Speculative fiction structures economic theory and capitalism – we need new narratives to push against capitalist ideology

This chapter demonstrates how economics can learn lessons and draw useful analogies from literature and literary theory. These lessons apply at two levels: they help illuminate the everyday behavior and belief systems of economic agents, and they also have implications for the nature of economics as an academic discipline. We argue that, to understand behavior and the formation of expectations in modern economies, it is necessary to examine the role of imagined states of the world in helping people construct and navigate the uncertain future. Modern capitalism is a quintessentially creative and imaginative system: it is driven as much by dreams, emotions, and dystopias as by calculation; it is structured by language and narratives; and it has novelty and radical uncertainty at its heart. This has implications at a meta level for the nature of economics: economists need to engage in metaphorical thinking – the imaginative transfer of concepts from one domain to another – to shine new light on the dynamism and innovation that are central to economic activity but poorly explained by current economic models. They must take seriously the role of imagined futures and other forms of fiction in guiding the expectations and behavior of economic actors. Indeed, we argue for a new form of “narrative economics” and the use of analytical imagination to help “read” and “interpret” the stories, imagined futures, social frames, and calculative practices that structure economic decision-making. Suggesting a central role for fiction and imagination jars with the conception that most economists have of their discipline as the most precise and empirically grounded of the social sciences: they focus on using mathematical models to analyze and predict the market behavior of economic agents. These models are frequently sophisticated and incorporate vast data sets of relevant factors. But at their core is a simple assumption that economic actors rationally optimize their utility within given constraints in the light of “rational expectations” (or informed predictions of the future) with the result that economic outcomes tend to a predictable equilibrium. Since markets are fiercely competitive, economists assume that anyone behaving irrationally would tend to lose out to those who internalize the correct model of how the economy works and have a firm grasp of objective probability functions. From their perspective, it would be retrograde to assume that market participants in practice imagine the future and attempt to convince others of their fictions. Why would it make sense to replace (or complement) the dominant “rational expectations” hypothesis with one of “fictional expectations?”  Our theory of fictional expectations is founded on two pillars: firstly, empirical observation of actual economic decision-making; and secondly, epistemological theory about the problems of knowledge facing economic actors, especially in relation to the future. There is now a growing body of empirical studies demonstrating the large role played by narratives in structuring behavior and guiding expectations in the economy. Robert Boyer has detailed how successive phases of recent capitalist history characterized by increasing levels of uncertainty have been structured around a series of beguiling “grand narratives” (or overarching stories) – such as “Japan number one, the new economy, and the omniscience of financial markets” – each of which has served for a time to coordinate investment and increase confidence. David Tuckett has likewise shown that stock-market investors rely on investment stories to give them the necessary conviction to act. At a policy level, Douglas Holmes has demonstrated how far central banks rely on rhetoric and communication to achieve the goals of policy: a central bank’s public statements seek to persuade market participants to internalize policy goals as their own expectations. So, for example, when Mario Draghi said in  that the European Central Bank would do “whatever it takes” to rescue the euro, these three words did more than anything else to calm market expectations and solve the euro crisis. At the level of consumption, we are frequently influenced by imaginaries of future pleasure that we project onto the next generation of new goods, under the influence of a constant stream of marketing images and narratives.

To understand why narratives and imagined futures seem to have such a significant effect in structuring expectations and behavior, we need to understand the problems that economic actors face in knowing enough to make the sort of rational calculations that economic models assume are possible. In all walks of life, human beings face barriers to knowledge and struggle to make sense of multifaceted reality. But economic actors face an additional problem: a large part of the economic activity typical of modern capitalism is geared to the future. People save for a retirement that may never happen; they invest in new products or processes that they expect will deliver useful service in the future; or they buy assets in the hope they will rise in value. But, crucially, the future envisaged is not – as is commonly assumed by economists – a straightforward statistical shadow of the past: it is neither predictable according to well-understood laws of motion like the future of planetary orbits; nor, for the most part, is it predictable in objective probability terms (like the incidence of road deaths) on the basis of past data and observed factors. To use Frank Knight’s terminology, the future is often a matter of radical uncertainty rather than calculable risk.

There are several reasons for this: first, global markets and financial networks have many of the classic properties of complex adaptive systems – with non-linear reactions and threshold effects – so that small changes in initial conditions can snowball into radically novel outcomes. Second, market capitalism is frequently subject to counter-movements of social and political protest and the unpredictable policy changes these imply. Most importantly of all, the economic future is to a significant extent the contingent creation of a dynamic series of collective and individual attempts to reimagine and refashion the economy. In other words, the economic future is not “out there” waiting to be discovered; rather, as James Buchanan and Viktor Vanberg put it, it is unknowable in advance because it has “yet to be created” by how we and others imagine, choose, and will it to be.