Narrative economics

Thanks to the Fed cutting interest rates this year, Americans are buying more homes. Housing starts, the figure economists use to track home building, has jumped 12.3% from last month and is at the highest level since July 2007.

At least one economist is worried.

Another figure they use to track housing is the Case–Shiller Home Price Index, which helps economists understand the price of homes across the country. According to the index, home prices have surpassed their pre-crisis levels.

Robert Shiller—the co-conspirator of the index, a Yale professor of economics, and a Nobel laureate—believes “we’re sneaking back into the old 2006 mentality.”

But then he said something really interesting.

“Housing is driven by narratives,” he told Yahoo! Finance. “Before 2007, the narrative was flipping houses [and the belief that] home prices have always gone up. Then, after the Great Recession, it was tragic narratives about people who lost their home, or dangers of borrowing too much or lending too much. It’s been 10 years since the crisis. Now, those narratives are starting to be forgotten.” Shiller has recently written a book called Narrative Economics to expand on this point.

People live their lives through narratives, the stories we tell each other and ourselves. Of course, as a writing major and student of the humanities, saying that economics is driven by the stories people tell themselves is like saying toast is better with butter. But to hear an economist—and a good one at that—say something so human is rather exciting.

In fact, Paul Krugman, another Nobel laureate in economics, said something similar in his MasterClass: “Economics is all about people, not about money.”

Stories, not math or spreadsheets, help us understand the world and our place in it. It’s how we make sense of things. It’s the most powerful sense-making device we have, according to the first episode of The Mind, Explained on Netflix.

The story of the Bible helps us understand the world and our place in it. It is a story, by the way. Spanning thousands of years, written by over 40 authors, filled with history, poetry, laws, and letters, the text tells us a lot about ourselves.

In the beginning, we were created in a beautiful garden with instructions to build a great city. We failed to do what we were supposed to do, and everything changed.

Since then we’ve been trying to understand how we can go back to our original mission of building that great city, but this time, not from a blissful, eternal state, but rather from a broken and ruinous one.

Hopefully, we can tell ourselves better stories this time around. Our economic future depends on it.

Thanks for reading.