Behavioural Economics: George Akerlof and Identity Economics

Everything in Economics is contextual. The trouble is that the standard textbook economics taught to students largely ignores this. George Akerlof’s recent work on identity economics tries to better understand the motivation of people in different contexts. Motivations include the aim of living up to the concept of who we think we should be. Identity is defined as a person’s sense of self, naturally this can change during a lifetime as the context of our lives changes too.

All economic systems are made up of organisations, groups and institutions. What makes them work? What makes them fail?

Why do some communities routinely give more to charities and others less? Why are some societies more innovative and productive? How important is identity in causing and then resolving industrial disputes or in addressing the causes of inner-city riots?

When people identify positively with an organisation or an area in which they live, they usually understand what their roles are and communities have mutually shared goals. Coming into contact with positive role models can have very powerful effects in this respect.

When trust breaks down and when people react negatively to what they regard as unfairness, the loss of social capital and quickly undermine institutions from within.

How important is it within an organisation to forge a common identity - be it a school, a business, a sports club, a mothers’ support group or a religious community. If and when this happens, how might it change the preferences and choices of people who become involved?

Akerlof writes: “When we examine people’s decisions from the perspective of their identities and social norms, we get new answers to many different economic questions”

Identity economics is set to become an increasingly important aspect of modern behavioural economics.

More here: Identity Economics (Project Syndicate)