Book review: Identity Economics

There is a very short list of books that I would recommend that every serious undergraduate economics student (or graduate economics student) should read. These books are not central to understanding economic theory or analysis, but they are important complements to a thorough grounding in economics. The very short list includes Robert Frank's Falling Behind: How Rising Inequality Harms the Middle Class (which I discussed here), and Ziliak and McCloskey's The Cult of Statistical Significance: How the Standard Error Costs Us Jobs, Justice, and Lives (which I reviewed here). To that very short list, I would now add Identity Economics, by Nobel Prize winner George Akerlof, and Rachel Kranton. That isn't to say that the book is without faults; only that it has something important to say that I think all economics students should understand.

Akerlof and Kranton have identified an important gap in economic models, which is the omission of identity - the subtitle of the book is "How our identities shape our work, wages, and well-being". As they note in the introduction:

The discipline of economics no longer confines itself to questions about consumption and income: economists today also consider a wide variety of noneconomic motives. But identity economics brings in something new. In every social context, people have a notion of who they are, which is associated with beliefs about how they and others are supposed to behave. These notions... play important roles in how economies work.

The inclusion of identity (Akerlof and Kranton define this as people's 'social category', which differs by context) into economics allows for a much richer understanding of people's decision-making. What would previously have been considered "idiosyncratic personal differences" between decision-makers can now be properly recognised as systematic differences between groups that have different identities.

The first part of the book outlines how identity can be incorporated into a narrative economic model (that is, not a formal mathematical model). They then move onto applying the model to several real-world situations, including the economics of organisations, education, gender and work, and race and poverty. The basic outline of the model works the same in each case: there is an insider-group that has certain norms and ideals, and an outsider-group that has different norms and ideals. If a member of the outsider-group tries to act like an insider, then they face a loss of identity utility. It may therefore be better for outsiders to act like outsiders.

The basic model seems a bit circular to me when identity is itself a choice, and is not associated with an easily delineated social category. Men and women are easy social categories to define, but 'jocks' and 'burnouts', as used in their model of education, are not so simple. However, where the categories are based on defined characteristics (e.g. gender, or race), then the model strays uncomfortably close to essentialism. So, when Akerlof and Kranton note early in the book that "Social scientists in other disciplines should find identity economics useful because it connects economic models with their own work", I rather think that a critical social scientist reading this book would get rather angry at the examples and how they are described. However, they would be missing the point - I don't think this is a book for other social scientists to better link their work to economics, but rather a book for economists to better link their work to other social sciences. This is why I think it is an important read for economics students.

I do have another concern, although maybe concern is too strong a word. Akerlof and Kranton treat 'standard utility' (the utility from consumption, including consumption of leisure) and 'identity utility' as separable. I don't think that is necessarily the case. A more thorough model would recognise that standard utility may well be a function of a person's identity. In other words, identity utility might not exist in itself, but might be expressed through systematic differences in the utility function between people with different identities. However, I guess if they adopted that form in their model, it would look much more similar to earlier models adopted by Gary Becker and others.

Despite that concern, this is an important book. I'm surprised it hasn't made a bigger splash in the discipline, but at the time it was released (2010), it would have been competing with other big new ideas like behavioural economics and experimental economics. In particular, I wonder how the current debate over the gender gap in economics (which I most recently blogged about last week) would look through a lens of identity economics? That will be a topic for another post.