When looking to understand what drives economies and business, it's ultimately all about the numbers, right? Wrong. Or so says Robert Shiller. The Yale economist and Nobel laureate who predicted the housing crisis of the late 2000s argues that people's actions more often depend on "stories" than hard data and complex formulas.

As a student in the 1960s, Robert Shiller read a book that planted a seed in his mind. First published in 1931, Only Yesterday recounts the events of the previous decade which led to the Great Depression. The penny dropped: How people at the time saw the world was a window on collective decision-making processes that no mathematical model could capture. Now, over 50 years later, Shiller's celebrated book Narrative Economics has taken a detailed and analytical look at the stories we tell ourselves about the world, many drawing on deep-rooted collective memories, or interpretations, of past events.

One example is the Great Depression and how stories about what caused it and how it played out would later inform policymakers during the global financial crisis of 2008-09. He also looks at narratives that reemerge – such as the "plague" stories during Covid-19. Indeed, narratives also have viral qualities, says Shiller. Social media has only accelerated this process. But economics has been slow to recognize the importance and value of narratives. Shiller thinks that needs to change. Rather than assumptions that decision-making is all self-interested processes like maximizing the "utility function" – or what's best for me – there are other powerful forces in play.

Let's start by defining what you mean by narrative economics?

Narrative economics would be the study of popular narratives that spread via a contagion [and are] similar to diseases in their transmission. I call them "economic narratives" – narratives that change people's economic decisions, their sense of how the world works or what's important or what the dangers are that ultimately affects people's thinking. It studies the stories that people tell that spread at certain times. Really traditional economics looks at people as rational optimizers who respond correctly to new information.

Can you give an example?

I was impressed that [Frederick Lewis Allen's book Only Yesterday, about the Depression], described a lot of undignified talk and fads and fashion changes that affected the economy, rather than exclusively central bank policy and tax policy. I thought: "This is more down-to-earth, I believe this as the story of the Depression." For example, people were disturbed when the dial telephone came in [rather than going through a switchboard operator]. This was striking people as typical of the Great Depression, where jobs were lost to machines. They thought: "Sooner or later, I am going to lose my job." That's only one of many narratives that were afloat, and I wanted to think that narrative economics would classify the narratives the way ornithologists classify birds.

Does technology play a role in helping narratives spread?

Information technology has increased the contagion of narrative – but it has [always] played a role, [from] the invention of the printing press by Gutenberg. Then we had the tulip mania [of the 17th century] and other events that I think were helped along by newspapers and speeding communication. The effects of the technology are again limited by the fact that people can only have so many stories on their mind at a particular time. But it has increased the spread of good storytelling, good writers. So, the creativity of narratives [has increased] – and the tendency for narratives to mutate like diseases.

Can you give us an example of something that changed people's behavior and had a meaningful impact on the economy?

The labor movement – which I think is narrative-driven and changes the power structure within the economy. The idea that workers should bind together and form a union, and then the union has spokespeople who interpret the events. There were stories of strikes that started to develop and polarize society. In the 1890s, there was a labor event called the Haymarket Riot where they ended up battling the police. And that event was in the memory of the people in the Great Depression, even though it was almost a half a century earlier.

Actions in the 1930s about whether to strike or not were informed by shared stories about an earlier conflict?

People [ask] when they approach a topic like the Haymarket Riot: "Is that something that we should teach our economics students?" Well, it's not core. The story of the Great Depression itself is a powerful story today. The Haymarket Riot has been forgotten by most people but the Great Depression itself is on the minds of everyone. The story mutated a bit and then suddenly it becomes viral again. So, we have a lot of talk of the Great Depression during the so-called Great Recession of 2007 to 2009.

Ben Bernanke – the head of the Federal Reserve in 2008 – was famously a student of the Great Depression. Do you think it guided his actions?

He wasn't [really] a narrative economist, but he immersed himself enough in that literature to capture some of the narratives. One thing that happened in 2007 and 2008 was the old admonition that's attributed to Franklin Roosevelt, "The only thing we have to fear is fear itself," was on their minds – even if it wasn't the emphasis of their research.

To prevent fear sparking panic ...

The idea that they had to stop the panic led to the Northern Rock [bank] bailout in the UK and similar bailouts in the United States. The importance of doing that quickly was not so much a result of graduate training and economic theory as it is a reading of history – in the sense that people will think this is the Great Depression again. The fact that there were bank failures and lines outside of banks ... it's the visual image that many people still have of bank runs. They didn't want that visual image. They wanted to make sure that people weren't panicking, and I think that shows the good sense of policymakers. It could've been worse. We can study these things.

How do you get a grip on all of these different narratives?

We have to be realistic about what starts things [and] we have to start thinking about collecting better data. One thing that we do have is digitized texts of acts of Congress, speeches, newspapers, legal briefs, magazines, even personal diaries and church sermons. It's all part of the narrative process. We can start quantifying. We could [also] start collecting data that is more attuned to understanding what people are thinking through time.

You even argue that the great economist John Maynard Keynes was, at heart, a narrative economist.

One thing I emphasize is that the data set matters. In response to the Great Depression, they started a systematic study of national income and product accounts and they invented the GDP. So, the data set changed then. That's "Keynesian economics" – it focuses on things like GDP and unemployment rate. But if you read Keynes, he would not have been entirely happy with the way "Keynesian economics" has gone. He sounds more like a narrative economist. In his 1919 book The Economic Consequences of the Peace, he talked about the narrative that would develop if we punished Germany too much and he kind of predicted World War II without actually saying that.

But if everyone else has already been engaging with this, why has economics taken so long to catch up?

Narratives can be long-lived and there's a narrative in the economic department that we are mathematicians – we have computer models – and there's a source of pride. It's the "queen of the social sciences," somebody said. I don't mean to say there isn't a role for mathematical economics. There is. And it's okay, I think we just need a little bit more tilt towards narrative economics.

You mean that economists need to think more out of the faculty?

Yeah, so in the US, the economists think of Donald J. Trump as a "not our department" [chuckles]. But he so occupies people's talk and thinking. It's just amazing: the omnipresence of Donald J. Trump in our thinking. How can that not matter for the economy?

But if Trump becomes less of a presence, what other big popular narratives do you see out there?

Well, the Trump narrative is not just a US narrative – it's a world phenomenon. But there are other narratives that are also very important, just like the global warming narrative. It's currently in remission a little bit because there isn't enough time to worry about Covid-19 and politics. Another narrative that's very important is the deep state narrative. And that the news media are taking orders to distort and lie to the public and cannot be trusted. That is a very important development. We've lost our trust in news and respect for all news media. That is a view of the world that is dangerous, I think. We've lost our adherence to reality.