George Akerloff has a Nobel Prize in economics. He shared it in 2001 with Joseph Stiglitz and Michael Spence for his work on imperfect information. His seminal paper on the subject, "The Market for Lemons: Quality Uncertainty and the Market Mechanism" (1970) took the used car market as an example where the lack of reliable product information meant that lemons could be sold for more than they were worth to people who would assume their quality was average (lacking any basis to know better), whereas cherries could not get the price they were worth, so they tended not to be on the market. As Wikipedia notes, the initial reception of Akerlof's paper was not enthusiastic at first, though that changed over time:
Both the American Economic Review and The Review of Economic Studies rejected the paper for "triviality", while the reviewers for Journal of Political Economy rejected it as incorrect, arguing that if this paper was correct, then no goods could be traded. Only on the 4th attempt did the paper get published in Quarterly Journal of Economics.[2] Today, the paper is one of the most-cited papers in modern economic theory (more than 5,800 citations in academic papers as of July 2009).
It's possible that Akerlof could earn a second Nobel Prize for work he'd only just begun when he got his first one, although his co-author, Rachel Kranton, should have pride of place for this one, since she first had to convince Akerloff himself that there was something there that needed attention. This work involves the integration of a key concept from the social sciences--identity--with one of the key strategies of micro-economics--game theory. Conventional micro-economics takes the view that people are rational decisionmakers, maximizing utility with respect to their preferred tastes. Over the last two decades behavioral economics has attacked this model by discovering all sorts of behavior that doesn't fit the simplified model of rationality that micro-economists use. For example, people don't equally value losing or gaining a dollar, even though the model says that they should. But Kranton and Akerlof have developed models that explains some of this "irrational" behavior--including, I would argue, the fact that sometimes only economists and their students act the way that "economic man" is supposed to.
They've written four technical papers on the subject over the past decade, and in February they published a book Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being. Here's what the publisher's blurb has to say:
In 1995, economist Rachel Kranton wrote future Nobel Prize-winner George Akerlof a letter insisting that his most recent paper was wrong. Identity, she argued, was the missing element that would help to explain why people--facing the same economic circumstances--would make different choices. This was the beginning of a fourteen-year collaboration--and of Identity Economics.
Identity economics is a new way to understand people's decisions--at work, at school, and at home. With it, we can better appreciate why incentives like stock options work or don't; why some schools succeed and others don't; why some cities and towns don't invest in their futures--and much, much more.
Identity Economics bridges a critical gap in the social sciences. It brings identity and norms to economics. People's notions of what is proper, and what is forbidden, and for whom, are fundamental to how hard they work, and how they learn, spend, and save. Thus people's identity--their conception of who they are, and of who they choose to be--may be the most important factor affecting their economic lives. And the limits placed by society on people's identity can also be crucial determinants of their economic well-being.
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At first, Akerlof thought that Kranton was mistaken, that what she was talking about was already taken care of by the economic concept of individual preferences or "tastes". But the idea of discrimination simply being a "taste", like a preference for apples over oranges or Coke over Pepsi, had always seemed ludicrously thin to me, and Kranton eventually convinced Akerlof that something deeper was going on. Here's how they introduced their idea in a recent brief piece their original 2000 paper, Economics and Identity(emphasis added):
This paper introduces identity--a person's sense of self--into economic analysis. Identity can account for many phenomena that current economics cannot well explain. It can comfortably resolve, for example, why some women oppose "women's rights," as seen in microcosm when Betty Friedan was ostracized by fellow suburban housewives for writing The Feminine Mystique. Other problems such as ethnic and racial conflict, discrimination, intractable labor disputes, and separatist politics all invite an identity-based analysis. Because of its explanatory power, numerous scholars in psychology, sociology, political science, anthropology, and history have adopted identity as a central concept. This paper shows how identity can be brought into economic analysis, allowing a new view of many economic problems.
We incorporate identity into a general model of behavior and then demonstrate how identity influences economic outcomes. Specifically, we consider gender discrimination in the labor market, the household division of labor, and the economics of social exclusion and poverty. In each case, our analysis yields predictions, supported by existing evidence, that are different from those of existing economic models. The Conclusion indicates many other realms where identity almost surely matters.
Our identity model of behavior begins with social difference. Gender, a universally familiar aspect of identity, illustrates. There are two abstract social categories, "man'' and "woman.'' These categories are associated with different ideal physical attributes and prescribed behaviors. Everyone in the population is assigned a gender category, as either a "man'' or a "woman.'' Following the behavioral prescriptions for one's gender affirms one's self image, or identity, as a "man'' or as a "woman.''2 Violating the prescriptions evokes anxiety and discomfort in oneself and in others. Gender identity, then, changes the "payoffs" from different actions.
This modeling of identity is informed by a vast body of research on the salience of social categories for human behavior and interaction. We present in the next section a series of examples of identity-related behavior. These examples, and other evidence, indicate that (1) people have identity-based payoffs derived from their own actions; (2) people have identity-based payoffs derived from others' actions; (3) third parties can generate persistent changes in these payoffs; and (4) some people may choose their identity, but choice may be proscribed for others. The concept of identity expands economic analysis for at least four corresponding reasons.
First, identity can explain behavior that appears detrimental. People behave in ways that would be considered maladaptive or even self-destructive by those with other identities. The reason for this behavior may be to bolster a sense of self or to salve a diminished self-image.
Second, identity underlies a new type of externality. One person's actions can have meaning for and evoke responses in others. Gender again affords an example. A dress is a symbol of femininity. If a man wears a dress, this may threaten the identity of other men. There is an externality, and further externalities result if these men make some response.
Third, identity reveals a new way that preferences can be changed. Notions of identity evolve within a society and some in the society have incentives to manipulate them. Obvious examples occur in advertising (e.g., Marlboro ads). As we shall explore, there are many other cases, including public policies, where changing social categories and associated prescriptions affects economic outcomes.
Fourth, because identity is fundamental to behavior, choice of identity may be the most important "economic'' decision people make. Individuals may--more or less consciously--choose who they want to be. Limits on this choice may also be the most important determinant of an individual's economic well-being. Previous economic analyses of, for example, poverty, labor supply, and schooling have not considered these possibilities.
They begin their analysis using standard economic motivations for behavior--individuals engaged in activities that suit their tastes and thus provide some utility. As a simplified model, there are just two such activities, and everyone has a taste for one or the other. If they engage in the activity that suits their taste, they earn some utility--which can vary for any number of reasons. But if they engage in the other activity, they earn no utility. In the standard economic model of utility maximization, each individual would engage in the activity matched to to their taste. I now quote directly from the paper, with apologies for the slight intrusion of technical notation:
We next construct identity-based preferences. We suppose that there are two social categories, Green and Red. We assume the simplest division of the population into categories; all persons think of themselves and others as Green. We add simple behavioral prescriptions: a Green should engage in Activity One (in contrast to Reds who engage in Activity Two). Anyone who chooses Activity Two is not a ''true'' Green--she would lose her Green identity. This loss in identity entails a reduction in utility of Is , where the subscript s stands for ''self.''
This is what happens when someone's personal preferences don't match what they are supposed to prefer, based on their identity. They get no utility (and hence no pleasue) from doing what they are expected to do. But they suffer a loss of utility in their sense of self as a "true" Green, if they do what they want to do--regardless of whether its "worth it" in the end or not (which Akerlof and Kranton can then describe with an equation). Traditionally, psychologists and sociologists have had a lot to say about this sort of conflicted situation, but economists, not so much. This model shows how economists can begin to account for such conflicts. But that's only the beginning:
In addition, there are identity externalities. If an i and j are paired, Activity Two on the part of i diminishes j's Green identity. j has a loss in utility Io, where the subscript o denotes ''other.'' After i has committed Activity Two, j may ''respond.'' The response restores j's identity at a cost c, while entailing a loss to i in amount L.
I don't want to get too bogged down in the details here. The important point here is that the authors show how traditional concerns that economists have ignored can be introduced into a economic framework, based not on whim, but on a wide body of scholarly literature from other social sciences. The results will produce significantly more realistic models, which can then be compared to actual behavior, to see how well those models work. At least initially, the results seem quite promising.
This model is then expanded to cases where they look at Green and Red identities in a given population, with different identity-based payoffs for different behavior.
One illuminating example they explore is why some members of racial minorities behave in seemingly self-destructive ways. This explanation is particularly powerful because it shows how persistent forms of "colorblind racism" and institutional racism create a cost for minorities trying to live according (white) mainstream ideals--something that even very successful blacks experience, for example--and how this in turn creates the condition in which such evidently self-destructive behavior takes place (a result that follows directly from the simplified economic model the authors introduce. Regarding the reality of costs for minorities trying to live up to white ideals, the authors quote from Jill Nelson's book, Volunteer Slavey:
As Jill Nelson {1993, p. 10} explains her exhaustion after a long day of interviewing for
a job at The Washington Post:I've also been doing the standard Negro balancing act when it comes to dealing with white folks, which involves sufficiently blurring the edges of my being so that they don't feel intimidated, while simultaneously holding on to my integrity. There is a thin line between Uncle-Tomming andMau-Mauing. To fall off that line can mean disaster. On one side lies employment and self-hatred; on the other, the equally dubious honor of unemployment with integrity.
Nelson is an example of "successful" black professional, but under present conditions, she will never fully belong, never fully experience the psychic benefits of achievements, no matter how how well she fulfills the role of an ideal type. The reasons may often be subtle--which may only make her experience more frustrating. Under such conditions, there will be some for whom the self-hatred would be far greater, and the satisfactions of integrity much higher--even if it means being poor. (Such is the common-sense translation of what the authors' model shows. ) Being in opposition to the dominant culture makes sense to them, not just in terms of a single economic choice, but in terms of adopting an entire identity, a way of being in the world share with others and creating a shared oppositional "ideal type" in contrast to the mainstream culture's "ideal type" that they have no hope of ever living up to. Behavior that makes no sense in terms of the rejected, unattainable ideal type is perfectly sensible in term of the oppositional ideal type, which allows them to gain utility (satisfaction) from activities that they can do well at. People who subscribe to either ideal type will sometimes engage in atypical behavior--but as explained above, there is a cost to identity in doing so. The authors go on to show how different conditions will lead to different sorts of population mixes--all of it quite rational in terms of two contrasting identity modes.
This model does not deny the agency of individual actors. Nor is it an excuse for "bad behavior"--with or without the quotes. But it is a clear refutation of the idea that such behavior is simply irrational, due to something wrong in the individuals concerned. While it may be possible to change individual behavior, one person at a time, this model strongly indicates that such an approach cannot change the behavior of the entire population, because it's always rational for some to choose an oppositional identity. In order to change that reality, one must change the larger social reality that imposes the conditions that are reflected in the parameters of the model. Of course, there is also the possibility represented by the appeal of groups such as the Nation of Islam, which construct a different kind of oppositional identity. (The same can also be said of black liberation theology--such as practiced by Reverend Jeremiah Wright--which is obviously much more threatening to the white power structure, precisely because its an oppositional identity that allows space for whites to also assume an oppositional identity as well, just as the Civil Rights Movement did.) It's highly significant that such widely observed and studied behavior can be explained by a relatively simple economic model of individual choice, provided that just two different identities are included.
Why is all of this important? Beyond the reasons already hinted at, there are a number of different reasons. First of all, it pushes back against the reductionist tendencies of micro-economics to drain the richness of human experience and posit a world of inherent and (largely) immutable constraints--which are fundamental presumptions of a conservative worldview. Akerlof's earlier work on imperfect information revealed that market failure is a pervasive, rather than an exceptional occurrence. And yet the conservative "free-market" narrative, which presumes the exact opposite, has grown vastly more potent over the period of time that his ideas have gained recognition and acceptance within the discipline of economics.
Akerlof's work with Kranton on identity could help to turn back that perverse narrative tide, in part because it provides a richer connection to other pre-existing interpretive traditions, from psychology, sociology, anthropology, etc., and in part because it can conceivably be popularized, to help inform a political counter-narrative to give a larger, more coherent shape to alternative descriptions of how and why market fundamentalism has failed. It's just a small beginning, but I'm going to have several other diaries this weekend that will suggest some examples of how this might begin to play out.
I want to conclude with two notes. First, in their first paper, Akerlof and Kranton say:
Politics is often a battle over identity. Rather than take preferences as given, political leaders and activists often strive to change a population's preferences through a change in identity or prescriptions. Again, examples abound. Fascist and populist leaders are infamous for their rhetoric fostering racial and ethnic divisions, with tragic consequences. Symbolic acts and transformed identities spur revolutions. The ringing of the Liberty Bell called on the colonists' identities as Americans. Gandhi's Salt March sparked an Indian national identity. The French Revolution changed subjects into citizens, and the Russian Revolution turned them into comrades.
This grand, sweeping view of politics is diametrically opposed to the view of politics conveyed by conventional micro-economics, which says that nothing matters more than isolated individual choices. It's highly ironic at least, if not profoundly self-contradictory that a grand political movement should be built around this minimalist vision. What better way to fight it than with a consistent politics that affirms, explores and elucidates the role of identify, rather than hiding and denying it? And that unites the role of identity with basic processes common to all?
Furthermore, this sweeping view of politics is also diametrically opposed to the view of politics conveyed by Third Way technocrats like Obama. However much they may claim to differ from market fundamentalist conservatives--and however much they may sincerely intend to do so--they nonetheless share in common with market fundamentalists an oversimplified micro-economic model of how the world works (even when they tweak it a bit). And this puts them intellectually much closer to the conservative worldview than to the much richer real world of multifacted identities, and the doorway to that world that Identity Economics represents.
One last note: a somewhat long but interesting review of Identity Economics can be found here. I'd originally thought I'd quote from it quite a bit in writing this piece. But if I had, I might not have written anything of my own. |
