It has also been suggested that our species be called Homo musicus, man the musician, because composed music is found in all human cultures, but in no nonhuman species.9 Linguist Ray Jackendoff sees many parallels between mental processing of narrative and of music.10 In his book Music, Language, and the Brain, Aniruddh Patel concludes there is a “narrative tendency” in music.11 Purely instrumental music does exist, but when it is successful in the marketplace, it typically merges into program music or symphonic poems whose titles or movements suggested a story that stimulates the listener’s imagination. According to musicologist Anthony Newcomb, the classical symphony is in effect a “composed novel” that at least vaguely, emotionally, suggests a story.12
Conspiracy Theories in Narrative
Popular narratives often have an underlying “us versus them” theme, a Manichaean tone that reveals the evil or absurdity of certain characters in the story. Jokes are quite often at somebody else’s expense—members of some other group. In extreme cases, they may focus on events as evidence of an imagined conspiracy. According to historian Richard Hofstadter, who offers many examples of unfounded conspiracy theories in US history, the narratives tend to show “almost touching concern with factuality,”13 despite often being almost absurd. Of course, it is rational for people to be alert to conspiracies, because history is filled with real conspiracies. But the human mind seems to have a built-in interest in conspiracies, a tendency to form a personal identity and a loyalty to friends based on the desire to protect oneself from the perceived plots of others. This disposition appears to be related to human patterns of reciprocity and of vengeance against presumed enemies, two tendencies that have been found relevant to economic behavior in terms of willingness to give in bargaining or eagerness to punish unfair behavior, even if doing so means economic loss.14
Story and Narrative
The words narrative and story are often used interchangeably. But according to the Merriam-Webster online dictionary, a narrative is “a way of presenting or understanding a situation or series of events that reflects and promotes a particular point of view or set of values.”15 So a narrative is a particular form of a story, or of stories, suggesting the important elements and their significance to the receiver. Narratives generally take the form of some recounting of events, whether actual or fictional, though often the specific events described are little more than bits of color brightening a concept and making it more contagious.
The human tendency to form simple narratives around even the most complex chains of events infects even the most analytical minds. Garry Kasparov, international chess grandmaster, commented from his own experience:
The biggest problem was that even the players would fall into the trap of seeing each game of chess as a story, a coherent narrative with a beginning and a middle and a finish, with a few twists and turns along the way. And, of course, a moral at the end of the story.16
Historian Hayden White has emphasized the distinction between a historical narrative and a historical chronicle, which merely lists sequences of events:
The demand for closure in the historical story is a demand, I suggest, for moral meaning, a demand that sequences of real events be assessed as to their significance as elements of a moral drama.17
Economists have tended to write theories as if a benevolent dictator can implement a specific plan to achieve the greatest social welfare. But we have no such planner. We do have people who can be selfish, altruistic, or both. These people can be influenced by stories.
Of Scripts and Rolling Suitcases
According to psychologists Roger C. Schank and Robert P. Abelson, narratives may be seen as nothing more than scripts.18 These scripts are also called social norms, and they partially govern our activities, including our economic actions. For example, the “prudent person rule” in finance is one social norm with economic impact. Fiduciaries and experts do not have the right to act on their own judgment. Instead, they must instead mimic a “prudent person,” which in effect means following a script.19
When in doubt about how to behave in an ambiguous situation, people may think back to narratives and adopt a role they have heard of, as if they are acting in a play they have seen before. We can debate whether such behavior is rational. In one sense it is rational to copy the behavior of apparently successful people, even if one does not see any logic in the behavior. Those being copied might have mysterious or unobserved reasons for such behavior, and their success suggests they have at least stumbled onto an advantageous behavior. But traditional economic theory does not model this kind of rationality. It sees the following of others’ behavior as more reflexive, not as a thoughtful application of the principle “When in doubt, imitate.” This reflexivity does not generally follow the typical economic assumption that people attempt to maximize their utility based on all available information. On the contrary, following scripts set by others often looks like quite stupid behavior.
People often fail to notice ideas if those ideas are not part of a script or are not packaged well enough. In my 2003 book The New Financial Order, I argued that some obvious financial inventions have not been adopted anywhere, and I asked: Why? As an analogy, I gave the example of wheeled suitcases. These did not become popular until the 1990s, when a Northwest Airlines pilot, Robert Plath, invented his Rollaboard with both wheels and a rigid handle that can collapse into the suitcase. An earlier version of the wheeled suitcase by Bernard Sadow in 1972 had achieved only limited acceptance. The traveler pulled it along by a leather strap, and it worked moderately well, though not perfectly because it tended to flop over sideways. Still, it was a big improvement over nonwheeled suitcases. Sadow had great difficulty getting his wheeled suitcase accepted in the market. Nobody was interested, but why? The idea was good, and today almost every traveler owns Rollaboards or their descendants. Most people wouldn’t even think about buying a suitcase without wheels.
Years after The New Financial Order was published, I received an email from a former patent examiner who told me of a wheeled trunk patent in 1887, and it looks like much the same idea.20 But I could not find it advertised in newspapers of that era. I later found a 1951 article by John Allan May, who recounted his efforts to manufacture and sell a wheeled suitcase starting in 1932. May wrote:
And they laughed. I was very serious about it. But they laughed, the whole lot of them.
When I spoke to any group about the further application of the theory of wheels they would express themselves as vastly entertained in a kind of soporific way.
(Why not make full use of the wheel? Why haven’t we fitted people with wheels?) …
I calculate I have outlined the wheeled suitcase idea to 125 groups of people and possibly 1,500 individuals. My wife tired of hearing about it back in 1937. The only man who ever took me seriously was an inventor who lived for a time a couple of houses away. The trouble was, nobody took him seriously.21
I have never understood why the wheeled-suitcase idea wasn’t absolutely contagious. My best guess is that, with Plath’s invention, glamour overcame the sense that wheels on a suitcase looked ridiculous. Its 1991 newspaper ads attached the Rollaboard narrative to airlines, which seemed much more glamorous in the 1990s than they do today:
It’s pilot-designed and approved for carry-on aboard most airlines. With its built-in wheels and retractable handle you can roll it through the airport, aboard the plane and down the aisle.22
The epidemic was fueled when flight crews adopted the Rollaboards, and passengers saw these glamorous-looking people walking through airports, pulling their Rollaboards effortlessly behind them. By 1993, the ads for Rollaboards took advantage of this publicity, citing them as the “first choice of aircrews worldwide.” Maybe that is all it took to make a good idea, over a hundred years old, suddenly contagious.
Experimental Evidence on Virality
Experimental evidence shows that the success of individual creative works depends on how people assess the reactions of others who are
observing the work. In one experiment,23 sociologist Matthew J. Salganik and his colleagues set up an “artificial music market” online. The market included an array of songs that customers could listen to, rate, and, if they chose, download. Unknown bands performed all the songs, and none of the listeners had ever heard any of the songs before taking part in the experiment.
This artificial market simulated real online markets in that subjects never communicated with one another except that they could observe the popularity of songs. This popularity ranking was the only “spark.” The subjects were randomly assigned to two conditions: independent and shared. Those in the independent condition had to choose songs entirely independently, never seeing others’ choices. Those in the shared condition were divided into eight worlds and saw others’ downloads in their own world only. In the extreme shared condition, the computer screen always showed the songs in rank order in terms of popularity measured by downloads. The first subject-customer to buy in each shared-condition world saw no information about others’ choices, the second customer saw the first customer’s first choice, the third customer saw the first two customers’ choices, and so on.
The researchers found that each of the eight worlds developed its own set of hits, only imperfectly correlated across worlds, and that the inequality of success across worlds was uniformly higher than in the independent world where customers never saw information about others’ choices. It seems logical to conclude that something about the random initial choices in the shared worlds got amplified as time went on. In the real world, the effect is likely even stronger because real-world marketers attempt to play up the audience size as much as possible. This research may be taken as experimental confirmation that random small beginnings can lead to big epidemics.
The lesson is that history, including economic history, is not the logically ordered sequence of events that is presented by subsequent narratives that try to make sense of it or try to achieve public consensus. Major things happen because of seemingly irrelevant mutations in narratives that have slightly higher contagion rates, slightly lower forgetting rates, or first-mover effects that give one set of competing narratives a head start. These random events can feed back into bigger and more pervasive narrative constellations, as we will see in the next chapter, which examines the narrative constellations associated with the famous (or infamous) Laffer curve.
Chapter 5
The Laffer Curve and Rubik’s Cube Go Viral
One of the toughest challenges in the study of narratives is predicting the all-important contagion rates and recovery rates. Despite all the work by epidemiologists and other scholars, we can’t precisely observe the mental and social processes that create contagion, and so we have trouble understanding how they play themselves out.1
To take an example from popular culture, predicting the success of motion pictures before their release is widely known to be all but impossible.2 Jack Valenti, former president of the Motion Picture Association of America, said:
With all the experience, with all the creative instincts of the wisest people in our business, no one, absolutely no one can tell you what a movie is going to do in the marketplace.… Not until the film opens in a darkened theater and sparks fly up between the screen and the audience can you say this film is right.3
Screenwriter William Goldman had a similar thought, in the opening lines of his book:
Nobody knows anything. Not one person in the entire motion picture field knows for a certainty what’s going to work. Every time out it’s a guess and, if you’re lucky, an educated one.4
In fact, many films and songs by one-hit wonders5 attest to the difficulty of going viral. The same person who’s had a hit often can’t do it again. Also, hits from past years never seem to become real hits again, at least not without significant modification.
Economics has its own one-hit wonders, including the now-infamous Laffer curve. Examining how this economic narrative went viral provides further insight into how economic narratives lead to real-world results.
The Laffer Curve and the Infamous Napkin
The Laffer curve is a diagram famously used by economist Art Laffer at a dinner in 1974 to justify the government cutting taxes without cutting expenditures, which would please many voters, if the justification were valid. The narrative can be spotted by searching for the words “Laffer curve” (see Figure 5.1). There are two epidemic-like curves (not to be confused with the Laffer curve itself) in succession, the first rising until the early 1980s, the second rising after 2000, when it became involved with another narrative justifying government deficits, associated with the words “modern monetary theory.”
The Laffer curve looks like a simple diagram from an introductory economics textbook, with one important difference: it is very famous among the general public. The curve, which takes an inverted U-shape, relates national income tax revenue to the rate at which income is taxed, taking account of the fact that higher tax rates make people work less, thus decreasing national income. The concept sounds like something that most people would find dull and boring. But, somehow, the Laffer curve went viral (Figure 5.1).
The Laffer curve described in the narratives that are tallied in the figure owes much of its contagion to the fact that it was used to justify major tax cuts for people with higher incomes. The Laffer curve’s contagion related to fundamental political changes associated with Ronald Reagan, who was elected US president in 1980, and with Margaret Thatcher, who became prime minister in the United Kingdom a year earlier, in 1979. Both were conservatives whose campaigns promised to cut taxes. However, the Laffer curve narrative may not have played a role in France’s election of a socialist president, François Mitterrand, around the same time. An analysis of digitized French newspapers shows that “la courbe de Laffer” went viral in France too, but not as much it did in the United States and the United Kingdom.
FIGURE 5.1. Frequency of Appearance of the Laffer Curve
The economic narrative of Arthur Laffer’s dinner napkin diagram about the effects of taxes on the economy shows a sharp epidemic around 1980 and a secondary epidemic after 2000. Sources: Author’s calculations using data from ProQuest News & Newspapers 1950–2019, Books (Google Ngrams) 1950–2008, no smoothing.
The Laffer curve narrative has a striking punch line that comes as a surprise but usually does not provoke any laughter. The narrative goes like this: What is the relationship between the rate at which income is taxed and the amount of tax revenue collected by the government? Well, it is very clear that if the tax rate is zero, zero tax revenue will be collected. At the other extreme, if the tax rate is 100%, then all income is confiscated by taxes. At a 100% tax rate, no one will work, and again the tax revenue is zero. For tax rates between 0% and 100%, some positive amount of tax revenue will be collected. When you connect the points, you have the Laffer curve. And here is the punch line: because the curve has the shape of an inverted U, there are always two tax rates that will collect a given amount of tax revenue. That conclusion is a surprise, for hardly anyone talks of a pair of tax rates for a given revenue. Obviously, to fund the government, it is better to apply the lower of the two tax rates, not the higher.
The notion that taxes might reduce the incentive to earn income and create jobs was hardly new. Adam Smith expressed the idea in the eighteenth century.6 Andrew Mellon, US treasury secretary from 1921 to 1932, was famous for his “trickle-down” economics, and, along with US president Calvin Coolidge (1923–29), successfully argued for reduction of income taxes that had remained high for a while after World War I. But then the Mellon name began to fade (outside of Carnegie-Mellon University), and the narrative lost its momentum.
The story of the Laffer curve did not go viral in 1974, the reputed year that Laffer first introduced it. Its contagion is explained by an anecdote that was published in Jude Wanniski’s 1978 book The Way the World Works. An editorial writer for the Wall Street Journal, Wanniski wrote a colorful story about Laffer sharing a steak dinner
at the Two Continents restaurant in Washington, DC, in 1974 with Wanniski and two top White House powers, Dick Cheney7 and Donald Rumsfeld.8 As the story goes, Laffer drew his curve on a napkin at the restaurant table. Years later, after Wanniski’s death, his wife found a napkin with the Laffer curve among her late husband’s papers. The National Museum of American History now owns the napkin.9 Museum curator Peter Liebhold writes of this napkin on the museum’s website:
Every museum curator searches for that incredible iconic object, a fabulous artifact that is both physically interesting and represents a great moment in American history. Sadly, such artifacts rarely materialize, and some of the best stories turn out to be apocryphal. However, sometimes you strike gold. It was my luck to beat the odds and collect an incredible story about American business history, a story of political change, economic revolution, and social impact—it was the real deal.10
The trouble is, Laffer himself disowned the napkin story. He wrote:
My only question on Wanniski’s version of the story concerns the fact that the restaurant used cloth napkins and my mother had raised me not to desecrate nice things. Ah well, that’s my story and I’m sticking to it.11
Laffer was being honest about his recollections, but his honesty could not stop a story that was too good to be stopped.
Narrative Economics Page 6