Identity and economics: what are we missing?

Is identity the missing motivation of economics? UC Berkeley's George Akerlof and University of Maryland's Rachel Kranton certainly think so. In a recent London lecture at the LSE, Akerlof explains how this interest arose:

In the spring of 1996 Rachel wrote me a letter which said that my previous paper, on Social Distance, in Econometrica, had missed the concept of identity. She also said that concerns regarding identity were a serious omission from economic theory.

Initially I was not pleased to receive this letter, which said that my previous paper was all wrong. I also thought that Rachel was in error. I thought that identity was just an aspect of people’s tastes. As a result, I also thought that standard utility theory already took full account of it. But after we talked it over for a great deal of time we discovered that identity really does have a meaning. We decided also that it is a major factor missing from current economics.

Rachel and I have now written four lengthy papers on this subject, and now we are trying to summarize it in a book. ...this lecture is a summary of where we have gotten to date on that book.

Of course, the fourth of these papers was Akerlof's January 2007 AEA Presidential Address, which has already attracted some econoblog commentary. But in his recent Stamp lecture Akerlof provides the wider argument, spanning all four papers. Both the Powerpoint (PDF) and transcript (PDF) from Akerlof's Stamp Lecture on 'Economics and Identity', delivered at the London School of Economics on April 25, are now available. This body of work is certainly starting to influence economic debates. Their first article, published in the QJE in 2000, has already been cited by over 100 economic papers.

Many of us would agree that the neoclassical model of human behaviour is incomplete. To what extent does the Akerlof-Kranton thesis help complete the picture? I'm not yet sure. But for those looking for a little economic theory to stimulate their neurons on a holiday Monday, reading the four papers below (which will form the basis of their forthcoming book) may be time well spent. I'm certainly taking them to read on my summer break.

Further reading:
* Economics and Identity (PDF), Quarterly Journal of Economics CXV(3), August 2000, pp. 715-733.
* Identity and Schooling: Some Lessons for the Economics of Education (PDF), Journal of Economic Literature, 40(4), December 2002, pp.1167-1201.
* Identity and the Economics of Organizations (PDF), Journal of Economic Perspectives, Fall/Winter 2004; a longer version with the modelling is available here (PDF).
* The Missing Motivation in Macroeconomics (PDF), AEA Presidential Address, January 2007

Comments

[Arthur Eckart]

Standard utility theory is based on rationality. Everyone attempts to maximize utility given constraints, and there are differences in tastes and preferences. Identity seems to be within that framework. Also, perfect information seems to be implicit in the theory. So, for example, suicide bombers may believe they're rational. However, they may be only ignorant. Dummy variables have been used in utility models for race, gender, ethnicity, etc. I guess, a dummy variable can also be used for type A or type B personalities, although that may not be "a major factor missing from current economics."

[Lafayette]

I've actually read the both the presentation (that Akelof made at the LSE) and the AEA paper, so piqued was my interest.

He (they, meaning him and Frankton) are actually on to something. That is, they are stretching economics into an area (like Startrek's Enterprise) that goes beyond its conventional limits. When two rivers blend, the waters become troubled at first before calming.

There are some troubling aspects about inserting identity into the subject of economic behaviour . Akelof does so by "example". He explains cases of identity and employs those of women and blacks, both examples of individual rights.

The examples are based upon "norms" that are supposedly formulated by societies and against which behaviour is judged. These sociological precepts (normative) are an important part of the manner in which sociologists (even psychologists) describe human behaviour.

So, what does this have to do with economics? Everything according to Akelof. He makes a good point when blaming the classical model of economics to be too fixated on the notion of market pricing. He would like, I suspect, to open classical economic models to accept another functional criteria, that of identity.

That is going to be a challenge. Price is something that is definable, it has a metric that calculable. Econometrics has closeted economics in a mathematics, which some (including myself) think is a too constrained intellectual corset.

Behaviour is normative. The difference is less than subtle. Metrics don't change, a yardstick is a yardstick, a meter remains a meter. But, norms evolve, morph, change and sometimes very quickly indeed.

Anyway, as said above. It is interesting to see the economic science touching base with other soft sciences. It takes two to tango. And, their offspring could be very interesting products indeed.

I, for one, am impressed with Maslow's hierarchy of needs and would like to see it take its place more roundly in economic theory. If there is a norm more central to life on earth, it is needs - both real (as Maslow's) and fabricated (by marketing). What is the difference between a need and a desire and how does it affect our propensity to consume?

Need is more primitive than identity. Identity is molded by the collective. One identifies oneself by means of communal norms. But, needs, especially survival, can be highly personal. If humans have evolved, it by satisfying the primal needs of survival long before the community establish norms that formulate identities.

Then again, human collectives (communities, towns, states, nations, religions) also find the need to survive - and that is perhaps more important in today's world than that of establishing an identity. Or, maybe this urge to survive is what constitutes identities that condition behaviour?

Go figure.