Every day we tell each other stories; stories are like glue. They bond us through shared experiences. The story we told ourselves this year was that we had to unite in the face of a deadly virus, and everyone had to tighten their belts and reduce discretionary spending to avoid an unsustainable inflationary boom; as a significant percentage of the workforce are laid up on furlough under the Coronavirus Job Retention Scheme.
Statistics show the total number of claims to date have been steadily rising, and these are published by HMRC monthly and dated to the Sunday of the previous month. The total number of claims to date has risen to £46.4billion from a total in May of £4.5billion. The total number of PAYE schemes has reached 1.2million from an initial total of 512,000. The total number of jobs furloughed stands at 9.9million from 3.8million in May.
Akerlof and Shiller in Nobel prize-winning book ‘Animal Spirits’ explain that ‘The story-based patterns of human thinking make it difficult for us to comprehend the role of pure randomness in our lives, since purely random outcomes do not fit into stories. In Fooled by Randomness, Nassim Taleb makes this point tellingly. He illustrates it through stories of people who make serious mistakes by failing to perceive the utter meaningless of certain events…’
Some journalists in an attempt to provide ‘analysis’ of the news particularly where trying to impose explanation of why a stock has risen or fallen perhaps try too hard to see patterns where we are simply seeing herding behaviour graduate toward stocks which are perceived to be in demand. Value investing, popularised by Warren Buffet and which has a number of imitators, is another approach where fundamentals like long-term debt profile, and sales to order book ratio, are emphasised more than a company’s market capitalization measured by equity.
Akerlof and Shiller continue, ‘Politicians are one significant source of stories, especially about the economy. They spend much of their time talking to the public. … And since much of their interaction with the public concerns the economy, so also do these stories’.
For example, sometimes the stories the government tells us are incomplete, such as in a recent statistical analysis of unemployment figures by sector. The figures for partial furloughs were not given for 31 October, but those who were furloughed under the Coronavirus Job Retention Scheme were highest in the following sectors: i) Professional, scientific and technical, which stood at 66,700; ii) wholesale and retail; and repair of motor vehicles, which were recorded as 65,200; iii) accommodation and food services, at 47,500.
An econometric analysis might say these sectors are where the bottlenecks in the economy are showing excess supply where wages are insufficient to attract and retain talent; or, where the CJRS was made through a PAYE scheme, where there is insufficient demand for these professional services.