It’s very interesting the way interest in narratives is popping up in so many places. The Royal Society has been looking at narratives in AI and in science more generally. Now Robert Shiller of Irrational Exuberance (and Nobel Prize) fame has a new book called Narrative Economics: How Stories Go Viral and Drive Major Economic Events. The book builds on a lecture he gave a couple of years ago. It begins: “This book offers the beginnings of a new theory of economic change that introduces an important new element to the usual list of economic factors: contagious popular stories that spread through word of mouth, the news media and social media.”

As the preface notes, the idea isn’t new; the 1894 Palgrave’s Dictionary of Political Economy mentions narrative economics. Robert Merton’s well-known concept of self-fulfilling (or self-averting) prophecies covers much of the territory of narrative dynamics. But perhaps today’s economy is more vulnerable than ever to contagion. An early chart in the book illustrates the surge in the proportion of articles across several socal science and humanities disciplines that contain the word ‘narrative’. Economics and finance are well behind history (of course) but also anthropology, sociology and political science.

Anyway, the book is about how narrative contagion affects economic events. It has in mind epidemic models, as well as – well, narratives. Each chapter focuses on a number of examples. The first section starts with Bitcoin as an example of how narrative affected behaviour and outcomes, then introduces some of the concepts concerning how narratives ‘go viral’ and the psychology of contagion. Part 2 is a brief section setting out ‘seven propositions of narrative economics’ (including ‘truth is not enough to stop false narratives’. Quite.) Part 3 describes recurring economic narratives such as financial boom and bust, or automation and jobs. The final part of the book sets out questions for research.

The book is always interesting, but somewhat bitty, one example after another, lacking a grand theory of narrative framework. However, as Shiller points out in the final section, there is plenty of scope for quantitative approaches to understanding the economic role of narratives, particularly using recent text analysis tools. A cynic might paint this emphasis on narrative – also recently explored by George Akerlof and Dennis Snower – as classic economic imperialism. After all, she might say, sociology and anthropology have been onto this for years. Some economists might on the other hand dismiss the emphasis on narratives as a source of dynamics as woolly nonsense, merely anecdotal. But both responses would be too negative.

A move to extend the use of qualitative approaches in economics should be welcomed, and an extension of the also-welcome revival of economic history. Narrative Economics joins a couple of other recent books, such as Morson and Schapiro’s Cents and Sensibility and Uncertain Futures edited by Jens Beckert and Richard Bronk in restoring the humanity to economics.

The heading of this post is not an invitation for the usual jokes about economic forecasts. It’s clear that most people think forecasting is what economists do, by and large, and that they do it badly. Indeed, some forecasts are a tissue of nonsense – pretty much any UK economcy & trade forecast from Patrick Minford these days for example, although 20 or 30 years ago he was a serious forecaster. I spent a few years myself in the mid/late 1980s doing macro forecasts for the UK and a few other countries, and later, as Economics Editor of the Independent, awarded an annual Golden Guru trophy for the UK forecast of key macro variables closest to the published figures at the time of the award – a necessary qualification because many macroeconomic statistics, especially GDP, are significantly revised over a period of years.

The revisions are with us still, but the techniques of forecasting have greatly improved since then, although of course there is a wide quality range among economic forecasters. For a non-technical guide to economic forecasting, there could be nothing better than Forecasting: An Essential Introduction by Jennifer Castle, Michael Clements and David Hendry. It is a crystal clear and intuitive explanation of what macroeconomic forecasts can and can’t do. It explains the inherent difficulties in trying to forecast the future of a complex non- linear, non-stationary system in which behaviour can be affected by forecasts themselves, all from a limited amount of past data. Better still, it explains the empirical techniques this ace team have devised to tackle some of the challenges.

My only complaint about the book is that the charts are a bit too small for my middle-aged eyesight. Although non-technical, there are lots of charts and it probably won’t make the bestseller list. However, it should be read by any student about to do a time series economietrics course, and to anybody about to start a job as a forecaster. Economics students are proficient in all the relevant software, have ploughed through the statistical theory in their econometrics courses, but anybody starting out as a forecaster naturally lacks the wisdom that comes with the experience of handling the data and seeing your lovingly estimated model produce some dreadful out-of-sample forecasts.

This book represents a treasure trove of crystallised wisdom. It offers up practical insights in clear prose. For example: “This principle of differencing is a method to remove the deterministic components of a forecasting model, by which we mean intercepts and trends. Deterministic terms capture the underlying equilbrium and growth rate of a variable of interest, so are fundamental to modeling, but can be catastrophic for forecasting when either component changes. The differencng principle can be applied to any model with an inherent equilibrium to which it corrects. … But…. if the object needing to be forecast is the level, a good performance forecasting the differences is not necessarily sufficient, as cumulating those differences may lead to an increasing divergence from the level.”

The book ends with some reflections on the limits to forecasting. Some things are inherently unpredictable – including events like the financial crisis which hinged not only on prior macroeconomic trends able to be captured in a macroeconometric model but also on unexpected policy decisions like letting Lehman Brothers go bust. But  the book notes that the forecasting process is not just about numbers but also about the narrative, at least in any macro policy context. Hendry coined the term ‘forediction’ to capture this.

No doubt the public at large will continue to mock economists and their forecasts, but they will always be needed, and in that case should be as good as economists can make them.

[easyazon_link identifier=”0300244665″ locale=”UK” tag=”enlighteconom-21″]Forecasting: An Essential Introduction[/easyazon_link]

Jesse Norman is one of the most thoughtful of the UK’s MPs, a principled Conservative, and has followed up his earlier biography of his hero Edmund Burke with Adam Smith: What He Thought and Why It Matters. It’s an excellent overview of Smith’s life and work. It would make a terrific read for economics students but also has much to interest those who’ve read every book about Adam Smith going. Like many recent books about Adam Smith (such as Emma Rothschild’s Economic Sentiments and Nicholas Phillipson’s biography An Enlightened Life), it reclaims the Theory of Moral Sentiments as having equal importance to The Wealth of Nations.

Part of Jesse Norman’s aim is to dissociate Smith from the ‘free market’, invisible hand caricature of many conservative economists and thinkers. The first part of the book is a pretty standard biography, nicely done. The second part is a history of how neoclassical economics came to hijack Adam Smith, stripping away from his thinking much of its richness and depth, not only in terms of human behaviour (not narrowly self-interested in Smith) but also in terms of institutional context (dynamic, contingent, evolutionary). The book has a nice section on Vernon Smith, whose experimental work in the 1980s was an early critique of the assumptions of neoclassical general equilibrium theory. In effect, it argues, much of modern neoclassical economics as it peaked in the late 20th century was foreign to Smith’s approach. What Smith did do was: “Set out the field of political economy with markets at its centre,” but in a way that makes institutions and historical sensibility equally central.

(There is also a section on Smith’s strong, principled opposition to the slave trade. It can never be said often enough that economics got the label ‘the dismal science’ from Carlyle because economists were prominent campaigners against slavery.)The book ends with a section on ‘why it matters’ and what a Smithian perspective would be on the economy now. Norman notes the tyranny of the arid mainstream perspective in policy economics right up to the financial crisis (although academic economics had by then already started to move decisively away from free marketism): “What is so striking about that crisis in retrospect is not, even, the egregious self-enrichment of the previous decade, or the specific failures of policy, law and enforcement involved. It is the intellectual grip which the language of free markets held on almost all the parties concerned, regardless of the often very different reality.” Indeed, free marketism still has a strong grip on policy, given that so many policymakers were trained in their economics when it was still at its peak.

What is to be done about this. “We need a new master narrative for our times,” Norman writes (italics his). The book calls for political renewal too. Who could disagree? (Although that makes it disappointing that Jesse Norman declared himself a supporter of Mr Johnson in the current Conservative leadership campaign.) It concludes, of course, that returning to the true Adam Smith can help shape the new narrative with markets still central to economic life but understood in the context of a political economy in which institutions, historical context and human nature play their proper role.

John Quiggin has a mission to correct the perception that economics implies markets are always marvellous and government intervention terrible. The title of his new book, Economics in Two Lessons, riffs on a comment by Paul Samuelson about a 1946 bestseller called ‘Economics in One Lesson‘: “When someone preaches ‘Economics in one lesson,’ I advise: Go back for the second lesson.”Apparently, Economics in One Lesson by Henry Hazlitt, a ‘free market’ advocate has sold over a million copies and been continuously in print – who knew? I’ve never read it. Quiggin’s response in Economics in Two Lessons is an attempt to battle the perpetual appeal of simple answers to complex problems.

Economics in Two Lessons: why markets work so well and why they can fail so badly is essentially all about the many ways in which markets can fail. The books starts with Lesson One:  the concepts of opportunity cost, gains from exchange and equilibrium, then introduces complexities: time, information (lack of) and uncertainty. Some nice applications follow, such as price controls, ‘free’ goods, spectrum auctions, road pricing. Quiggin uses the concept of opportunity cost as a frame for the remainder of the book, including when market prices diverge from opportunity cost.

“Most of the questions of principle involved in public policy can be illuminated by the careful application of the idea of oportunity cost and its relationship to market prices.” Lesson One is that market prices reflect and determine opportunity costs in production and consumption. Lesson Two is that there are social opportunity costs to be taken into account as well.

Hence the book then moves on to the ‘second lesson’, turning to income distribution, unemployment, natural monopolies, externalities like pollution and financial bubbles. The final section turns to policy prescriptions for a market failure world. For example, a chapter on income distribution looks at unions, minimum wages, and issues relating to income ‘predistribution’ such as intellectual property and limited liability.

There are plenty of examples and the book is very clear, making it an attractive supplement for undergraduate courses – I guess this is the target market as each chapter has further reading. I like the way Quiggin weaves in the history of economic thought on these issues. It’s a shame he feels the need to knock ‘mainstream’ economics so much; there’s little here for a mainstreamer to disagree with, except swipes like these: “The term ‘externality’ is one of those bits of jargon that most economists would be at a loss to explain.” What a bizarre claim. I have other quibbles – for instance, I’d disagree that Mill-ian utilitarianism is inherently more egalitarian than post-Pareto welfare economics.

On the whole, though, this is a highly readable introduction to the intellectual framework of modern policy economics, with plenty of lively examples (although I hope that those teaching public policy economics will also consider my forthcoming – late 2019/early 2020 – Markets, States, People……). It doesn’t dethrone my favourite book to recommend to newcomers to economics, John McMillan’s Reinventing the Bazaar either, but is well worth reading. Just remember – this isn’t anti-mainstream economics, it’s what economics is.

[easyazon_link identifier=”0691154945″ locale=”UK” tag=”enlighteconom-21″]Economics in Two Lessons[/easyazon_link]