What is Narrative Economics?
Economists tend to use specific language to their field such as GDP, inflation, recession or stock market crash.
Economists sometimes get too caught up in the numbers and forget that the economy’s foundations are underpinned by people’s emotions - people’s hopes, fears, prejudices etc. These are crucial if one wants to understand big economic events. Cue narrative economics.
Narrative economics considers the collective stories that change economic behaviour. A narrative refers to a collective story or belief shared by a group of people. One example is the astute businessman: this is a popular narrative in the USA. Donald Trump utilised this image to get himself elected in 2016. The image he portrayed was a tough-negotiating, 100%-for-the-working-people businessperson, looking to get a great deal and make America Great Again.
Another example is the stock market crash of 1929. Narratives at the time dictated that ordinary people could become rich by gambling their savings. Inevitably, people made bad investments which led to a huge asset bubble. Eventually, this led to the market crashing on October 24th 1929.
One economist who focused more on feelings rather than figures was Cambridge economist John Meynard Keynes. He noted in his book ‘Economic Consequences of the Peace’ that Germany would become sick and tired of the heavy reparations they were required to pay due to the Treaty of Versailles that followed WW1. This was a human prediction which could not really be tested against facts and figures at the time, and he was right.
Bitcoin | The Power of Narrative Economics
In late 2008, somebody calling themself Satoshi Nakamoto publicly shared a link to a paper called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’. Since then, the currency Bitcoin has become an accepted worldwide currency, even though its creator’s true identity was never revealed.
What made Bitcoin unique was not necessarily the mathematical theory behind it, but the reaction people had to it as a new and exciting prospect. The vast majority of its users have no idea how it works. If you found a Bitcoin user and referenced Elliptical Curve Digital Signatures or the Merkle tree, you’d probably be talking to a brick wall.
It’s the narrative that excites people: the promise of doing things in a new, anarchistic way. People see Bitcoin has a way to scrap the existing blueprint around how we pay for things and how we receive our incomes. People see it as an investment into the future and that if they just invest some of their money into Bitcoin, they will be among the enlightened, early adopters, leaving behind everybody else. It is a feeling that makes you feel brave and powerful, I guess similar to those first humans who will one day colonise Mars.
The other attractive idea around Bitcoin is that it is separate from the controlled world, where MNCs and governments reign supreme. Again, Bitcoin is for those individuals who feel they have had enough of the corruption that may or may not go on within these big institutions. The currency also doesn’t belong to any one country - so, it’s also a universal currency that you can use anywhere in the world.
The power of this narrative in the world of money has essentially sold this attractive story to the early adopters. From the enigmatic founder Satoshi Nakamoto to the complex mathematics, to the exciting new world that we can be a part of but must first break free from. I think I’m unintentionally making some links to the film The Matrix here.
In the coming weeks, we will come back to explore more examples of the power of economic narratives. Stay tuned if you’d like to know more.
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