Seven basic plots and the narrative of the economy

You've heard it before, in one variation or another: there are only so many stories in the world. Sometimes it's six, sometimes twenty - sometimes just one - but the idea is always the same: there's a limited number of ways a plot can turn out.

A few years ago, Christopher Booker picked up this idea, analysed it to death and produced an excellent book called The Seven Basic Plots. He picked out seven common story structures which, he argues, include all successful stories (others are possible but he suggests that they result in unsatisfying outcomes which do not ring true for us). His proposal comes down to psychology in the end - he makes a convincing case that specific kinds of story fit with our view of how the world should be, and therefore create a satisfying structure. It all comes down to our desire - and expectation - that people should get what they deserve.

His thesis applies to works of fiction and not to real life, of course. Real life doesn't behave according to our subconscious presumptions about what the world should do. But nor do we have access to accurate knowledge about what is happening in real life. Everything we learn - and especially everything we learn about economics - is mediated through the narrative of journalists, academics, authors or other interpreters. And their stories do obey the rules of plot structure - if they didn't, we wouldn't believe them.

It's easy to find each of these plots in the narratives of economic commentators and journalists. Each of the seven structures relates to a story about the economy that we've all seen, and reveals new insight into the subconscious quest for justice that makes the story appeal.

Overcoming the Monster

Not so hard, this one. It's the activist politician's narrative and it goes like this: the monster is the recession (or excessive debt, or the banking crisis) and we will muster the weapons at our disposal, stand firm and our clear view of truth and justice will slay the beast in the end.

The story, like many others, has five parts: the call (the first signs of financial crisis), initial success (the rescue of Bear Stearns), confrontation (the Fed tries and fails to save Lehman Brothers), final ordeal (the recession and mounting deficits), and miraculous escape (at the last moment, as the TARP money is finally running out, the stimulus works and the recession is defeated).

The appeal to justice is as simple as the story: the recession is bad (caused by the sins and venality of bankers, or US subprime borrowers depending on who's telling it) and we are good, so we must prevail.

Rags to Riches

It might seem that the story of the last two years is better described as riches to rags. But within this framework the classic story of poor boy made good still appeals. Business magazines remind us that "eight out of ten successful companies were founded in a recession" or show us the smart fund manager who shorted the banks or bet against CDOs at just the right time and walked away with a billion dollars.

But there's a more fundamental story which is captivating a wider segment of the economics community. And that is the rise of China.

The archetypal rags to riches storyline has a poor orphan, basically good at heart but in a bad situation, picked on by the bigger boys or girls. Through virtue and a deserved stroke of luck they start their rise to prominence, but are still taken advantage of by the more sophisticated, and less moral, rich folks. After a climactic crisis, they finally mature - surpassing the flawed rivals who could never reach the same potential - and rise to their true inheritance. Usually at this point, the orphan's true love comes back onto the scene, there's a wedding and the happy couple - China and India anyone? - rule over the kingdom for the rest of their lives.

This time, the venality is a sin shared by all of us in the West - profligate, decadent, addicted to debt to buy from the East the honest goods that we have forgotten how to produce - and the virtue is the poverty, redeemed by industriousness, of the developing world. The starting point can plausibly be anywhere in history - let's say the moment when India's cotton industry lost out to the UK's in the 18th century, or when China's silkworms were stolen by Europeans in the 15th - the crisis was the Asian currency run of 1997-98 and the lesson wisely learned was to build up trillion-dollar reserves. On this reading, it's perhaps the most literal example imaginable of rags to riches.

The Quest

The quest, it seems, is for The Solution - whatever policy, or institution, or restructuring will bring about an economic recovery.

A quest always begins with a call to a young hero, who sets out to find his destiny. This hero - let's call him Barack for the sake of argument - consults with wise men (Krugman, Summers), recruits his band of helpers (Geithner, Brown, and the reluctant but ultimately loyal Merkel), is almost led astray by temptation (protectionism, partisanship), passes between two deadly extremes (a $2 trillion stimulus and helicopter money, or no stimulus at all and letting the market sort it out), slays mythical beasts along the way (AIG, GM, Rick Santelli), and finally comes in sight of his goal. He must then pass three final tests (or in this case pass three final bills: the stimulus, the budget and...a healthcare bill? the Employee Free Choice Act? a mandate for the Federal Reserve to target nominal GDP futures?) to reach the solution.

In many Quest stories, the hero does not meet his princess at the end but is already married to her before he sets out, and remains loyal to her throughout. Ahhh. Sweet.

One note of caution: when the treasure is finally achieved, many heroes must spend the second half of the story returning to their starting point. That's the 2012 election campaign starting in a year's time, then.

Voyage and Return

A slightly different tenor to this story structure. This is the plot of Alice in Wonderland, H.G.Wells's The Time Machine, The Wizard of Oz or the Rocky Horror Picture Show.

In this story we start in the ordinary world and are suddenly called into a new and strange realm. Our initial reaction is puzzlement, and we do not know quite why we are here. After an initial fascination with the new world, we start to have some less pleasant adventures, and our focus turns desperately to home. But we are drawn deeper and deeper into a world we can neither understand nor control before finally - often through luck not judgement - escaping to return home, no richer but hopefully little poorer, and a little wiser.

Today, this story is told two ways. One is that the recession is the otherworld, and after wandering around for a while, happening across toxic assets and experimenting with strange bailouts, we will find the key - or be released naturally - and return to our normal life.

The other, perhaps darker, version is that the boom of the last seven years was Oz, and this is normality. We've returned from a thrilling but nightmarish era of colourful, debt-fuelled consumption to an ordinary life where we spend what we earn and gradually pay off the mortgage. The preferred interpretation is really the choice of the author, and I suspect that the first version of Voyage and Return is the popular interpretation among non-economists, while the latter is the morality tale of the Austrians.

The open question with Voyage and Return is what we learn from the experience. Will we be wiser and grow to understand and manage our world in a better way; or will we revert to type, relieved and lucky to have escaped a worse punishment?


Comedy is a tough plot to summarise, because there are often so many extraneous events to distract the reader that it's hard to find a coherent thread. But Booker analyses it as follows:

Comedy consists of (a pair of) "below the line" protagonists (characters somehow in the 'shadow' of the more powerful "above the line" characters who are their social superiors) struggling against the elite, usually represented by one dominant 'dark' character. The struggles in part consist of mistaken or concealed identity; the story being resolved when the 'inferior' characters have a moment of recognition and turn the tables on the elite, taking their place at the head of the community - at which point, if it's Shakespeare, they all get married.

So who in the economic tableau represents these below-the-line figures? I'd hazard a suggestion: Nouriel Roubini and Nicholas Taleb. Scorned and neglected by the economics elite until 2007, their warnings ignored, 2008 was the moment when the tables turned. Their identity finally revealed, the ugly ducklings grow up to become black swans (wait, that's a different plot...) and the dukes and princes of the upper class - Greenspan, Wall Street and the general equilibriates - are humbled.

Who can be the dark figure against whom these heroes struggled? Hank Paulson, Bernie Madoff, Dick Fuld or the evil baron Goldman of Sachs? This is an unsatisfying storyline in the current context, perhaps because the end result is still so uncertain. And because, as Booker describes, a failure to recognise the truth can so easily turn Comedy to...


In this, most timeless of storylines, the protagonist enters into a forbidden course of action and gains immediate reward. The story accelerates as he (it is usually a he) starts to exert his new powers and enters a dream stage of self-satisfaction and success. But this success, amoral or immoral as it is, can never provide satisfaction and the hero is drawn to commit more and deeper sins. Soon he loses control of the situation and the dream turns to nightmare. Finally the darkness closes in and the protagonist, despairing, is destroyed.

Many commentators read the story of the economic crisis straight out of this book. Our indulgence in debt, consumerism, financial services, imports and deficits lit the touchpaper. For years we were able to live in luxury with the sinister powers of the devil (Greenspan? The Chinese government?) keeping inflation low and our lifestyle high. But this could not be sustained, and growth came at the expense of ever more debt, the money supply increasing through off-balance sheet financial instruments, and finally an uncontrolled rise in commodity prices pushed us over the edge (starving a billion innocent poor people into the bargain). We are now in the nightmare phase, clutching at trillion-dollar public deficits and printing hundreds of billions of pounds to let us clutch the dissolving remnants of our lifestyle. And soon will come destruction, with the insolvency of the state and a descent into chaos and war at worst, or autarky at best.

In this view, the financial system is too far gone to save, and the best we can do is learn to weave baskets and hope we haven't forgotten how to grow vegetables in our gardens.

And clearly this story has an appeal. Some people like to flagellate themselves and decry the immorality in what they have done. A larger group likes to blame others, who they see as more irresponsible than themselves. Some wish to see it as the government's fault. Whoever gets the blame, blame there must be. After all, if everything has gone so terribly wrong, surely somebody must be at fault?


Let me tell one last story - inspired partly by Paul Mason's Meltdown: The End of the Age of Greed, partly by a bit of economic data, and partly by my own instincts.

This story starts a bit like the last one. But to make it a little more personal, let's pick a young man named Stephen. Stephen is 24 years old, in the early part of his career. He's qualified as a computer programmer and gone to work in an investment bank, developing systems to help them value credit options.

He's well paid but is going to be even better paid next year, and the year after, so why not borrow a little now in advance of those well-deserved bonuses? The house he bought last year is already worth 20% more than he paid for it (of course some of that has come back in equity release already). A healthy amount of debt is part of modern life and nothing to be ashamed of.

Two years and many fun evenings later, his promotion to derivatives trader comes through as expected and he gets to play his part in extending the same debt to thousands of other Stephens. Of course he can see that some of them are not such good risks as he was, but that's not really his problem - when averaged out, surely the losses will be less than the returns on the loans.

Like any honest trader he is willing to put his money into his own products: this year's bonus and remortgage goes into a hedge fund - one of his clients, in fact - which should easily earn him a 40% return on leveraged CDO products. His new car is almost a necessary business expense - it shows his customers that he's doing well and that gives them confidence in him.

But as this perfect life reaches its peak, we start to see that there's something sour about it. The debts are starting to go bad, the capital layer of Stephen's bank looks thin and the economy is gradually catching on to the problems. The good angel - Roubini again - is warning him that this is the wrong path, while the bad angel - the rest of the financial system - urges him to up the stakes - it always worked before...

And then in autumn 2007 all hell breaks loose.

The forces of good are arrayed against towering mountains of debt and writeoffs which threaten the civilised world. The old leader - King Gordon - warns of the bloody war to be fought and the pain to be endured, as dark clouds gather overhead. Stephen, of course, is on the other side - the forces of banking which are determined at all costs to maintain their power and profits. Battle is joined.

The light armies win some early battles but soon Stephen's army has the upper hand. More debt, more assets and more free markets - they will easily roll over the resistance. The rhetoric from the banking world - we have enough capital now, value at risk is minimal - rings hollow, while the speeches of the good guys are baleful, warning of still worse pain ahead and the need for a final push.

That final push starts to make a difference, but more importantly there's something inherent in the banking philosophy which is unsustainable - it contains, in the classical sense of hubris, the seeds of its own destruction. In building up a tower of leverage of unparalleled height, the only-too-human capabilities of Stephen, and the thousands of Stephens alongside him, are overwhelmed. They can no longer see what they are carrying, and the moral hazard and escalating risk of the debt starts to bring the tower down around him.

And here is where, in Paul Mason's story and perhaps in this week's newspapers, the plot takes a twist away from the tragic. Stephen, after all, is still an intelligent person with other skills, and he can escape from under the falling marble masonry of the banking giants. The new leader of the armies of good, young prince Obama, has crested the Hill and with the sun behind him and the voices of angels singing, speaks for the first time of recovery - but a recovery built on new foundations. Stephen crosses the battlefield and, recognising and banishing the darkness inside him, joins the quest to create a new economy.

We're at this new beginning now. A revived era of technology and environmental progress, a rebalanced world economy, an approach to equality for the Chinese working class and the humbling of the proud generals of banking, is the rebirth promised by this storyline. What hints could we see at the start of the story? That edge of self-awareness, the fundamental honesty and capability in Stephen's heart, gave him enough strength to avoid the tragic downfall and return to the light, with a new future ahead instead of the violent death that's inevitable in the structure of tragedy.


Which of these stories is true? None of them of course, or all. The real world has too many protagonists, too much information and too much randomness for simple explanations of this kind.

But we seek meaning and we choose whichever of these stories conforms with our assumptions about justice and culpability. Do you think the bankers are at fault? Then the bankers must come to a deserved and sticky end. Is it consumers' fault? Then consumers will be punished with an endless recession. Was it the politicians? Then the infinite debts of the state will crush them in Sisyphean torment.

And who is the good guy here? If the financial sector was actually a force for improving the economy, it will ultimately be rewarded with a return to prominence (Mervyn King, perhaps?). If the public, or those who were prudent enough to save, were the essential source of virtue, they will inherit the kingdom of heaven (Peston). If the government's place is to coordinate and correct the selfishness of the individual, they are on their way to a permanently more substantial role in managing the economy (Krugman). And if you believe in the rational wisdom of man (Mankiw), then mankind will always be okay, while if you focus on the flaws and biases inherent in humanity (Thaler), then you will expect our potential to be kept always in check unless guided out of the swamp by science.

Our choice of story reveals us better than it reveals the economy. Economics can say little about the grand narratives of history - its successful tools are all there to adjust the small scale, the technical details, not to provide universal interpretations. There is no meaning to all this; it just is.


Donald Pretari said…
This is an excellent post. Narrative thinking, as I call it, also applies to "theories". In this crisis, we have looked for past occasions similar to this one, and have been invoking the names of figures and theories that seem to offer an explanation and hope. Hence, the focus on Keynes and the Great Depression.

These foci supply a hopeful narrative and road map for dealing with the current crisis. In fact, the main importance of these foci is in giving us a paradigm that we can test our various views against as the crisis progresses.

The main figures that I have relied on are Irving Fisher and Bagehot, with Keynes and Milton Friedman as well.

On the social and political aspects of the crisis, I have relied upon Burke and Hayek.

It's not that other opinions and theories aren't important to me, but that these figures provide the backdrop against which I see this crisis and judge other views.

As for Obama, FDR is a good example to follow, since he was actually pretty conservative, but took a pragmatic stance that served us well. We're here.

Don the libertarian Democrat
Steve said…
Reality comes at last!! so one should always think about the final outcome of an economic reform..this will help the policy to improve the system better.

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