ogc163
Superstar
Nobel laureate Robert Shiller argues that gossip, half-baked philosophy, and fake news drive economics — not only numbers. His peers aren’t exactly thrilled.
Two decades ago, before the dotcom bust, economist Robert Shiller told peers that the stock market was vastly overpriced. A few years later, before the financial crash, he warned that housing was fated for a massive correction, too. Now the rabble-rousing, Nobel laureate professor has a new message for them:
Put down your calculators. It’s time to listen.
And what will his fellow economists hear when they do? An epidemic of chatter, says Shiller — stories told and retold at home, on social media, at workplaces, and just about everywhere else people gather. The skinny may be about new money pouring into Bitcoin, or the Chinese trade deal really about to happen this time. Before long, collective mobs of people will be moving their money around, sending the Dow to new highs.
In short, after four decades of a religious-like fixation with mathematics, mainstream economists may learn that the gossip, whispers, half-baked philosophy and “news tips” passed human to human since cave days drive economics. True, fake, it hasn’t mattered — such talk has spread and commanded surprising influence over economies. Shiller regards this as no small matter. In a new book, he argues for a profession-wide, decades-long study of viral stories as a path to much-needed improvement in utterly flawed economic forecasting.
To say that the field has been cool to Shiller’s latest big idea is to insult the walk-in freezer. For almost three years, Shiller has laid out his thinking in speeches and papers, including to some 900 of the world’s leading economists at the 2017 meeting of the American Economic Association (of which he was president at the time). At such speeches, there has been polite applause. But outside, normally voluble economists have treated “narrative economics,” as Shiller calls his theory, as though it doesn’t exist, and most of those I contacted for this story either did not respond or said they didn’t know enough to comment.
A well-connected “Chicago school” economist told me this would happen. “I think it will be hard for you to get anyone on the record against this for several reasons,” this person said in an email. “(i) We are indeed storytelling creatures and there’s wisdom in what Shiller says. (ii) He’s a nice guy and why pick a fight? (iii) Any skeptical quote would sound foolish and narrow-minded. ‘Economist X at U of Y says, “I’m ignoring narrative economics because it’s not in my toolkit.’” I see Economist X’s point, but the internet would make mincemeat of him.” For those very reasons, this economist also declined to be named. “Stories are important,” he said, “but what makes them economics?”
Shiller has an aw-shucks laugh, a slight hesitation, a shock of big hair, and, at 73, a still-boyish grin. All together, the picture is disarming — and misleading. Shiller, who teaches at Yale, is not lacking in Type A assurance and ends up talking a lot because he is a reflexive contrarian — he himself says he agrees with almost no argument he hears. But he may also be the world’s politest practitioner of Nobel-level economics, serving up his sometimes-cutting quibbles with such quiet, smiling courtliness that it’s hard to be offended.
When I told him that the anonymous peer quoted above had questioned whether he was describing real economics, he became Robert Shiller testy. “I don’t care what you call it. Is it right?” he said. He paused, repeated himself, and if he had stomped his foot, he would have surprised no one. Then he said, more softly, “It is still relevant to study scarcity and the allocation of resources. But you can’t separate out a ‘pure’ economics. It’s not like we should do patriotic economics.”
Coming from Shiller, Narrative Economics, his highly readable, compelling book, is a broadside against the Chicago school, the mainstream, rigorously math-based philosophy that has dominated capitalism since the 1980s. Pioneered by Milton Friedman, the Chicago school tells us not to second-guess the market — humanity, disciples argue, is made up of rational, self-interested individuals whose systematic actions fully explain the larger economy. Governments should stand back and let the science of economics get on with its thing.
The Chicago school's crowning moment arrived with the election of Ronald Reagan and Margaret Thatcher, moving the unregulated, unfettered market to the center of economic policy. But just as the Chicago acolytes were taking Washington and London by storm, a few voices were beginning to sow doubts. Psychologists like Danny Kahneman and Amos Tversky, and economists like Shiller himself, were pointing out that emotion seemed to influence economic decisions in ways that very few people would call mathematically grounded. A few years ago, the Nobel committee signaled its agreement, awarding the field’s biggest prize to a string of “behavioralists,” including Shiller, in 2013. A tense peace settled in between the Chicago and behavioral schools.
Now, Shiller is upsetting the ceasefire with his new thesis. “We are developing a new side of economics,” says Dennis Snower, president of the Kiel Institute for the World Economy in Germany, who collaborates with Shiller. “The standard statistical analyses are no longer valid. They assume that we know the probabilities with which everything will occur. In reality, we are almost never in that position.”
There is an opening for such a challenge in a field beset by numbingly bad forecasting. Among the misfires: the unprojected 2008-’09 financial crash, and the fatefully under-appreciated ferment of people “left behind” by globalization, in part responsible for Brexit and the election of Donald Trump. Economics’ miserable record goes back to the beginning of modern forecasting: Of 469 recessions around the world during the last three decades, the International Monetary Fund foresaw just four by spring of the prior year, Bloomberg reported. Private sector economists did no better: From 1992 through 2014, they projected just five of 153 recessions. In an op-ed at the New York Times in September, Shiller argued that the problem is fundamental. The leading economic indicators on which economists rely, such as interest rates and GDP growth, have been better at telling us where we have been than where we are going.
If the Chicago school is so bad at forecasting, how can it possibly be trusted to know how best to structure an economy? So it is that, though rational market advocates may not fully realize it, the times have made them exceedingly vulnerable. “I think of the current decade as comparable to the 1930s and the 1970s in the sense that a dominant approach to economic policy has come to a crashing end,” says Binyamin Appelbaum, author of The Economists’ Hour. “In the 1930s, it was the end of laissez faire; in the 1970s, the end of Keynesianism; in the 2010s, the end of blind faith in markets.”
Since Copernicus five centuries ago, human advancement has been all about replicable facts. The tech you use, the food you eat, the vehicle you drive, your furnishings and clothes — much of the civilization you know — are trackable to the scientific revolution he set in motion by placing the Earth in orbit around the Sun. We want to quantify everything, the faster the better.
But are we excessively wed to data and numbers? A growing number of experts in diverse fields — from mountaineers to investors and economists — say we are: Our math mania has eroded our sense of intuition — Shiller says we are missing time-worn narrative clues to what’s really going on, while other thinkers say our primal “mental maps” have atrophied.
In the French alpine village of Chamonix, below Mont Blanc, I recently attended the Summit of Minds, a conference organized by former senior executives of the World Economic Forum, the annual gathering of elites on the other side of the Alps in Davos. Blaise Agresti, a local climbing guide, stood up at a breakfast devoted to what a moderator called “navigating an uncertain world when the old borders no longer exist.” He told the story of a man, a few weeks earlier, who, carrying a small GPS device, trekked some 9,000 feet up Mont Blanc. Just before reaching a shelter where climbers spend the night on the way to the summit, the man, traveling alone, veered onto a little-used fork and up a gradually steepening and narrowing ridge. There, he fell almost 1,000 feet to his death.
How it was that the man managed to take the wrong turn weighs on Agresti, a retired Army officer who formerly ran Chamonix’s mountain rescue office. Every year, more than 20,000 people use the same path, Agresti said, and if the man was paying attention, there was no way to miss the shelter. He simply did not look around. Instead, Agresti suspects, his attention was “only on his GPS,” and it somehow was wrong, or he misread it. “If you are a mountain guide and you use only technology, you will die,” Agresti told me. “You don’t see the crevasse. You can’t adapt to reality.”
Agresti runs a local firm that, in addition to guiding climbers, promotes high-end retreats above Chamonix. He invites senior corporate executives to be separated from their smartphones and forced to think about their surroundings at altitude — “to rebuild their natural compass” at a time of constantly changing conditions, Agresti said. “Data is a way to map the world,” he said. “But it’s perhaps not the right data, or the right map.”
He told the story of the Norwegian explorer Fridtjof Nansen and a four-year attempt in the 1890s to be first to the North Pole. At one point, Nansen left his crew behind and pushed ahead with a single companion, a team of dogs, a sextant, a theodolite, and two watches, the latter critical to calculating longitude. Soon after, both watches broke, leaving the men lost in an unmapped and to them all-but featureless landscape. It took two years, and they never reached the pole, but they made it out. “Nansen moved on ice floes with nothing,” Agresti said. “He was able to locate his position himself. We’ve lost a lot of these abilities.”
One after another, bankers, investment advisers, and economists responded in unanimity about a world fast becoming unrecognizable to those relying on the usual technologies to make sense of it all. They spoke of a “paradigm shift,” “a movement,” and a “revolution” occurring in response to this disorientation: An open math rebellion.
“People can’t get their minds around the fact that we are on an ice floe,” said David Bowers, an investment adviser with U.K.-based Absolute Strategy. “We love plans, algorithms, scenario planning. But you need full situational awareness. You need to learn cognitive diversity.”
Shiller told me when we spoke later, “There are some economists who think that the economics profession should be a mathematical discipline. To me economics and other social sciences are part of a big picture. If we are trying to stay in the mathematical world, we may become irrelevant.”
Two decades ago, before the dotcom bust, economist Robert Shiller told peers that the stock market was vastly overpriced. A few years later, before the financial crash, he warned that housing was fated for a massive correction, too. Now the rabble-rousing, Nobel laureate professor has a new message for them:
Put down your calculators. It’s time to listen.
And what will his fellow economists hear when they do? An epidemic of chatter, says Shiller — stories told and retold at home, on social media, at workplaces, and just about everywhere else people gather. The skinny may be about new money pouring into Bitcoin, or the Chinese trade deal really about to happen this time. Before long, collective mobs of people will be moving their money around, sending the Dow to new highs.
In short, after four decades of a religious-like fixation with mathematics, mainstream economists may learn that the gossip, whispers, half-baked philosophy and “news tips” passed human to human since cave days drive economics. True, fake, it hasn’t mattered — such talk has spread and commanded surprising influence over economies. Shiller regards this as no small matter. In a new book, he argues for a profession-wide, decades-long study of viral stories as a path to much-needed improvement in utterly flawed economic forecasting.
To say that the field has been cool to Shiller’s latest big idea is to insult the walk-in freezer. For almost three years, Shiller has laid out his thinking in speeches and papers, including to some 900 of the world’s leading economists at the 2017 meeting of the American Economic Association (of which he was president at the time). At such speeches, there has been polite applause. But outside, normally voluble economists have treated “narrative economics,” as Shiller calls his theory, as though it doesn’t exist, and most of those I contacted for this story either did not respond or said they didn’t know enough to comment.
A well-connected “Chicago school” economist told me this would happen. “I think it will be hard for you to get anyone on the record against this for several reasons,” this person said in an email. “(i) We are indeed storytelling creatures and there’s wisdom in what Shiller says. (ii) He’s a nice guy and why pick a fight? (iii) Any skeptical quote would sound foolish and narrow-minded. ‘Economist X at U of Y says, “I’m ignoring narrative economics because it’s not in my toolkit.’” I see Economist X’s point, but the internet would make mincemeat of him.” For those very reasons, this economist also declined to be named. “Stories are important,” he said, “but what makes them economics?”
Shiller has an aw-shucks laugh, a slight hesitation, a shock of big hair, and, at 73, a still-boyish grin. All together, the picture is disarming — and misleading. Shiller, who teaches at Yale, is not lacking in Type A assurance and ends up talking a lot because he is a reflexive contrarian — he himself says he agrees with almost no argument he hears. But he may also be the world’s politest practitioner of Nobel-level economics, serving up his sometimes-cutting quibbles with such quiet, smiling courtliness that it’s hard to be offended.
When I told him that the anonymous peer quoted above had questioned whether he was describing real economics, he became Robert Shiller testy. “I don’t care what you call it. Is it right?” he said. He paused, repeated himself, and if he had stomped his foot, he would have surprised no one. Then he said, more softly, “It is still relevant to study scarcity and the allocation of resources. But you can’t separate out a ‘pure’ economics. It’s not like we should do patriotic economics.”
Coming from Shiller, Narrative Economics, his highly readable, compelling book, is a broadside against the Chicago school, the mainstream, rigorously math-based philosophy that has dominated capitalism since the 1980s. Pioneered by Milton Friedman, the Chicago school tells us not to second-guess the market — humanity, disciples argue, is made up of rational, self-interested individuals whose systematic actions fully explain the larger economy. Governments should stand back and let the science of economics get on with its thing.
The Chicago school's crowning moment arrived with the election of Ronald Reagan and Margaret Thatcher, moving the unregulated, unfettered market to the center of economic policy. But just as the Chicago acolytes were taking Washington and London by storm, a few voices were beginning to sow doubts. Psychologists like Danny Kahneman and Amos Tversky, and economists like Shiller himself, were pointing out that emotion seemed to influence economic decisions in ways that very few people would call mathematically grounded. A few years ago, the Nobel committee signaled its agreement, awarding the field’s biggest prize to a string of “behavioralists,” including Shiller, in 2013. A tense peace settled in between the Chicago and behavioral schools.
Now, Shiller is upsetting the ceasefire with his new thesis. “We are developing a new side of economics,” says Dennis Snower, president of the Kiel Institute for the World Economy in Germany, who collaborates with Shiller. “The standard statistical analyses are no longer valid. They assume that we know the probabilities with which everything will occur. In reality, we are almost never in that position.”
There is an opening for such a challenge in a field beset by numbingly bad forecasting. Among the misfires: the unprojected 2008-’09 financial crash, and the fatefully under-appreciated ferment of people “left behind” by globalization, in part responsible for Brexit and the election of Donald Trump. Economics’ miserable record goes back to the beginning of modern forecasting: Of 469 recessions around the world during the last three decades, the International Monetary Fund foresaw just four by spring of the prior year, Bloomberg reported. Private sector economists did no better: From 1992 through 2014, they projected just five of 153 recessions. In an op-ed at the New York Times in September, Shiller argued that the problem is fundamental. The leading economic indicators on which economists rely, such as interest rates and GDP growth, have been better at telling us where we have been than where we are going.
If the Chicago school is so bad at forecasting, how can it possibly be trusted to know how best to structure an economy? So it is that, though rational market advocates may not fully realize it, the times have made them exceedingly vulnerable. “I think of the current decade as comparable to the 1930s and the 1970s in the sense that a dominant approach to economic policy has come to a crashing end,” says Binyamin Appelbaum, author of The Economists’ Hour. “In the 1930s, it was the end of laissez faire; in the 1970s, the end of Keynesianism; in the 2010s, the end of blind faith in markets.”
Since Copernicus five centuries ago, human advancement has been all about replicable facts. The tech you use, the food you eat, the vehicle you drive, your furnishings and clothes — much of the civilization you know — are trackable to the scientific revolution he set in motion by placing the Earth in orbit around the Sun. We want to quantify everything, the faster the better.
But are we excessively wed to data and numbers? A growing number of experts in diverse fields — from mountaineers to investors and economists — say we are: Our math mania has eroded our sense of intuition — Shiller says we are missing time-worn narrative clues to what’s really going on, while other thinkers say our primal “mental maps” have atrophied.
In the French alpine village of Chamonix, below Mont Blanc, I recently attended the Summit of Minds, a conference organized by former senior executives of the World Economic Forum, the annual gathering of elites on the other side of the Alps in Davos. Blaise Agresti, a local climbing guide, stood up at a breakfast devoted to what a moderator called “navigating an uncertain world when the old borders no longer exist.” He told the story of a man, a few weeks earlier, who, carrying a small GPS device, trekked some 9,000 feet up Mont Blanc. Just before reaching a shelter where climbers spend the night on the way to the summit, the man, traveling alone, veered onto a little-used fork and up a gradually steepening and narrowing ridge. There, he fell almost 1,000 feet to his death.
How it was that the man managed to take the wrong turn weighs on Agresti, a retired Army officer who formerly ran Chamonix’s mountain rescue office. Every year, more than 20,000 people use the same path, Agresti said, and if the man was paying attention, there was no way to miss the shelter. He simply did not look around. Instead, Agresti suspects, his attention was “only on his GPS,” and it somehow was wrong, or he misread it. “If you are a mountain guide and you use only technology, you will die,” Agresti told me. “You don’t see the crevasse. You can’t adapt to reality.”
Agresti runs a local firm that, in addition to guiding climbers, promotes high-end retreats above Chamonix. He invites senior corporate executives to be separated from their smartphones and forced to think about their surroundings at altitude — “to rebuild their natural compass” at a time of constantly changing conditions, Agresti said. “Data is a way to map the world,” he said. “But it’s perhaps not the right data, or the right map.”
He told the story of the Norwegian explorer Fridtjof Nansen and a four-year attempt in the 1890s to be first to the North Pole. At one point, Nansen left his crew behind and pushed ahead with a single companion, a team of dogs, a sextant, a theodolite, and two watches, the latter critical to calculating longitude. Soon after, both watches broke, leaving the men lost in an unmapped and to them all-but featureless landscape. It took two years, and they never reached the pole, but they made it out. “Nansen moved on ice floes with nothing,” Agresti said. “He was able to locate his position himself. We’ve lost a lot of these abilities.”
One after another, bankers, investment advisers, and economists responded in unanimity about a world fast becoming unrecognizable to those relying on the usual technologies to make sense of it all. They spoke of a “paradigm shift,” “a movement,” and a “revolution” occurring in response to this disorientation: An open math rebellion.
“People can’t get their minds around the fact that we are on an ice floe,” said David Bowers, an investment adviser with U.K.-based Absolute Strategy. “We love plans, algorithms, scenario planning. But you need full situational awareness. You need to learn cognitive diversity.”
Shiller told me when we spoke later, “There are some economists who think that the economics profession should be a mathematical discipline. To me economics and other social sciences are part of a big picture. If we are trying to stay in the mathematical world, we may become irrelevant.”