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- Narrative economics, as I define it,
is the study of popular narratives.
Stories with morals that go viral.
Some narratives go viral
because they contain real truth
and knowledge, and are useful.
I'm more concerned with the
other kinds of narratives,
which are more story-quality,
and that travel from person to person.
They have a high contagion rate.
Changes in public thinking
are revealed by them,
and changes in public thinking
are important causes of
major economic events.
I've been thinking about
narrative economics
ever since I was a teenager.
It started out when I was a undergrad
at the University of Michigan,
and I took a history course.
And I got a good insight
from the history course
about why we had the Great Depression.
- [President Roosevelt] Well, first of all,
let me assert my firm belief
that the only we thing we
have to fear is fear itself.
- People of think of
Franklin Delano Roosevelt,
the president, saying, "The
only thing we have to fear
"is fear itself," so that the Depression
is described as some kind of panic.
There were other narratives
during the Great Depression
that I think were very important.
One of them was a frugality narrative.
Steinbeck's book, "The Grapes of Wrath,"
was a description of life
in the Great Depression,
sympathetic to the suffering of that time.
Economists don't like to talk
about the meaning of life,
but it's in the
Depression. In other words,
people had a different
sense of the meaning.
People thought that we'd been
living too high in the 1920s,
and we were show-offs.
- [Narrator] Much of America concentrates
on life's simple pleasures.
Booze, jazz, and razzamatazz.
- They came back to religion,
to modesty in fashion,
and sympathy for people
who were disadvantaged.
- [Narrator] The old mills stayed shut.
The years had built a new
method, a new machine.
Automatic, high-speed, powerful, accurate,
never gets tired, never gets sick.
- High-speed machinery goes
in, men like you and me go out.
- Another narrative of
the Great Depression
was a technological
unemployment narrative.
Machines were now replacing jobs,
and the jobs would never be back.
That scared people into cutting back,
just as the frugality narrative
also encouraged them to
cut back their consumption.
- Section five, speed her up, four one.
(bell ringing)
- "Modern Times" was
a Depression-era movie
starring Charlie Chaplin that described
the effects of automation.
The workers are told, in this factory,
semi-automated factory,
that they have decided
to automate their lunch,
to speed things up.
So the workers are asked to
sit down by a lunch machine
that will feed him his
lunch at high speed.
It was a hilarious scene, but it indicated
the dehumanization that's caused by robots
that are taking over.
But basically, the narrative
about machines replacing jobs
goes back hundreds of years,
even thousands of years.
Aristotle talked about it.
But it has become stronger and stronger,
and it remains very strong
today, in the 21st century.
Artificial intelligence
is fundamentally scary
because it replaces us.
What defines us more than our brain?
We have people who used to think
that they were safe from being replaced,
because they had developed
high cognitive skills.
But we have machines that are doing things
like playing chess better than people can.
So who are we anymore?
We tend to fashion stories about ourselves
that are self-congratulating.
But the problem is, we have
machines that are doing
so much better than you could ever do.
It creates a sort of sense
of meaninglessness in life.
I think it can have the effect
of causing a economic
recession or depression.
- We have witnessed a startling
drop in the stock market.
As the housing market has declined,
banks holding assets
related to home mortgages
have suffered serious losses.
As a result of these losses,
many banks lack the capital
or the confidencies in each
other to make new loans.
In turn, our system of credit is frozen.
- The Housing Crisis of
2007 to 2009 in the US,
and in other countries as well,
was the following of a boom in home prices
that was unprecedented in history.
It wasn't interest rates, it
wasn't building costs going up,
it wasn't the population surge,
none of those things happened.
So what did happen?
- So many people are fighting
for their American Dream.
For the Las Vegas Dream.
Because there's so many
ways Felicitas and Francisco
have lived the American Dream.
Their story is not one of great
wealth or great privilege.
Instead, it embodies the steady pursuits
of simple dreams through hard work
that has built this
country from the bottom up.
Finally, three years ago,
they were able to reach
that destination in the
pursuit of the American Dream.
After so much hard work,
Felicitas and Francisco
were able to move into
a home of their own.
- In my book, I describe
that as the result
of a narrative that began
about home purchases,
about home ownership,
about the American Dream.
The American Dream was
coined by James Truslow Adams
in a book he wrote in 1931
called "The Epic of America."
Adams hinted at a kind
of American philosophy
that it's actually good for the country
if you buy a big house and
a big, nice, fancy new car,
because that won't so much invite envy
as it will be an inspiration to others.
They'll say, "Well, if he or
she did it, I can do it, too."
And that's what makes America great.
So it's a patriotic statement.
But the narrative included an idea
that home prices are going to go way up,
and that there's a lot of smart people
who are not stopping with just one house.
They buy two houses,
or maybe three houses,
and they're making a bonanza.
And it collapsed when
the narrative changed,
when people started talking
about housing bubble,
and started talking about the foolishness
of the investors in it.
The Great Recession that
followed was substantially caused
by a changing narrative about housing.
Why is narrative economics important?
People live their lives
as fulfilling a story,
and it changes motivation
in fundamental ways.
Human thinking has to be studied
if we're going to understand
economic fluctuations.
We have to understand how people
change their thinking through time.
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