Maybe economic forecasters are doing the best they ever could do. But it
seems that, with economic events coming again and again for no apparent cause,
it would be a time to think whether economic theory could stand some
fundamental improvement.
It is rare to see a professional economist, in interpreting the past or
forecasting the future, quoting what a businessperson or newspaper writer thinks
is going on, let alone what a taxi driver thinks. But to understand a complex
economy, we have to take into account many conflicting popular narratives and
ideas relevant to economic decisions, whether the ideas are valid or fallacious.
Criticism of traditional approaches to macroeconomic research is not new. In
a famous 1947 article, “Measurement without Theory,” economist Tjalling
Koopmans criticized the then-standard approach of looking exclusively at
statistical properties of time-series data like GNP or interest rates to find leading
indicators to help in forecasting. He asked for theories based on actual
observations of underlying human behavior:
These economic theories are based on evidence of a different kind than the
observations embodied in time series: knowledge of the motives and habits of
consumers and of the profit-making objectives of business enterprise, based
partly on introspection, partly on interview or on inferences from observed
actions of individuals—briefly, a more or less systematized knowledge of
man’s behavior and its motives.7
In short, as Koopmans pointed out, traditional economic approaches fail to
examine the role of public beliefs in major economic events—that is, narrative.
By incorporating an understanding of popular narratives into their explanations
of economic events, economists will become more sensitive to such influences
when they forecast the future. In doing so, they will give policymakers better
tools for anticipating and dealing with these developments. Indeed, my argument
in this book is that economists can best advance their science by developing and
incorporating into it the art of narrative economics. The following chapters lay
the groundwork for bringing science and art together in a more robust
economics.

The Moral Imperative of Anticipating Economic Events
Ultimately, the objective of forecasting is to intervene now to change future
outcomes for society’s benefit. In his 1969 presidential address to the American
Economic Association, Kenneth E. Boulding (another teacher who influenced
me at the University of Michigan) said that economics should be considered a
“moral” science, in that it is concerned with human thought and ideals. He
inveighed against:
a doctrine that might be called the Immaculate Conception of the Indifference
Curve, that is, that tastes are simply given, and that we cannot inquire into the
process by which they are formed. This doctrine is literally “for the birds,”
whose tastes are largely created for them by their genetic structures, and can
therefore be treated as a constant in the dynamics of bird societies.8
Economics, Boulding says, “creates the world it is investigating.”9 Often, we
don’t want to forecast but to warn. We don’t ever want to forecast a disaster; we
want to take actions that will prevent the disaster from happening.
Newspaper accounts of central bank actions, such as the routine raising or
lowering of interest rates, seem to reflect the assumption that the exact amount
and timing of these actions are of central importance, rather than the words and
stories that accompany them. Irving Kristol, writing in 1977, expresses the
typical economist’s view succinctly, dismissing public opinion polls purporting
to measure business confidence:
It is all supremely silly. Business confidence—as represented by the
willingness to invest in new plant and equipment—is not a psychological
phenomenon but an economic one. It is what Mr. Carter and what Mr. Burns
do that counts, not what they say. John Maynard Keynes may have believed
—and some of his disciples obviously still believe—that the propensity to
invest is governed by the high or low “animal spirits” that prevail among
businessmen. But then, Keynesian economists have always had a poor
opinion of the intelligence of businessmen, whom they represent as
temperamental children, to be paternalistically “managed.” … What governs
business confidence are the prospects for profitable investment. That and
nothing else—not what the president says, not what executives say, not what

anyone else says.10
Kristol does not identify the economic forces that operate independently of
stories to produce economic crises. He does, however, hint at the politicization
of economics when he argues that economists insult businessmen’s intelligence
when they try to describe less-than-optimizing business behavior. Many
economists have learned that it pays to flatter businesspeople, whose support is
useful to economists’ careers. Describing the economy as driven only by abstract
economic forces suggests that the economy operates in a moral vacuum, that
there is no criticism of their leadership.