the gold discoveries and wars that Friedman and Schwartz emphasized likely
were exogenous because they were made possible by innovations in popular
narratives, such as gold rush stories or fake news about foreign conspiracy.
We must be wary of many (but not all) economists’ supposition that the
causality always runs from economic events to narratives, and not the other way
around. There has been a lively debate about the impact of self-fulfilling
prophecies in economics. Sociologist Robert K. Merton coined the phrase self-
fulfilling prophecy in 1948, intending to apply the concept to economic
fluctuations. The term often refers to prophecies stimulated by genuinely
extraneous events, with the most popular example being sunspots (spots on the
sun, which come and go through time, and are observable through telescopes).
The economist William Stanley Jevons proposed in 1878 that world economic
fluctuations might be driven by “periodic variation in the sun’s rays, of which
the sun-spots are a mere sign.”3 If the heat coming from the sun is stronger in
some years than in others, then crops and other economic output may be stronger
in hotter years, which may lead to major economic fluctuations. There was by
1878 already astronomical evidence on solar activity, going back centuries, in
the form of counts of sunspots through time. He thought he discerned a
correlation between those sunspot counts and economic events. And the cause of
this correlation had to be the sun, for there is no conceivable theory that
causality could go the other way, from economic events on earth to spots on the
sun. His theory sounded plausible, but subsequent economic research did not
support it, and variations in solar output are too small to have any substantial
such effect. Sunspots should hardly affect the economy, but they may do so if
people mystically believe they should, as economists David Cass and Karl Shell
explained in 1983. Now, economists use the term sunspots to refer to any
extraneous noise that affects the economy because people believe it will.
Economist Roger E. A. Farmer has been a leader in the field of macroeconomic
self-fulfilling prophecies.4 To his and others’ work I add the idea that these self-
fulfilling prophecies do not come out of nowhere. Rather, they typically come
from millions of mutations in narratives, of which a few are contagious enough
in the current environment to become major epidemics. As we have seen, this
process can be observed and modeled.

Random Events, Birthdays, and Anniversaries: How Does a
Narrative Become an Economic Narrative?
Generally speaking, most people harbor vague fears and concerns stimulated by
narratives, but these fears have little or no effect on their actions. The narratives
become economic narratives when they involve stories in which others take
action and describe the actions they take, such as investing in and getting rich in
certain financial markets. Economic narratives thus tend to involve scripts,
sequences of actions that one might take for no better reason than hearing
narratives of other people doing these things.
Trying to understand major economic events by looking only at data on
changes in economic aggregates, such as gross domestic product, wage rates,
interest rates, and tax rates, runs the risk of missing the underlying motivations
for change. Doing so is like trying to understand a religious awakening by
looking at the cost of printing religious tracts. But it is easy to see why
economists often fall into this trap: abundant data exist for GDP, wage rates,
interest rates, and tax rates, but data on narratives are spotty at best. Economists
may be falling into what historian Jerry Z. Muller calls the “tyranny of metrics.”
Muller is not opposed to providing quantitative indexes of important economic
phenomena, but he does note that most people overreact to such indexes and fail
to see that they are overestimating the importance of arbitrary quantifications
that are really of limited value.5
The people who make economic decisions against a background of narratives
do not usually explain their decisions. If asked to explain, they might be at a loss
for words or try to talk like economists. How, for example, can someone explain
the ultimate reasons why he or she hesitated to spend during a recession?
Hesitation is not taking action, and might be caused just by absence of any
identifiable thought to take action, amidst a large number of other thoughts.
Contagious stories are largely creative and innovative, not simply a logical
reaction to economic events. For example, major stock market corrections take
place over many days, during which the public has plenty of time to read the
sometimes creative and sensationalistic writing of the various news media,
whose job is to attract attention. Over that time period, stock market participants
take part in countless conversations that reinterpret the news in efforts not only
to inform but also to amuse.