Some of the most contagious narratives are new, more resistant variants of old ones. For example, the narrative that ‘technology is taking over our lives’ is just the most recent modification of the technological unemployment narrative that has been periodically scaring people since the Industrial Revolution.7 The fear has always been of chronic unemployment as machines take people’s jobs and produce too much output.
The rise of automation, artificial intelligence (AI) and machine learning have altered the narrative from muscle power being replaced by machines to the wider concern of computers substituting for the human brain. For individuals, this technology narrative creates a growing fear of irrelevance. When transmitted more widely, however, such concerns can affect the broader economy by reducing people’s confidence to consume, invest and engage in entrepreneurship.
Multiple narratives can coexist, reinforcing or undercutting one another. Investors need to assess which will become the dominant narrative driving behaviour and ultimately markets. For example, the technology story is reinforced by the secular stagnation narrative. This theorises that growth and inflation will remain low indefinitely, because developed economies are plagued by an increasing propensity to save and a declining wish to invest. The narrative is powerful because it is grounded in our experience over recent decades.
Set against this is the counternarrative that the same technology could harbinger a ‘fourth industrial revolution’. In this scenario, further technological innovation will support continued strong growth and earnings, thereby justifying higher market valuations.
Multiple narratives can coexist, reinforcing or undercutting one another
For decades, scientists have been warning that greenhouse gas emissions are warming our planet. But, as we have seen, narratives play a decisive role in motivating action, and the climate story was complex and discouraging. For one thing, the message emphasised the costs and burdens of climate policy: there would be “a trade-off between more economic output in the near term and the damage caused by global warming in the long term”.8 In addition, policies to mitigate climate change faced a free-rider problem. Because we all share the earth’s atmosphere, a reduction in global emissions by one country or bloc would benefit everyone more or less equally. In short, “every country has an incentive to let others mitigate, and thereby reap the benefits without incurring the costs”.9 This negative narrative failed to compel action.
Then a counternarrative emerged. Economist Nicholas Stern proclaimed the “transition to a zero-emissions and climate-resilient world provides the greatest economic, business, and commercial opportunity of our time.”10 This new framing – of an optimistic, green transformation story – was based on the pace of technological innovation and disruption, which has substantially reduced the cost of producing renewable energy and storing it in batteries.
Strong narratives can drive market consensus and lead to crowded trades around major themes. Stern’s more upbeat message has not only encouraged people to act on climate change and other sustainability issues, it has also catalysed an ESG (environmental, social and governance) trade in markets. This trade has become prevalent not only because the story behind it is strong – the innovations in sustainable technologies and the promise of higher returns from investing in a better future – but also because the narrative resonates with so many different groups of investors. Whilst it is clearly of benefit that so much capital should flow into tackling climate change and other sustainability challenges, such crowded trades can eventually lead to disappointing financial returns for investors.