The "Identity Economists" Answer Your Questions

We recently solicited your questions for George A. Akerlof and?Rachel E. Kranton, authors of the new book Identity Economics. As usual, you came through with excellent questions; George and Rachel tackled a great many of them. Thanks to all involved, and enjoy.

Well, the most obvious question would be: what’s the main argument in Identity Economics? –Ray

The main argument is that people’s economic choices are based on more than personal taste — they’re also based on what is considered appropriate and inappropriate behavior. And whether something is appropriate or not depends on a person’s social identity – man or woman, black or white, military or civilian. Sentiments like those expressed here (see the next question – one reader’s mother wouldn’t be caught dead shopping at Walmart despite the lower prices) can have deep implications for economic outcomes. The book explores gender and the mismatch of workers to jobs, the low educational attainment of minority children, and weak work incentives when employees feel little attachment to their firm.

Which seemingly irrational economic habits are the most difficult to break.
– F’rinstance, my mom won’t shop at WalMart

A bit later in this post, we talk about the salience of social situations. The goods being bought and the social meaning of the goods matter. We don’t know your mother of course. But imagine someone who wouldn’t be caught dead shopping for her own clothes at WalMart but would buy party supplies for an elementary school end-of-year party.

Please address the United States’ historical approach to meritocracy and its effect when a society ignores the necessary skills required to survive and thrive. In other words; are we not creating a permanent underclass if we ignore the value of competing? Thank you in advance. –Bob

Merit-based rewards and, for example, access to higher education, are certainly conducive to economic growth and efficiency. Identity Economics points out that people may not feel they should compete for the rewards and for this access despite their intellectual capabilities. Historically, access to many American institutions was based on race and class. Though legal barriers have fallen, many social divisions remain.

I only just learned about the existence of this book, but I am fairly familiar with earlier research by G.A and R.K. It is my opinion that the aim of an economic model of identity should be to capture identity as a context-specific, multi-dimensional and dynamic element. To my knowledge, the classic Akerlof and Kranton identity model treats identity as an exogenously determined parameter. Is there anything in the book that expands on that earlier model? Also: In the light of neuroscience-based economics research, as well as personality neuroscience, do you think that identity economics might have become a dead-end? –Daniel R Hawes

You are right that our basic model treats identity and norms as exogenously given – but this model is only the tip of the iceberg. We agree that an economic model should also capture the dynamics and multi-dimensionality of norms and identity. In some of the studies in Identity Economics, we begin this endeavor. We ask when, for example, school administrators and employers would benefit from molding students’ and employees’ identities and work-group attachments.
As for neuroscience – quite the opposite! Social influence and social context are widely observed in both human and non-human primates, and we are launching a new program to explore the underlying neural mechanisms.

Have the authors read Mary Schweitzer‘s Custom and Contract (1987)? The colonial period laid the foundations of the Industrial Revolution. Schweitzer explores how social norms governing age, gender and households flexed, but did not break, in the face of growing incentives to increase productivity in the household, the main unit of production. The book provides a microcosmic refutation of the claims of market fundamentalists that market incentives conquer all. –nobody.really

We have not read the book but certainly will now. Thank you very much for the reference. The argument, as you describe it, would support our general message. Social norms and identity can trump monetary incentives, and economic patterns may be largely determined by adherence to deeply held norms.

In my casual reading of economics, I get the impression that some influential economists believe some seemingly goofy things. Here are three examples I have come across:
1. Asset bubbles do not exis (a corollary of the efficient-market hypothesis).
“I don’t know what a credit bubble means. I don’t even know what a bubble means. These words have become popular. I don’t think they have any meaning.” – Eugene Fama
2. Drug addiction is rational. See this.
3. Tax cuts don’t matter (Ricardian equivalence, as explained by Robert Barro and others)
If you get a tax cut, rather than spending it, you will save and invest the money so that you or your heirs will be able to pay inevitably higher taxes later.
Could it be that some economists hold irrational beliefs because of blind faith in the methodology of their field? I have the impression that some economists come up with elegant mathematical models and do not take sufficient care to see if their models correspond to economic reality.
I do not suspect you of making this error. I recall that Paul Krugman wrote “Akerlof’s market for lemons had virtually no explicit math in its main exposition; yet it was transformative in its insight.”
My apologies if I have misstated any of the theories above; I am not an economist.?- Alan Thiesen

Economists do value elegant mathematical models but also value the match between theory and evidence. There are many researchers working to build better models that capture empirical findings such as asset bubbles and savings distortions.
Our book is in that tradition – we are trying to make economic models closer to observed reality. Identity Economics brings in the social context and considers the motives of real people in real places in real time.

what do you make of Marx‘s concept of class identity?- do you think that class identity is more conducive to democracy (rule of the many) than the atomistic identity model of the free market is? (ie. does atomistic identity tend more toward oligarchy of a powerful few, which come to dominate the market) –frankenduf

History certainly teaches that class identity can be very powerful. Identifying with class, rather than with family or ethnicity, gives the potential for transformative social movements.
While we do not study class identity per se, this possibility can emerge from the framework in the book. Identity Economics makes the basic point that a person’s social identity – how they think about themselves – gives rise to a new set of incentives. These social incentives can then shape economic outcomes.

I first came across this concept in Chip and Dan Heath‘s book “Made to Stick”, where they note that an appeal to identity can sometimes trump self-interest , using politics as one example (188-189). Does your book give any indication of which factors lead to situations where people seem to base decisions more on identity than self-interest? E.g., type of decision? Age? Gender? Cultural group?
– JonathanF

Our book discusses how different identities are salient at different moments in time. And third parties (such as politicians) can gain by making a particular identity salient at just the right moment. The book describes how the particular situation matters; the social context and who is interacting with whom will matter. And some institutions try to create a new social context where people will act differently than otherwise. We discuss this possibility in the context of school reform. Successful schools often create a new social world, with its own norms and values, and children learn to behave differently in the school than in the wider community.

How is your conception of identity, and whether something is “proper” or “forbidden”, distinct from the way social scientists conceptualize social norms?- karisa

Our conception of identity is actually distilled from the many notions of identity and social norms in the wider social sciences. Identity Economics provides a simple way to bring very complicated notions into economic models.

Re #8, couldn’t one argue that one’s self-interest is, in fact, preserving one’s identity as opposed to what someone else would expect to be one’s (economic or practical) self-interest?
Take a seemingly trivial example, box tops for schools. You can pay an extra 80 cents for a box of name brand granola bars to get the 10 cent box top to give to your school. One could argue that this is against one’s self-interest because you could buy the cheaper granola bars and donate 10 to 79 cents to the school and both you and the school come out ahead.
But lots of people decide to be good sports and buy the name brand granola bars because it is socially valuable in terms of school and parental identity (we are people who help our school) and little Johnny isn’t the only kid not bringing in his baggie of box tops (he is a participant in the school culture).
At some level they have decided that identity is worth the 80 cents.
– di

Yes, there are many community-building activities that are quite costly but the costs can be avoided. Here we see how firms (granola bar makers) can profit from people’s desire to create community and group identity. Frankly, we agree that a school would be financially better off just asking people to contribute cash, rather than buy granola bars, chocolate bars, or our personal favorite, wrapping paper. We would also argue that there are many ways to create community and school identity (old-fashioned picnics!) that do not give a cut to outside firms and turn the children into salespeople.

A very simple glance at the ideas in your book might lead to the sort of “self-esteem” education many in my generation were raised with in the 80s. In some sense, I don’t think self-esteem culture was totally off base; if you raise your children to believe they are smart and capable, that will become part of their identity and will create a magnetic draw around the influences in their life. Obviously, the culture may also create fear of failure and a sense of entitlement… How would you apply the ideas of Identity Economics to raising children?- vimspot

Identity Economics would argue that self-esteem is based on social notions of appropriate behavior. The social here is critical. Appropriate and inappropriate behavior is not just a general concept, but applies to children as part of social groups. So, for example, a child who internalizes a norm that people “like him” do well in school will then feel good about himself when he does well in school.

1. How does the ability of institutions to shape identity impact the proper assessment of a corporation’s responsibilities to its workers? If the firm and the worker aren’t engaged in arms length negotiation over the terms of the workers contract, but instead the firm to some extent is able to shape the worker’s values, does that give the firm a heightened responsibility to its workers?
2. Does your work undermine the economic theory of politics? Does it suggest that values ought to be a more central part of public discourse?- John

1. Excellent question about firm’s responsibility to workers. The military is our prime example of a firm that shapes its workers’ identities. It is a two-way street. Recruits are willing to adopt this identity since they see that the firm really does hold these values and leadership makes similar types of sacrifices.
2. Identity Economics would amend the economic theory of politics. Rather than thinking of citizens as voting according to their economic self-interests, citizens should be seen as voting for what they see as appropriate policies for the nation. We do often observe that people vote against their economic self-interest and support candidates who appeal more to their sense of social responsibility, for example.

I’m interested in the feedback loop that forms between identity and economics. How do you measure the effect of economic well-being on identity and vice versa?- misterb

There is certainly this feedback loop, but as with all feedback loops it would difficult to measure. Such feedback loops give rise to what economists call an “identification problem.” We cannot tell which affected what first. For example, does identity affect prices of particular goods and services, or do prices affect identity? In a chapter of the book, we discuss the types of tricks economists try to use to identify these effects. With social changes, however, typical empirical studies would be quite difficult, and we advocate looking for new types of data such as ethnographies and experiments.

From a reading of current cognitive psychology it seems patently obvious to me that the “rational economic actor” is clearly a religious fantasy, and so, a crazy basis for any economic theory. On the other hand, “animal spirits” explanations lack strong empirical verification. Can identity economics – and animal spirits in general – be converted from a narrative explanation into a solid testable mathematical model? How far away are we? Are there any good results already?- Jim Birch

The aim of Identity Economics is to do just that. We build a simple model of identity and social norms and relate the model to evidence. We could even say the model is testable if given sufficient specificity on the social context and economic problem at hand. The problem with “testability,” however, is the lack of data and the identification problem discussed in response to another reader’s question. Yet, despite all this, there is some success. A chapter of Identity Economics reports on statistical and experimental evidence of identity effects.

Do you think that the malleable nature of identity is enough to explain most individuals’ differing attitudes towards the theft of physical and digital products?
How does your proposition that identity may be the most important factor affecting economic decisions apply to non-Western cultures where identity is defined collectively rather than individually??- Rob

Identity Economics would apply even more strongly in societies where individuals have strong attachments to a collective identity, such as family, tribe, or ethnicity. The basic argument is that people’s economic decisions are based on social norms for appropriate and inappropriate behavior. The more people adhere to these norms, the more powerful the economic implications would be.

Is economic identity primordial or constructed? By that I mean, is economic identity something that one is born with (like gender, ethnicity, or religion) that cannot be changed but is inherent in one’s very essence. Alternatively, is economic identity a social construct where one’s identity is created through experience, learning, and interaction with others.?- Joseph

Identity as ascribed or created through experience is a huge topic in the study of social identity. Identity Economics takes as a starting point that people have a particular identity, or can possibly choose among identities, and then make choices given that identity. Fellow economists Roland Bénabou and Jean Tirole have a theory of identity where people’s actions today give them information and help them invest in their future identity.

I would like to entertain the question of social costs of certain economic actions, i.e. I need a new garage, I can
A. Have my out of work brother do it
B. have someone knowledgeable on building do it
C. I can have a trained professional do it.
Each subculture and even microculture has different answers to that question, and while it is a personal question for me the same question goes to those who choose government contracts etc. They are making those personal decisions based ultimately on the social costs, and therefore establishing their identities in the process.
Having established those identities, entire rafts of future choices are removed and added and tends to make behavior more predictible.?- Peet

Yes, Identity Economics would tell you to look for the social norms in a particular subculture, and these norms would help predict behavior.

As a medical student the only time you here people discussing the economy is in sarcastic jabs about how health care reform has become a bipartisan issue, but that’s an issue for another day. What I am interested in is whether you have looked at all into how people manage their health. From the perspective of someone who is learning how people get sick, it is staggering how much disease could be prevented with a change in our cultural identity. It is not a coincidence that a country who just imploded on its self because of reckless financial behavior is also the country where kids are developing hypertension and type 2 diabetes before they learn algebra.?- Tim

This is an excellent suggestion to study in depth health outcomes and identity. The framework we outline in Identity Economics would lend much support to your observations. Cultural norms have impacts on all sorts of decisions involving the short vs. long term. Identity Economics would also tell us to look for differences across groups. That is, some identifiable groups both save more and have better long-term health outcomes, despite being in similar economic situations.