Can Policy and Narratives Go Hand In Hand?

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By: Ashu Arora

Edited By: Joseph Schneider

Economists, both experts and practitioners, participate actively in the policy landscape. There is a fair amount of interaction between economic research and public policy decision making and this interaction takes place through three modes: 1)when economists participate directly in decision-making as a central bank governor, minister, or a  member of a regulatory body, 2) when economists contribute to a group working directly towards the policy formulation, and 3) when they engage themselves in academic research on policy related themes. 

The major criticism about the role of economists in policymaking comes from the fact that contemporary economists of great individual distinction differ sharply on many critical issues of policy. As a result, the choice of different simplifications leads to quite different conclusions, leaving policymakers indecisive about the choice. 

Some scholars have tried to address the issues pertaining to the limited ability of economics curriculum to address some key issues of this century like financial instability, work ethics, etc. In one of these attempts, in the essay, Econ as a Tribe, Alex Leijonhufvud describes that “Econ” is not studied systematically and the tribe requires research to get more information on its social structure and ways of life. This sounds truer in times when advanced tools, theoretical as well as empirical, have led us to analyze economic events using real-time data to generate a predictable outcome. Despite that, economists have often failed to understand the complex nature of the economy and, hence, failed to predict even the most comprehensible events.

This became more evident after the 2008 financial market crash in the US when only a meager number of economists were able to predict the crash. Moreover, it was later argued that academic economists were too disconnected from the real world to see the crisis forming.

With the evolution of economics as a discipline, various approaches have been applied to understand the complex nature of Homo Economicus precisely. For example, in the past few years, behavioral economics, a combination of psychology and economics that investigates what happens in markets in which some of the agents display human limitations and complications, has gained popularity. The field contributed to bridging the gap between the economic and psychological aspects of decision-making. 

Another such approach, proposed by a Nobel Laureate in Economics, Robert Shiller, is “Narrative Economics,” which pertains to the study of the spread and dynamics of popular narratives,—particularly those of human interest and emotion —and how these change through time, to understand economic fluctuations. The human mind is believed to naturally seek a lasting comprehension of events by weaving them into narratives within the context of social interactions. The major argument surrounding this phenomenon is whether policy formulation and narratives can go hand-in-hand.

Narratives are believed to play an important role in formulating public policy and crafting, manipulating, and influencing narratives that shape public policy.  It can be argued that the way narratives are perceived and incorporated is important to understand the rationale and efficacy behind the policy. But, even if we account for this, narrative-driven policy does not always yield positive results.

Sri Lanka recently suffered a huge economic crisis and it was observed that 9 out of 10 people were skipping meals. A ban on the import of chemical fertilizer was among other factors, considered one of the major reasons behind the crisis. One of the justifications for the ban was the narrative that chemical fertilizers and pesticides had adverse health and environmental impacts and went against the country’s heritage of sustainable food systems. The ban resulted in a huge decline in agricultural output and an economic downturn. In the United States, Donald Trump won the 2016 US presidential election on the premise that he would bring back the jobs “stolen” by the immigrants. Contrary to this narrative, research showed that immigrants filled the jobs not wanted by Americans and contributed to positive economic growth and innovation.

In both these examples, public narratives impacted policymakers’ course of action, but the decisions evidently failed to yield the promised outcome.

A lot depends on the understanding of policymakers and on how well they can establish the connection between the past events (i.e. the “learnings”) and link it with the present (i.e. the “outcome”). Even if policymakers are well aware of the narratives popular with the masses and they are taking them into consideration while making a policy, how far should they rely on these narratives while designing the policy? Narratives that are studied in detail and identified with precision can be used to explain some past events and provide effective insights while looking at current policy measures. However, using the same narratives to design a long-term policy does not seem to be a wise approach. Some scholars argue that popularizing purpose-driven narratives can swiftly shift economic policies from developmental goals to overhauled political agendas.

The impact of purposive narratives is quite evident when we see the concentration of wealth. A few wealthy and resourceful people can swing the narrative based on challenges of low literacy, poverty, limited access to education, lack of critical thinking, and the influence of religious and caste factors within the population.. Such narratives subsequently influence people’s decisions (often their political decisions), which enhances the individual’s probability of acquiring more wealth, leading to a perpetual concentration of wealth and power in a few hands.

Therefore, the question remains whether narratives and policy can work in tandem when the impact of a narrative could entirely change the course of events. If so, how will we determine which narrative adds economic value and which one is an economic bad? Once the premise is set that narratives are an important part of policy formulation, this change could lead to a fragile situation that stakeholders could use to put forward their agenda.

It could lead to economic decisions motivated by Keynes’s animal spirit, but only to result in an inhumane outcome.

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