A Dynamic Model of Political Narratives and the Rise of Neoliberalism

We develop a dynamic model where two parties compete for office by offering policies supported by narratives that describe policy effects. Voters demand narratives that suit their interests based on motivated reasoning and parties supply narratives to win elections. Over time, the set of narratives can expand endogenously. We characterize equilibrium paths and show how polarizing narratives can benefit a party through enabling policy differentiation. We then develop a specific application to ``neoliberalism'', a policy narrative that gained currency in the late 1970s. Our analysis clarifies why the 1970s oil shocks incentivized parties on the right to supply neoliberal narratives and why that prompted parties on the left to respond with the ``Third Way'' narrative that became a new consensus. These narrative dynamics were precipitated by a temporary shock but permanently altered the policy equilibrium, preventing a return to the old post-war consensus.