| Identity Economics |
| George Akerlof and Rachel Kranton, Princeton University Press, 2010, 185 pages, £16.95. |
| Spare a thought for poor old Homo Economicus – after centuries of cultivation and nurture, it seems that the economics profession has rounded decisively on its creation in the past few years. Indeed, titles on behavioural economics, which have taken great pleasure in systematically pointing out the multifarious holes in the neoclassical interpretation of economic decision-making, seem to have been very much in vogue of late. |
| Yet while many of these titles (I am sure you have seen them at your local bookshop) have made some interesting, witty and counterintuitive observations about how individuals go about making decisions, the literature has struggled to unify these examples into any kind of overarching theory that might be more widely applied by economists. |
| In this regard, Nobel prize-winning economist George Akerlof and Rachel Kranton’s latest effort, Identity Economics, has made a big leap forward. It is typical for economists to assume that individuals derive utility by simply maximising their consumption, subject to their tastes and preferences, which are individual characteristics independent of their social context. Akerlof and Kranton’s work is a bold attempt to improve on this standard framework by systematically incorporating the roles that individual’s identity, norms and social category play in economic decision-making. |
| Such a modification, the authors believe, can explain a broad spectrum of economic behaviour which does not sit easily within the traditional framework. Why are black students in the US, for example, 50% more likely to drop out of school than white students, despite evidence to suggest that the monetary returns to education for this group are larger? Why is it that members of the armed forces are paid so little, despite the dangers that they face? Why are piece rates so rarely used to remunerate workers, despite the beneficial incentives that they create for the firm? |
| Admittedly, Identity Economics has some drawbacks. It’s not entirely clear to me how much the authors have simply imported and repackaged established ideas from other fields (I imagine there might be a few annoyed sociologists out there). Yet the book does not seem to be aimed at economists either – rather, the authors try and cut back on the econo-babble in order to make their work accessible to as broad a cross-section of the social sciences as possible. Those hungry for data tables and the algebra should probably go straight to the authors’ academic papers, which are themselves fairly accessible. (‘Economics and Identity’ in the Quarterly Journal of Economics, Vol CXV, August 2000, pp 715-753, is the place to start.) These I found to be more convincing than the book itself, which sketches out only the very bare bones of some of their findings. |
| What’s more, the book is not short on self-congratulation. Much effort is made to tell the reader that Identity Economics is ‘at the frontier’ of our profession, the next stage in the ‘evolution’ of economics. Clearly, there was little room left for modesty in the book’s all-too-brief 130-odd pages (excluding notes). The term ‘model’ is also applied far too liberally, particularly in many cases where the authors are just sketching out some ideas on their topic before examining the data. |
| But these are pretty minor objections. Indeed, by the end of the book, my overwhelming feeling was that the authors had made a pretty robust case for why our profession should pay greater attention to the social structures that underpin our economic decisions. For this, they should be highly commended. |
| Samuel Tombs |
| UK Economist, Capital Economics |
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