John Maynard Keynes: Narrative Economist
Kristol’s dismissal of opinion polls notwithstanding, some of the most famous
economic forecasts in world history appear to be based substantially on
observations of narratives and worries about their human consequences. In his
1919 book Economic Consequences of the Peace, Cambridge economist John
Maynard Keynes predicted that Germany would become deeply embittered by
the heavy reparations imposed by the Versailles treaty ending World War I.
Keynes was not the only person to make such a prediction at the end of the war;
for example, the pacifist Jane Addams led a campaign for compassion for the
defeated Germans.11 But Keynes tied his argument to evidence about economic
reality. Germany was indeed unable to pay the reparations, and he was correct
about the dangers of forcing Germany to try. Keynes predicted how Germans
would likely interpret the reparations and the associated clause in the treaty
asserting that Germany was guilty of war crimes. Keynes’s insight exemplifies
narrative economics because it focuses on how people would interpret the story
of the Versailles treaty given their economic conditions. It was also a forecast
because he warned, amidst a “cheap melodrama” of foreign policy in 1919,
about a war to come:
If we aim deliberately at the impoverishment of Central Europe, vengeance, I
dare predict, will not limp. Nothing can then delay for very long that final
civil war between the forces of reaction and the despairing convulsions of
revolution, before which the horrors of the late German war will fade into
nothing, and which will destroy, whoever is victor, the civilization and the
progress of our generation.12
Keynes was right: World War II began amidst lingering anger twenty years
later and cost sixty-two million lives. His warning was grounded in economics
and tied to a sense of economic proportion. But Keynes was not talking about
pure economics as we understand it today. His words “vengeance” and
“despairing convulsions of revolution” suggest narratives filled with moral
underpinnings, reaching to the deeper meaning of our activities.

From Irrational Exuberance to Narrative Economics
This book is the capstone of a train of thought that I have been developing over
much of my life. It draws on work that I and my colleagues, notably George
Akerlof, have done over decades,13 culminating in my presidential address,
“Narrative Economics,” before the American Economic Association in 2017 and
my Marshall Lectures at Cambridge University in 2018. This book makes a
broad attempt at synthesizing the ideas in all these works, linking these ideas to
epidemiology (the branch of science concerned with the spread of diseases) and
putting forth the notion that thought viruses are responsible for many of the
changes we observe in economic activities. The “story” of our times, and of our
personal lives, is constantly changing, thereby changing how we behave.
The insights into narrative economics presented in this book dovetail with
recent advances in information technology and social media because these are
the conduits through which stories travel the globe and go viral in milliseconds,
and which have had profound effects on economic behavior. However, this book
also examines a long span of history in which communications were slower,
when stories were repeated via telephone and telegraph and via newspapers
delivered by truck or train.
This book is divided into four parts. Part I introduces basic concepts, drawing
from research in fields as diverse as medicine and history, and offering two
examples of narratives that many readers will recognize: (1) the Bitcoin
narrative, whose epidemic began in 2009, and (2) the Laffer curve narrative,
which went viral mostly in the 1970s and 1980s. Part II provides a list of
propositions to help guide our thinking about economic narratives and to help
prevent errors in such thinking. For example, many people do not realize that
perennial narratives may undergo a process of mutation that renews once-strong
stories and makes them strong again. Part III examines nine perennial narratives
that have proved their ability to influence important economic decisions, such as
narratives about others’ confidence or about frugality or job insecurity. Part IV
looks to the future, with some thoughts about where narratives are taking us at
this point in history and what kind of future research could improve our
understanding of them. Following part IV is an appendix that relates the analysis
of narratives to the medical theory of disease epidemics.