The study of epidemics can tell us a lot about economic narratives.
Let’s look at how the coronavirus pandemic of 2020 spread. We were made aware of 3 key indicators: contagion rate (our R-value), a recovery rate and a death rate. When the R-value is positive, it means the number of those being infected outnumbers the recovery and death rates. It means the epidemic is growing and the virus is spreading. When the epidemic is in decline, this process is the opposite: the number of those dying or recovering outnumbers the number of new cases.
The same pattern occurs with contagious economic narratives. One example of this is Bitcoin, as mentioned in a previous post. The method of delivery is via face-to-face contact and communications technologies via the media ecosystem: one particularly powerful instrument being social media.
Like a virus, at first the economic narrative of Bitcoin rose rapidly. Also like a virus, there was a contagion rate (rate of spread) and recovery/death rate (people who are losing interest or forgetting about the Bitcoin narrative). The story only dies out if the number of people who are losing interest or view the story as forgettable outnumbers the spread of the news.
With Bitcoin, this rapid increase began in around 2013, before suddenly spiking and hitting its peak in 2018. This is also mirrored in its price history. The Bitcoin story is not over just yet, and is probably due to reemerge in a differently packaged narrative (much like the second wave of an epidemic). See the image of Google search history in the United States between 2013 and 2019.
Disease epidemics and narrative epidemics follow a similar pattern of spread (exponential growth). Knowing this, governments can model economic and political responses by getting ahead of emerging economic narratives.
Narratives can also merge with other narratives
Sometimes, stories gain the most momentum when they merge with other stories that connect with it.
One example is the narrative around the terrorist group ISIS post-2014. At the same time, there were other narratives going on in the world relating to immigration: the UK’s upcoming Brexit referendum and the US presidential elections where Donald Trump would be a candidate. There is no doubt that these narratives intermixed which gave rise to even greater growth. Suddenly, leaving the EU became very important for the UK, and electing Donald Trump became a popular idea. One of Trump’s earlier policies was to stop the inflow of Muslim immigrants (Executive Order 13769) and this was no doubt fueled by the news around ISIS and the 2015 San Bernardino terrorist attack.
The key message is that narratives often occur in constellations with other narratives.
Another economic narrative was the example of the Laffer Curve. The Laffer curve is a theory created by Arthur Laffer. The diagram shows that governments can actually generate more tax revenues if they lower taxes to a tax revenue maximisation point.
When the idea was first suggested, it didn’t gain much momentum. But one particular incident at a restaurant gave the narrative the fuel it needed to go mainstream. The story goes that Arthur Laffer allegedly drew the diagram on a napkin and showed it to a number of Republican politicians (Donald Rumsfeld and Dick Cheney). For some reason, the story of this economic discovery being illustrated on a restaurant napkin made the theory seem groundbreaking.
Moving forward, the tax-cutting logic behind the Laffer curve fed into modern government policy, and the notion was that governments and government institutions were no longer efficiently run. People began to mistrust big government. Newly elected politicians such as Ronald Reagan and Margaret Thatcher jumped on the opportunity to apply Laffer’s ideas to gain popularity with voters.
In relation to the politics served up by Reagan and Thatcher, the Laffer curve made perfect sense and complemented the narrative that government intervention and taxation were negative things.
We must be careful that, when we are presented with a new economic narrative, we do not miss the constellation of other narratives that surround it, because it can lead to a biased (and hence inaccurate) viewpoint.
In the coming weeks, we will come back to explore more examples of the power of economic narratives. Stay tuned if you’d like to know more.
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