You Won’t Believe What's Driving the Economy
Economists are warming to the idea that rumors and narratives matter.
Moods can be infectious.
Photographer: George Marks/Retrofile/Getty ImagesThis article is for subscribers only.
Do humans act largely rationally, or can stories and rumors throw an entire economy off course? Lately, economists are increasingly recognizing that narratives matter.
In the early 1920s, the U.S. suffered a brutally sharp economic contraction, in which inflation turned rapidly to deflation and stock price-to-earnings ratios dropped to 50-year lows. The economists Milton Friedman and Anna Schwartz, in their book "Monetary History of the United States," blamed an inexperienced Federal Reserve, which had abruptly increased its discount rate by 1 percentage point.