacked the legislative process to serve their own goals. We should not pretend their actions are arbitrary or artificial. As Philippon shows – brilliantly – the effects of this group on the U.S. economy are intentional. That argument is too important to ignore.


A Great Deal of Ruin: Financial Crises Since 1929. By James Gerber. Cambridge: Cambridge University Press, 2019.

All financial crises are not the same. They may share common features in the risk factors that bring them about, in the dynamics they unleash, and in the scars they leave behind. They tend to create similar feelings of uncertainty and panic as well. And every crisis yields its own ‘lessons’ for future policymakers. But once you open up the engine at work either in causing the crisis or fixing it, you see a lot of variety.

That diversity is an important theme running through James Gerber’s excellent introduction to the major financial crises we have experienced over the past hundred years. Gerber uses the highly contingent nature of financial crises to explain why they are so hard to predict, why they are so easy to underestimate once they get started, why they are so challenging to address, and why economists disagree on what went right in the policy response and what could have gone better. Gerber’s point is not that we cannot learn from the experience; on the contrary, his book shows how crises have shaped the intellectual history of macroeconomics and finance in many ways. Nevertheless, the overriding message is that we should mix data and humility in equal measure when drawing conclusions or offering policy recommendations.

Although published in 2019, Gerber’s book is ideal for anyone confused about how governments are responding to the economic consequences of the coronavirus pandemic. As with the crises of the past, the economic consequences of government efforts to stop the spread of the novel coronavirus are unique. Nevertheless, there are certain ‘risk factors’ that Gerber identifies that can help explain why some countries seem to be more vulnerable than others. Those same risk factors can help readers to anticipate how economic consequences will evolve as the shockwave extends from the real economy into the financial sector and from one country to the next.

Most important, perhaps, Gerber’s book explains why some themes are emerging so strongly in the policy debates both within and among national governments – about the importance of global leadership, the threat of economic contagion, the limits of monetary accommodation, the scope for fiscal stimulus, and the perils of moral hazard. Each of these themes is just an echo of the lessons ‘learned’ through the experience of the Great Depression, the Latin American Debt Crisis, the Asian Financial Crisis, the Subprime Crisis, and the European Sovereign Debt Crisis.

A sub-theme in Gerber’s book is about the power of ideas. This only stands to reason. If crises are as contingent and diverse as Gerber paints them to be, they necessarily create uncertainty. That is precisely when people reach for models in search of instructions on how best to protect their interests or to foster some sort of recovery. These models provide the ‘narratives’ that Robert Shiller says are so central to economics – and it is clear from repeated citation that Gerber draws on Shiller’s work.

The striking point is how much Gerber’s analysis is also caught up in narrative structures. The story he tells of the Eurozone crisis is a good illustration. His argument mirrors the conventional wisdom among American economists closely; it skews somewhat from the conventional wisdom in Europe. Gerber places more emphasis on fiscal integration and less on the role of the European Central Bank, for example. He also puts greater stress on the theory of optimum currency areas and almost none on the problem of sudden stops in Europe’s integrated financial markets. These ‘shortcomings’ are not serious in such an ambitious survey. It is a terrific book. But as Gerber shows time and again, even subtle shades of emphasis are important in policy deliberations. Here too narrative is critical to economic success.

These books review were originally published in Survival. You can download the edited version of these reviews here.