Economic narrative and idealism

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By FERNANDO NOGUEIRA DA COSTA*

Our expectation regarding the economy is built by the human mind, but also by a reality independent of it.

Robert Shiller, laureate of the Nobel Prize in Economic Science in 2013, is a researcher and popularizer of behavioral economics. In January 2017, shortly after the victory of the right-wing populist narrative in the election for president of the United States, he published a text that had a lot of repercussions among those interested in his line of research.

Entitled narrative economy, assumes that the human brain is highly attuned to narratives, whether factual or not, to justify ongoing actions, even basic economic actions like spending and investing. Stories motivate and connect activities to values ​​and feelings of need. They “viralize” and spread on social networks around the world. They have an economic impact.

Robert Shiller understands Narrative Economics as the study of the dynamic dissemination of popular narratives, particularly those of human interest and emotion. It shows how they change over time and provides insight into economic fluctuations.

A recession, for example, is a time when many people decide to spend less. Realizing this attitude, entrepreneurs postpone opening a new business or expanding an existing business by hiring workers. Many are impressed and express support for the fiscal austerity narrative.

In a feedback process, they make these decisions in response to the recession itself. However, to understand why a recession started, this theory of feedback or economic multiplier is inconsistent.

Disease epidemic theory provides a realistic framework for understanding infectious disease dynamics. Its simplest model divides the population into three compartments: susceptible, infectious, and recovered.

Susceptible people are people who have not yet caught the disease and are therefore vulnerable. Infected people have the disease and are actively spreading it. Recovered had the disease and overcame it, became immune and are no longer able to get the disease again or spread it. In this SIR model, their sum reaches the total population.

The key idea of ​​this mathematical theory of disease epidemics was, in a completely mixed population, the rate of increase of infectious agents in a disease epidemic equals a constant contagion rate times the product of the number of susceptibles. If the number of infected had a constant recovery rate, every time a susceptible encountered an infectious, there would be a chance of infection.

The number of such encounters per unit of time depends on the number of susceptible-infectious pairs in the population. Recovery from illness is assumed with a form of exponential decay rather than a fixed timeline for illness.

Robert Shiller uses the same SIR model to describe the word-of-mouth transmission of an idea. In this case, the contagion rate is the fraction of the time that an infectious, interested and receptive person encounters a story (or “conspiracy theory”) effectively convinces the susceptible enough of the narrative to spread it further.

Many encounters may be needed before a given person becomes infected. The removal rate can be described as the rate of forgetting, of simple memory decay, but there is also forgetting due to ostracism.

This removal also occurs as the repertoire of other more current stories evolves away from that past. There are signs of decline, for the collective memory, because that narrative seems less connected or less adequate.

Faced with the present, it is overcome by new theories or prejudices. For example, in Brazilian politics, after all the armaments, the coup d'état and the destruction of public property, Bolsonarism “is gone”. Stupidity has reached its peak and will enter into a fatal decline.

In economics, the Keynesian multiplier model with its “multiple rounds of spending” is a kind of epidemic model with the contagion rate given by the marginal propensity to consume (PMC) and the removal rate zero. It is a model of feedback theoretically attractive.

Any stimulus to economic activity would increase someone's income. That individual would then spend that income, according to his marginal propensity to consume, generating income for another to also spend by his marginal propensity to consume, and so on. After all, the national income would gradually increase until it contaminated the result of the national income.

In practice, according to Robert Shiller, the purely Keynesian form of contagion is limited. Some multiplier estimates are too low. So this kind of contagion is not as important as it first appears.

The “permanent income hypothesis” suggests Keynesian contagion is very low if people do not believe the narrative. If the income surge is not permanent, the marginal propensity to consume will be very low and the multiplier little different from one.

In an asset bubble, contagion spreads through public attention to rapid price increases. They increase the rate of contagion of popular narratives justifying these increases, raising demand for assets and even more prices.

The impact of the speculative “epidemic” on the asset's return would depend on its speed in relation to the discount rate to bring the expected return to present value. If the velocity is too low, there will be very little impact on short-term returns. So changes in asset prices would find little short-term serial correlation over time. The self-fulfilling prophecy would not lead to increased spending.

When I read this narrative by Robert Shiller, I remembered the lessons of Father Henrique de Lima Vaz, creator of the AP (Popular Action) and my Hegel teacher. I followed your course on the Encyclopedia of Philosophical Sciences, at FAFICH-UFMG, as a “special student” for almost half a century.

Narrative economics slides into idealist philosophy. Ontology is the philosophical study of the nature of reality, existing entities and the relationships between them, seeking to understand the fundamental categories of being and the laws of motion of existence.

Ontological idealism posits fundamental reality to be mental or spiritual in nature. Mind, consciousness or spirit are the primary entities. The material world would be derived from or dependent on this mental reality. Idealism gives primacy to idea, thought or mind over matter. Ideas and concepts are fundamental in understanding and interpreting reality. The mind plays an active role in constructing and perceiving the world.

According to epistemological idealism, knowledge is constructed and dependent on mental activity. It is not a direct and objective representation of reality, but an interpretive construction, based on mental structures and processes. Idealism rejects the idea of ​​matter being fundamental reality or the physical world being independent of mind. For him, matter is a construction of the mind or a manifestation of consciousness.

Hence, he emphasizes the importance of subjectivity and individual experience in understanding reality. Interpretation and perception are influenced by mental states, beliefs, values ​​and individual experiences. Idealism values ​​the freedom and autonomy of the individual. It emphasizes the ability of the human mind to create, transform and shape reality according to its purposes and ideals.

As for the nature of reality, at the time of the course (1974), I was a supporter of “historical materialism”. He believed that the fundamental basis for understanding society and history was the analysis of the material conditions of existence, such as production relations, social classes and productive forces. It emphasized the importance of economic forces and power relations in shaping social and historical structures.

He understood consciousness and the idea as products of material and social activity. The way people think, understand and interpret the world would be influenced by the material conditions in which they live.

As I matured intellectually, I began to question the view of history solely as a result of class struggles and changes in production conditions. I didn't reach the extreme of fully rejecting materialism, but now I reflect on the narratives.

In the same semester, I studied the philosophy of Immanuel Kant. It overcomes some limitations of empiricism and rationalism with an approach called “transcendental idealism”. Our knowledge is constructed by the human mind, but it also recognizes the existence of a reality independent of it.

His “transcendental idealism” differs from Hegel's “absolute idealism”. While for him everything is a manifestation of the mind, Kant avoids the purely subjective view of reality.

*Fernando Nogueira da Costa He is a full professor at the Institute of Economics at Unicamp. Author, among other books, of Brazil of banks (EDUSP).


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