Photo: Abhijit Bhatlekar/Mint
Photo: Abhijit Bhatlekar/Mint

A good narrative is an economic remedy

With a credible narrative of effective policies addressing pain points, the unfolding economic slowdown may have been less severe

Narrative economics holds that contagious beliefs and viral stories manifest in the economy by influencing behaviours. With a credible narrative of effective policies addressing pain points, the unfolding economic slowdown may have been less severe. Mint explains how.

What is narrative economics?

Nobel-winning Yale professor Robert Shiller has put the study of narratives at the heart of economics. Narrative economics holds that storytelling drives human behaviour and, thus, the economy and that, besides policies and mathematics, there’s often a story behind an economic trend. Narratives on slowdowns make people hold back spending and investment decisions. They put off non-essential big-ticket purchases. Businesses defer hiring, axe jobs and cut corners. Apart from business calculations, gut feelings and emotions driven by narratives trigger economic behaviour that end up deepening slowdowns.

Can we measure the impact of narratives?

Some narratives are contagious, while others disappear in no time. Conventional and avant-garde media have a role to play in this. At present, economists lack the sophisticated tools for capturing these drivers. But mathematical models of expectations will start incorporating narratives sooner than later. Using data sets he built by surveying individual and institutional investors for years, Shiller predicted economic events. He called the 2008 collapse in the US housing market that triggered the global financial crisis and the subsequent economic slowdown, the dot-com bust and the 78% fall in the Nasdaq from 2000 to 2004.

Why do narratives affect economic behaviour?

People whose savings are affected will hold back in the current slowdown, but even those who secure assured salaries and pensions seem to be deferring purchases and investments.

What about economic behaviour of Indians?

Narratives can be constructed to trigger herd behaviour. The public discourse dominated by scams had altered behaviours of even upright bureaucrats during the 2012 policy paralysis phase. Files stopped moving and projects clearances were held back out of fear of the 3 Cs: courts, CAG, CVC. RBI said the paralysis was a drag on growth. The apex court also cancelled 214 coal mines awarded between 1993 and 2010. Businesses floated on assured availability of coal found their investments jeopardized. Investors pulled back.

Do narratives matter in other fields?

Shiller has written of the power of narratives in politics, where more than the substance the consistency of the message counts. Understanding history demands understanding the stories of people who experienced the events. In the American Civil War over 620,000 Americans were killed. Shiller has drawn attention to the power of emotions about abuse of slaves and narratives intertwined with history.

Puja Mehra is a Delhi-based journalist and the author of The Lost Decade (2008-18).