Baltic Business Research

Today sees the start of a new monthly contribution to my blog in which I briefly introduce my favorite reading of an economic paper or book during the past month. This time my choice was very easy. Nobel Prize winner George Akerlof enters  –  together with professor Rachel Kranton –  a new research area:  Identity economics (IE). Akerlof’s / Kranton’s (A/K’s) book with the same title has to be seen as a text book on the interesting field of identity economics. They started their co-operation some 15 years ago.

I like the recently published book because it may lead to a new, important approach in interdisciplinary research – an approach that I have been supporting for quite some years, particularly when it comes to psychology and sociology. Historically – as A/K point out – Adam Smith showed considerable interest in social issues and the creation of a good society. Since the end of the eighteenth century, however, economic research has become more and more model-oriented, using that incredible person called homo oeconomicus who is supposed to know everything, receive all necessary information and always comes along with perfect individual decisions.

We know, however, that such an ideal world does not exist in reality. As Gary Becker realized more than 40 years ago – entirely correctly – social issues matter in economic developments. In 2002 economic psychology received a great deal appreciation when the Nobel Prize was awarded to Daniel Kahneman and Vernon Smith.

A/K seem to be ready to give economics a new social dimension by modeling and analyzing how “our identities shape our work, wages, well-being”, etc. They put together identity, norms, and social categories into economics. A/K conclude that “people’s identity defines who they are”: Their social categories and their identities determine their economic decisions.  This is the case because “different norms for behavior are associated with different social categories”. We have to understand these two factors in order to capture what IE is all about. Choosing identity may be the most important economic decision a person can ever make, according to Akerlof and Kranton. People’s choice of identity reveals their conception of who they want to be and/or who they are.

Gender and race issues fit particularly well into the IE approach, many times related to education and work – factors that in the long run also have an impact on economic growth. Thus, IE has a macroeconomic dimension as well. Other applied examples are why certain incentives work or don’t work and why certain schools or cities succeed or don’t succeed.

A/K nicely blend their research approach with examples from real life. This really fascinating book has a non-mathematical content which should give it quite a large readership. But it should be added that A/K also deal with the necessary technical modeling. More about this can be read in various economic reviews and papers.