What is the role of storytelling in economics?

Vignettes scattered through Adam Smith’s writing illuminate his arguments. Such thought experiments continue to play a key role in economic analysis today.

Economists are great storytellers. Their tales might be anecdotes of economic events that they have observed and which seem significant. More often, they are small, thoughtfully imagined stories about how the economic world works. Economists use these narratives to reason about why things happen in the way that they do – and perhaps what might happen next.

Where did this style of doing economic science come from? Well, maybe from Adam Smith, who is often seen as the father of the discipline.

When economists think back to his book The Wealth of Nations, they typically remember his narrative of the pin factory, which appears as the first step in his argument. He tells us how by dividing the process of pin-making into a set of 18 individual tasks (drawing out the wire, straightening it, cutting it, creating and fixing the head, and so on) – with each worker specialising and becoming highly efficient in one task – the workshop could produce thousands of pins a day. This contrasts with the few that would be made if each worker made whole pins.

The reasoning and the moral: the division of labour leads to huge productivity gains through specialisation of tasks. Economists often recall another of Smith’s stories, one of innovation: a little boy who figured out that if he tied a piece of string onto a steam engine at a particular point, it would automate his task, freeing him to play with his friends.

They may even recall his vignette of an individual who sought to exchange a small amount of salt for meat, but finds that all that is available in the market is a whole oxen. This creates a small story explaining how money must have emerged to solve such difficulties of exchange.

These stories occur in the first four chapters of his monumental work, which laid out an account of the whole economic system, and how and why it came to develop the features it has. Even though economists no longer build their accounts on labour being the source of value and the driver of wealth creation, Smith’s stories have remained memorable. Why is this so?

Perhaps the answer is that modern economists share his dependence on small stories – not as descriptions of things they have seen nor as illustrations of their ideas, but as something more important, namely as tools for reasoning through their ideas.

Smith’s stories sometimes captured an essential point in a nutshell format – as in the example of the little boy’s innovation. Sometimes the stories were puzzle-framers, designed to explore a difficult question – such as why and how money developed to solve the salt/oxen exchange problem. And sometimes they were illuminators, clarifying difficult questions and explaining complicated answers – not least why the division of labour opens up such productive powers.

Certainly, Smith’s telling of small stories resonates with the way that modern economists use such accounts: as nutshells, puzzle-framers and illuminators. These are not descriptions of what happens but imaginative thought experiments to explore hidden economic ways and to reason about economic activities and outcomes. Small stories are an everyday practice for modern economists, just as they were for Smith.