Many decades ago, I happened across Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds (the first of many editions was published in 1841). A quote from the foreword piqued my interest: “The poet/dramatist Johann von Schiller once said, ‘Anyone taken as an individual is tolerably sensible and reasonable—as a member of a crowd he at once becomes a blockhead.’” Mackay proceeds to analyze a number of historical episodes—the Mississippi Bubble, Alchemy, the Crusades—and debunk the underlying logic of each that had so fully captured the imaginations and behaviors of those who lived through them.
Years later, while rummaging through a used-book store in New York City, a related but obscure book caught my eye: The Crowd: The Study of the Popular Mind (1895) by Frenchman Gustav Le Bon. His work was an early attempt at crowd psychology. These two thinkers have yielded valuable insights for the study of markets, as speculative contagions and financial bubbles require a crowd mentality to push valuations beyond the boundaries of reason. Propelled by fanciful imagination, the crowd can take individuals to places they never would have gone alone.
A Tale of Two Cities: Between Washington and Wall Street
The investors cheering the equity market to new highs, irrespective of the disintegrating economy upon which it derives its value, are not the only “mob” in the news. Quite the contrary, the riot at the Capitol in early January has stolen the front page of every paper, financial or otherwise.
On January 6, 2021, Trump supporters stormed the U.S. Capitol, overwhelming its police force, in an attempt to protest, change, or thwart congressional certification of the Electoral College vote. The same day, the S&P 500 ticked up to a new all-time high. Go figure. The former is an astonishing break with democratic decorum, previously unseen on such a scale (unless one counts the British sacking of the Capitol in 1814). The latter has become almost routine the past decade.
In the financial center of the world, New York City, it has been the best of times since the depths of the 2009 market selloff. Meanwhile, the political capital, Washington, D.C., has seen increasingly worse times since the turn of the millennium. In addition to seemingly interminable culture wars, wealth disparity (the sort that inspired Dickens’ classic novel) has fractured society, creating parallel worlds—capital and labor, left and right, religious and secular—that may not be fully defined by the current distributions of wealth and income, but each certainly maintains robust and divisive discourses on the phenomenon. Frustrations among factions are high.
Over the past two weeks, the press, pundits, and politicians have pontificated like Monday-morning quarterbacks on the events leading up to and culminating in the assault on the Capitol building. I neither heard nor read, though, of anyone drawing attention to a theory of crowd behavior. This powerful force was harnessed by two of history’s most heinous demagogues— Hitler and Mussolini—toward their despotic ends, and its pernicious effects are on full display upon both the political and financial stages.
The Monster with a Pea Brain
Gustav Le Bon examined this theme, with the French Revolution as his laboratory. He characterized the crowd as a monster—a group of people who, when aggregated, manifest a sublimation of the individual’s attributes such that the lot of them possess the collective intelligence of a diminutive pea.
He suggests that the most striking peculiarity presented psychologically by a crowd is the following:
Whoever be the individuals that compose it, however like or unlike be their mode of life, their occupations, their character, or their intelligence, the fact that they have been transformed into a crowd puts them in possession of a sort of collective mind which makes them feel, think, and act in a manner quite different from that in which each individual of them would feel, think, and act were he in a state of isolation.
Le Bon further observes, as does Schiller (though Le Bon stated it more delicately), that we are likely to function at a lower level—intellectually, morally, and emotionally—due to submission to the will of the crowd.
Men the most unlike in the matter of their intelligence possess instincts, passions, and feelings that are very similar. From the intellectual point of view an abyss may exist between a great mathematician and his bootmaker, but from the point of view of character the difference is most often slight or nonexistent. Membership in the crowd brings an egalitarian leveling to the ignorant and educated alike, largely because of the substitution of the unconscious behavior of crowds for the conscious activity of individuals in isolation.
Le Bon also describes crowds as emotional and says that, when in them, the individual often begins to feel and express the emotions of a “primitive being.” Individuals tend to become “lost” in crowds and engage in acts they wouldn’t even consider alone. In addition to having a collective mind, a crowd can quickly become irrational.
Moreover, it’s worth repeating that the process of capitulation downgrades an individual’s capability for intellectual processing to the diminished level of the crowd, effectively the lowest common denominator. The crowd is a mighty monster—usually with a pea-sized brain.
According to Le Bon, three mechanisms are responsible for creating this monster. First, because individuals are anonymous, they lose the sense of individual responsibility, and they thus participate in acts in which they would not normally engage. Second, the process known as contagion reduces an individual’s inhibitions, making it acceptable to behave as a (negative) role model acts. And third, people become more susceptible to suggestion in crowds; the mob effectively hypnotizes the individual, who then follows the guidance of other members or the crowd’s leader.
A Narrative Analysis of the Crowd
While modern scholarship views the totality of Le Bon’s argument as somewhat primitive, his basic recognition of the individual’s surrender to the crowd has been substantiated by others. See the Threshold Model (Granovetter, 1978) or even The Tipping Point (Gladwell, 2000). Still, his model surely has limits. It’s hard to imagine members of the Capitol riots becoming so inspired by the energy and rhetoric of a Black Lives Matter rally that they take to the streets in solidarity.
The advent of Narrative Theory helps to bridge the gap. A major critical lens in the humanities, Narrative Theory, has recently found application in economics by Robert Shiller, Narrative Economics (2019). He argues that underlying narratives widely held across society play an important supporting role in determining economic outcomes.
Narratives account for the susceptibility of individuals to crowd participation. Here we find the underlying unity between our two cities. The crowd on the National Mall was fed a narrative of election fraud and a broken democracy. The sitting president was the chief proponent of this story (an ancillary narrative grounded in even greater falsehoods). Such lies captured the imagination of thousands, and blood was spilt as a result.
A different narrative has been fed to the investing crowd. A strategy known colloquially as “buy the dip,” rests upon a lie promulgated by the Federal Reserve. Implicitly through its actions over the last decade, the bank has told investors it will never allow markets to go down. While the bank’s capacity to do so is highly debatable, hindsight bias has resulted in most believing this story. If the Capitol mob went crazy with rage, the Wall Street crowd has gone crazy with greed. Addicted to Fed liquidity and rising asset prices, they have abandoned reason, individual sense, and moral fortitude. A riot in prices is a riot nonetheless. Such socially destructive forces have consequences, as participants in the January 6 attack are learning firsthand—as charges get filed against individuals across the country.
The Leadership Imperative
Another central aspect of Le Bon’s thesis is the centrality of a charismatic leader. The leader of the crowd is “acclaimed as a veritable god,” taking hold of imaginations with “new formulas as devoid as possible of precise meaning.” Thus, the followers can ascribe their individual grievances to the leader’s agenda. The leader can thereby carry forward myriad complaints without naming them specifically.
The applicability of this description to Donald Trump is obvious. To the Fed, the application is more complicated. No one would accuse the current Fed chair of charisma. But a personality cult remains intact. From the nearly mythic powers ascribed to Greenspan “the Maestro,” we can see that the narrative is steeped in charisma rather than the person. Our technophilia extends beyond digital-tech companies to the mechanical tinkering of the Fed’s financial wizards. Conceptualizing the economy as a machine is enticing, because we can then control and improve it. That is the story. It does not comport with reality, however. Interludes of crisis have unmasked the myth of the omniscient central manager at the Reserve Bank.
The markets have certainly taken the Fed’s narrative at face value. When it steps in to force interest rates lower, investor worries tend to evaporate and the dip is bought. Concerns over the efficacy of monetary tools at the lower bounds—or alarm at the seeming inability to reduce the Fed’s balance sheet—have largely been fringe issues unable to unsettle the dominant sense of trust in monetary policy that pervades the Wall Street crowd.
We have been recently reminded, however, that the behavior of crowds can surprise, even shock. Narratives do not endlessly endure. When they come up against reality, change waits in the wings. Wall Street has not yet had that reckoning, but the pieces are already in place for when the storylines change.
In the meantime, beware the crowd.
 Popular mid-20th-century public theologian Reinhold Niebuhr made a somewhat related point specifically in relation to morality in Moral Man, Immoral Society. While individuals may develop the capacity for moral behavior, the aggregation of individuals into a society at the social level, due both to complexity and the requisite elements of moral formation, will on the whole behave less morally and ethically than its independent elements. Classically, an individual avoids violence more effectively than does a nation-state.