“The Great Depression, we talked ourselves into,” Robert Shiller tells The Daily Telegraph. The Yale economics professor and winner of the Nobel Memorial prize, can credibly claim to have predicted the two biggest crashes of the last 20 years – the tech bust and the US housing collapse.
Now, in his latest book, Narrative Economics, he argues that economists must stop focusing purely on economic data, and pay more attention to another “important driver of economic change, which is narrative.” Stories affect behaviour, which in turn affects economic outcomes. For example, Shiller argues that a respect for frugality actually worsened the Depression. “It wasn’t proper to live high and show off, you had to be more modest, which is a narrative that encourages curtailment of expenditure.”
What narratives are we in danger of falling for today? Shiller reckons the obsession with the inverted yield curve (which is seen as a reliable indicator of pending recession) is a good example. “Before 1970 there were virtually no mentions of it.” But then “it started to catch on and every successive recession had a stronger talk about an inverted yield curve… it is a self-fulfilling prophecy.”
The asset that worries Shiller most today is an old enemy – US property. Prices are now slowing, after years of rapid growth, which also happened ahead of the 2006 crash. “It would not surprise me at all if in the next year or two we saw modest declines in home prices and if things play out right, there could be bigger declines.”