Why does gender, race or class play a role in the economic choices we make?
In 1988, accounting firm Price Waterhouse discovered to their cost that failing to promote a female employee to partner because she did not conform to the social norms of how a woman should behave was evidence of sexual discrimination. The US Supreme Court ruled that they had applied double standards, looking for aggressiveness and assertiveness in senior people but only if it came from a man.
These social norms – our beliefs in how people should behave – play out in all aspects of our lives but have previously been undefined in how they influence economics.
The missing link
Nobel Prize-winning economist George Akerlof began collaborating with the economist Rachel Kranton more than fourteen years ago when she wrote to him arguing that his academic paper was wrong. Kranton believed that our identity was the missing element in economic theory that explains why people with the same economic circumstances make different choices.
Together they developed their notion of Identity Economics – how our perception of who we are and who we want to be shapes our lives more than any other factor. Our identity can affect how hard we work, what professions we choose, how we learn, what we spend our money on, and how we save.
The book proposes that identity economics can be viewed as a new stage in the development of economic thinking. Modern economics follows Adam Smith’s goal in the eighteenth century to turn moral philosophy into a social science designed to create a good society. In the nineteenth century, economists began to build mathematical models of how the economy worked, using a rational human with only economic motivations. As economics evolved in the twentieth century, the models grew more sophisticated but humans lagged behind. This began to change when Gary Becker developed ways to represent a variety of tastes, such as discrimination or children. Behavioural economics has now introduced cognitive bias and other psychological findings. Identity Economics brings in the social context to explain what real people do in real situations and how our identity defines our choices.
In their thoroughly researched and referenced book, the authors consider the importance of identity economics in work and school, gender and race. They also look ahead at how identity economics can change economic thinking.
Identity in the workplace
The authors believe that identity economics can be used to help organisations get their employees to feel like firm insiders –people who share the company’s goals, rather than outsiders – people who will play the game for their own benefit.
About 40 years ago, economists began to build a theory of work incentives, emphasising the role of wages and bonuses. A good company gets those incentives right – but a more subtle view draws a near-opposite conclusion. If employees only care about wages and bonuses, they will game the system, doing what it takes to earn the bonus, rather than what is good for clients or the firm. It also doesn’t explain why organisations such as the military can inspire such loyalty – with employees prepared to put their life on the line. Payment for piece work, or targeting CEOs purely with maximising a firm’s value, will not result in long term success.
If monetary incentives alone do not work then could identity economics, suggesting that firms do well when employees identify with it and when their norms advance its goals, be the answer?
About the authors
George Akerlof is the Koshland Professor of Economics at the University of California, Berkeley, and 2001 Nobel Laureate in Economics. Akerlof is the co-author, with Robert Shiller, of “Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism”.
Rachel Kranton is professor of economics at Duke University. She earned her Ph.D. in Economics at the University of California, Berkeley and has been awarded fellowships at the Russell Sage Foundation in New York and the Institute for Advanced Study in Princeton.
“An important new book. . . . Professor Akerlof and Rachel Kranton have invented Identity Economics.”
Daniel Finkelstein, The Times
“Business managers, economists, policy makers, and school administrators will all gain fresh insights into similar enigmas that confront them if they bear the book’s message in mind: identity matters. “
“A lucid look at how social considerations carry economic consequences. . . . The authors use the word ‘identity’ as shorthand for the way people divide themselves into social groups, each of which -like high-school Jocks and Burnouts – has a sense of how to behave.”
James Pressley, Bloomberg News
Author: George A. Akerlof & Rachel E. Kranton