When optimism becomes a dirty word

A bugbear of mine that is increasingly turning into a mission is my aversion to and desire to fight the doom and gloom that surrounds us. I am convinced that being pessimistic and gloomy is not only bad for mental health but also bad for investment performance and the economy overall. This is why I wrote my series of articles against Cassandras and why I will keep bothering my readers from time to time with articles like the one today. And I am not going to apologise for my shameless optimism. Rather, I would like to explain why I think this doom and gloom sentiment is hurting our economy.

I came across two papers that look at the prevailing sentiment in media across hundreds of years.  The first paper was mentioned in a piece in the Financial Times. Ironically, an opinion columnist in The Times of London cared enough about this piece to write a rebuttal. Well, to cut to the chase, I am coming down firmly on the side of John Burn-Murdoch of the Financial Times.

The paper that led to this flurry of op-ed pieces examined 173,031 books published in England between 1500 and 1900 with the help of modern textual analysis tools. The key finding of this analysis is that starting with the Enlightenment, scientific texts became increasingly divorced from religious content and more and more progress-oriented and optimistic in tone. Furthermore, industrial works become more progress-oriented during the Enlightenment and the Industrial Revolution.

Progress orientation of books published in England

Source: Almelhem et al. (2023)

The implication is that this more progress-oriented and optimistic attitude created fertile ground in which the Industrial Revolution could take hold. It remains an open question why the Industrial Revolution took hold in England and Northern Europe rather than in China or the Arab World which showed similar levels of economic development many decades before. What makes England and Northern Europe special? I have written before about how patience and long-term orientation seem to be a key ingredient.

More generally, I still think that the shift in values away from God and religion towards secular ventures and inquiry into nature as described in Deirdre McCloskey’s Bourgois Virtues is a major if not the most important driving force for this ‘British exceptionalism’.

The counterpoint made in The Times of London is that doubt and small-c conservatism is not a bad thing per se but provides us with the ability to avoid costly mistakes. Furthermore, the paper cited above does not show causation, only correlation.

Which is where the second paper comes in. Using textual analysis of 13,000 US newspapers, the authors of that study show that the bias in news reporting has become increasingly negative since the 1960s. This is not only true of news in general but also for economic news.

News-based sentiment in the US

Source: van Binsbergen et al. (2023)

Where this analysis goes further than the first paper is in testing if there is a relationship between news-based sentiment and future economic growth, employment, and consumption. They find that a one standard deviation improvement in their news-based economic sentiment leads to an average increase in GDP per capita growth of 2% the following year. It also leads to a 0.15% increase in employment growth and a 0.17% increase in consumption. And while this is not proof of causation, it is more than just correlation. It at least suggests that there is some link between sentiment and future growth even if that link may work indirectly.

Note, though, that there is a much smaller impact on future growth in employment and consumption than in overall economic output. And my theory (though admittedly, I can’t prove it) is that optimism works through one channel in particular: Productivity.

The people who increase productivity the most are inventors and entrepreneurs. But who is crazy enough to start a new business? Only people who are overconfident or overly optimistic about their chances of success. It’s a well-established finding that entrepreneurs are chronically overconfident and overoptimistic. But at the same time, innovation and new businesses are what drive technological progress, increase productivity and, ultimately, create jobs.

When the mood in news media and society overall turns more and more pessimistic it means, in my view, that fewer people will feel confident enough to start a new venture. That reduces entrepreneurship and thus reduces productivity growth, economic growth, and employment. A general mood of pessimism and aversion to trying out new things makes us all poorer because it slowly erodes the foundations of our economy.

This is where pessimism and doom and gloom become corrosive to society. It continuously holds people back. Not by a lot, but a little bit every time someone tries something new. And if I may become political for a moment, this is where our current political discourse has become poisonous. We live in a world where NIMBYs have outsized influence. We all know that we need to invest more in infrastructure. But try to build a new railway line or a wind farm anywhere and you can be sure the locals will show up with pitchforks to prevent these projects from being built in their neighbourhood.

Small-c conservatism provides a healthy and valuable check against unnecessarily changing institutions and “trying to fix what isn’t broken”. Yet, modern conservatism has sometimes morphed into something where ‘progress’ and ‘optimism’ have become dirty words. In my view, we need to fight this urge and instead fight pessimism and despondency. Otherwise, we risk that our doom and gloom sentiment becomes a self-fulfilling prophecy.