All Commentary
Wednesday, March 28, 2012

Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being

In Identity Economics, 2001 Nobel laureate George Akerlof and Rachel Kranton summarize years of work, taking something that scholars in the humanities and other social sciences have studied intensely and incorporating it into the model-and-measure framework of economics. They tweak the standard models that graduate students learn in order to incorporate the pleasure and pain people enjoy and endure by conforming to the norms and ideals associated with various social categories. The authors’ relatively simple model explains a lot about human action.

At the outset Akerlof and Kranton state that identity economics “makes economics a more useful tool for improving institutions and society” by focusing on people’s “notion(s) of who they are, which is associated with beliefs about how they and others are supposed to behave.” For leaders of organizations, they explain how providing workers with the opportunity to develop an attractive identity is, on some margins, more important than wages. Business leaders especially will be interested in their discussion of how identity matters in the sales field, on the shop floor, and in the corner office. Scholars across the social sciences and business leaders will find much of value in Identity Economics.

In chapters on educational achievement (and the lack thereof), poverty in minority communities, and occupational segregation, the authors explain how norms and identity help produce the outcomes we see. Their chapter on African-American poverty, for example, argues that it is a complex mix of social forces (the left’s favorite explanation) and bad personal choices (the right’s favorite explanation). They harmonize these explanations and highlight the practical difficulties confronting people interested in improving the lives of the poor. They offer a way of understanding social phenomena that will provide other scholars with fresh perspectives on the problems they study.

An obvious question is “[w]here do norms and identity come from?” and the authors include this in a list of unanswered but important “deeper questions” on the last page. That needs to be pressed further before we start talking about policies to correct pathologies that may have their roots in “identity.” Readers of The Freeman might take issue with their claim that their “models show . . . why it took a social movement and government intervention [emphasis added] rather than a competitive marketplace to erode the discrimination against women in the United States.” Intervention itself has contributed to the problems they identify, and I am skeptical of the notion that more intervention will fix them.

Consider two examples. First, their discussion of “women’s work” examines the Diaz v. Pan American World Airways case, in which a Florida court held that gender was irrelevant to the tasks required of a flight attendant. Notable about this is that the Diaz decision came in 1971, seven years before airline deregulation in 1978. Before deregulation airlines were prohibited from competing on the basis of price, so they shifted to other margins (like attractive stewardesses). Airline flight attendants were almost all male when commercial aviation started, but that changed in the 1950s. That this occupation became “women’s work” was probably an unintended consequence of airline price regulation.

Second, Thomas Leonard’s research on Progressive Era and New Deal regulations on labor markets shows how government intervention institutionalized “women’s work” and marginalized women, African-Americans, and immigrants as “undeserving workers” to be kept out of competition as much as possible. Identity channeled through the political process likely creates “Baptist and bootlegger” coalitions of pure rent-seekers and observers who derive identity utility from keeping others limited to what they think should be their socially prescribed roles.

Our ability to use this new knowledge in the service of better institutions and a better society is more limited than some readers, particularly those of an activist bent, are likely to believe because any pathologies that identity norms introduce into the market will certainly be amplified through the political process.

This leads me to the view that Akerlof and Kranton have made an important contribution, but not in the way that many readers are likely to think. Some will see “identity economics” as another market failure requiring corrective intervention. What will ultimately emerge, I think, is a more robust critique of intervention. I agree with the authors that people derive utility from seeing themselves and others conform to socially prescribed identities and disutility from seeing deviations from them. Intervention, however, provides a mechanism by which people can impose large costs on deviators at little cost to themselves.

The authors discuss the political implications of their thesis to a degree, but acknowledge that it leaves many questions to be worked out. Follow-up research might investigate, for example, how identity norms affect the development of welfare programs and how they influence people’s willingness to go to war.