Identity Economics, by George A. Akerlof & Rachel E. Kranton

>> Friday, December 24, 2010

TITLE: Identity Economics
AUTHOR: George A. Akerlof & Rachel E. Kranton

COPYRIGHT: 2010
PAGES: 134
PUBLISHER: Princeton University Press

SETTING: N/A
TYPE: Non Fiction
SERIES: N/A

REASON FOR READING: Work.

In 1995, economist Rachel Kranton wrote future Nobel Prize-winner George Akerlof a letter insisting that his most recent paper was wrong. Identity, she argued, was the missing element that would help to explain why people--facing the same economic circumstances--would make different choices. This was the beginning of a fourteen-year collaboration--and of Identity Economics.

Identity economics is a new way to understand people's decisions--at work, at school, and at home. With it, we can better appreciate why incentives like stock options work or don't; why some schools succeed and others don't; why some cities and towns don't invest in their futures--and much, much more.

Identity Economics bridges a critical gap in the social sciences. It brings identity and norms to economics. People's notions of what is proper, and what is forbidden, and for whom, are fundamental to how hard they work, and how they learn, spend, and save. Thus people's identity--their conception of who they are, and of who they choose to be--may be the most important factor affecting their economic lives. And the limits placed by society on people's identity can also be crucial determinants of their economic well-being.
This was a work/professional development read. We've been doing a lot of work on alternatives to regulation lately, and there are quite a few developing areas in economics that provide some interesting material. So far the bulk of our efforts has been on behavioural economics (not least because this government is very keen on it), but there are other possibilities. Identity Economics could be one of them.

In a few words: this book is about how identity issues can have real effects on the decisions people make, and how classic economic theory doesn't really allow for taking this into account. I ended up getting some good ideas from this, although most were stuff that shore up the theoretical framework for things we're already doing. I suppose with this kind of thing you read and absorb the concepts and just need to let them percolate and develop, so actual ideas for new things might arise a while later.

I should also note that this was a remarkably readable book, considering what your average economics paper looks like these days. Akerlof's famous 1970 Market for Lemons article on information asymmetry and adverse selection is one that is quoted often when people complain about the mathematical inflation in economics. If Akerlof could write such an influential article without using excessive and complicated maths, how come people can't seem to manage it these days? There's an argument that most complex maths are not really that necessary, more a way of standing out, and there might be something to that. Anyway, this was quite clear and easy to digest.

MY GRADE: A B+, I suppose. I usually grade according to my enjoyment of the book, but in this case, it's more about usefulness than anything else (and maybe lack of painful headaches generated *g*)

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