So let me begin.
This talk is based on the book Identity Economics that I’ve just completed with Rachel Kranton
and that gives a picture of what the title page looks like.
So in the spring of 1996 Rachel wrote me a letter and she said that the paper I’d just written
which was called ‘Social Distance’ had missed the concept of identity.
She said that that paper classified social motivation as peer effects
which is what you usually find in the labour economics literature now.
With peer effects people change to conform to what other people are doing.
But Rachel said that peer effects are the wrong way to represent social motivation
and the thing as it turned out, after we explored it for some considerable time, is that Rachel was actually deeply right.
Initially I had thought that Rachel was in error.
I had thought that identity was in fact just an aspect of people’s taste
and as a result I also thought that standard economic theory already took full account of it.
But then we mulled it over for many months and we discovered that identity really does, it really does have a meaning.
And it’s well defined, it’s well defined in the context of economic modelling.
So in my 30 minutes I think the most important thing for me to do here is to motivate you,
to indicate to you that there’s something there, there is something,
that this is just as I’ve said earlier, the tip of an ice berg.
So identity is second nature, it’s second nature for many social scientists
but economists we’re systematically trained not to see it.
The standard view of economics is that it’s about incentives.
To give you one example that’s the main theoretical theme of the very good book for economics.
By training its sights on price incentives, standard economics is price theory.
But then that takes us to the central question here, are there types of motivation,
are there types of motivation that are not described in current price theory or that are missing from current economics.
And we think that identity is one of them.
So we ask the question whether there’s a systematic way to think about and to characterise this motivation.
Our goal is to analyse it by tools that are very similar to those of standard price theory.
But motivations regarding identity are all but absent, they’re all but absent in current price theory and in current economics.
Yet as we’re going to see identity has serious impact on many of the most important economic problems.
So standard method in economics is based on the maximisation of objective functions.
So typically consumers maximise utility functions and firms maximise profit function.
And this may be a way of, a good way of doing economics.
The description of what people are maximising gives a formal way to classify how firms and how consumers both behave.
So when it does that, it does that by classifying their motivation,
so it’s how we use these profit functions and utility functions.
I now want to give you some motivation for why identity does matter, for why this is important motivation.
But economist’s characterisation of people’s motivations misses important aspects of that.
So people typically have opinions as to how they should or how they should not behave.
They also have views on how others should or should not behave.
The views about how they and others should behave depend upon who people think they are.
Sociologists will say it depends upon their identity.
What does that mean, in economic speak, that means that they lose utility
in so far as they or others fail to live up to those beliefs regarding what people should or should not do.
So such motivations are central, they’re central to motivation in modern sociology.
But they’re absent from economist’s representation of utility.
People’s views of how they and others should or should not behave are called norms.
So these views, further more these views are held often with very great conviction.
But I should say that they’re not always ethical views.
In fact very often they’re not ethical views, we somehow hold these views subconsciously.
For example you probably, I feel I should probably not give this lecture while wearing shorts,
it’s probably ok but I have that view and I sort of hold it, maybe strongly, ok.
So now we’re going to talk about something that makes this very operational, you can actually put this into a model very easily.
So sociology is a further concept, it is a further concept that gives an easy and natural way
to add those norms to the utility function.
Sociology say that people have an ideal, they have an ideal for how they should or should not behave.
Furthermore they often conceptualise that ideal in terms of people.
So it may be someone they know, it may be someone they do not know or it may even be an imaginary person.
We can then bring this into standard economics by a simple device.
We just modify utility functions that express people’s motivations.
We modify the utility functions to add a loss in utility,
to add a loss in utility that depends upon the distance in behaviour from that ideal.
So let me give you an example, so this is I think a very strong example,
so religion affords many examples of norms that are described by the behaviour of an ideal person
who is typically the founder or the profit of the respective religion.
So for an example let’s consider Christianity, so consider Christianity’s use of the gospels.
The gospels describe the life of Christ and this is what Christians believe.
Christians believe that a Christian aught to take the gospel of Christ as the model of behaviour.
A Christian thinks she should be ashamed in so far as she does not live up to her interpretation of the gospels.
But religion is only one of the many realms, this is just one of many, many, many realms where people have such an ideal.
So to appreciate the ubiquity of norms in motivation it’s useful to see some further examples.
Now what are those examples going to demonstrate, they’re going to demonstrate
that people tend to be happy when they live up to how they think they should be.
And they’re correspondingly unhappy when they fail to live up to those norms.
And I know that’s how I behave, I know that this is a major part of my motivation.
I think when you think about yourself and you think about something that you're doing
and you think you're doing it well, according to how you think it should be done, then you tend to be happy.
And then when you think you're not doing it well it tends to make you unhappy.
So this is really a motivation that’s very important and that’s what this is about.
So now we’re going to give you some examples to try to motivate you.
So here’s an example that comes from my life and quite possibly from yours.
Teacher usually has a clear view of what it means to be a good teacher.
So I know when I teach a good class I feel good about myself and when I teach a bad class,
one that doesn’t seem to go over, I feel really quite bad about myself and it takes me some time to recover.
So think about, the same feelings apply to almost any activity you do,
from playing golf to playing tennis to being a good parent, to whatever else it is.
It applies to the conduct of most jobs.
So Randy Hodson who is a sociologist at Ohio State University, surveyed ethnographies of the United States work place.
And this is what he found, he found that most employees care about their dignity at work.
So what does that mean, they want to conceive of what they do is useful and then they feel a lack of dignity if they are thwarted.
So those who are unable to get such satisfaction are likely to show their displeasure by acting up in some way or other.
Ok so now I’m going to give you another example.
So Erving Goffman has found an example of a natural experiment that’s revealing of adherence to norms.
So he observed the behaviour of children of different ages when they were brought to the local merry-go-round.
Now because appropriate activity differs by age, the children should have predictable different reactions.
So for the toddlers riding a wooden horse is an accomplishment, they’re tremendously pleased by this.
So I’ve got a toddler there and he’s, you don’t have the top of his head
but he’s tremendously pleased by what he’s able to do, the father looks a little bit worried I guess.
Actually if you ever go to the merry-go-round you should go and observe this.
It’s actually quite interesting, I did that.
So in contrast for older children there’s a gap between their conception of how they should behave and riding the merry-go-round.
So the older children need to distance themselves from an activity that’s so age inappropriate.
So they do so by riding a frog rather than a serious animal like a horse.
Or they show it by standing up dangerously during the ride or in some way or other they just can’t be there,
they’re not supposed to be there, they like that merry-go-round, going around, but they somehow can’t do it.
So actually I went to my local park with a merry-go-round in Berkley and I saw exactly what's described,
the 3 and 4 year olds all were doing exactly what that guy was doing, well not quite,
they were waving merrily to their parents on the side lines as they passed by.
But then I got a glimpse of what this is all about.
I saw a 13 year old, I don’t think I was just lucky, I think if you go to the merry-go-round
and watch it for let’s say an hour, you’ll probably find this.
I saw a 13 year old who went on to the merry-go-round and this is what he did, he first warily sat on an ostrich,
he later switched to a horse and then he went to another animal and finally remarkably
while the merry-go-round was still turning, he seems to have gotten off,
he was, you know he was simply in hiding and I lost sight of him.
And he simply got off and went off in the background.
Now you find the same thing, you know you talk about the merry-go-round and the kids and everything
but you’ll find the same thing in surgical operations.
So in surgical operations at medical schools, because of their inexperience the medical students are given tasks that are,
you’ll be happy to know ridiculously easy but they respond in the same way as the older children at the merry-go-round.
They just can’t stand being there, they are not living up to who they ought to be,
these people are already doctors by the time they’re holding that clasp there, which is not going to kill you.
So what they have to do is they play the clown and Goffman has quotes from them too.
So these examples are then illustrative, they’re illustrative of behaviour that is pervasive.
And sociology is then dense, it’s then dense in examples of people’s views as to how they and others should behave.
And this is what people do and I think you do too.
They show their joy when they live up to those standards and they show their discomfort and reactions when they fail to do so.
Ok so that describes some of the motivation.
Now it turns out that you can simply add this motivation simply to almost any economics problem
where it should happen to be appropriate.
And it turns out that it’s pretty easy to do so.
So how does this apply to economics?
The typical demand curve as you know now is said to be derived
as people choose the best combination at each price and each level of income of apples and bananas
that they’re going to buy, that’s the typical text book demand curve.
So we economists, we’re very clever, we’re very clever in altering the utility function
to take into account many social considerations.
And there’s lots of literature on this which I’m sure a lot of you know.
But we’ve not altered it in a way that takes into account identity.
So what does that entail?
What that entails is for people to have a view as to who they are like the examples of the Christians
or the teacher or the children at the merry-go-round.
And corresponding to who they are they have an ideal for behaviour.
And then they lose utility in so far as they do not live up to that ideal.
They may also have an ideal for how others should behave and then we lose utility
and so far as those others do not behave that way.
And then people often seek to restore their identity and that’s especially interesting
because many of those reactions, many of those reactions such as duelling and making foreign wars, they are very perverse.
So it’s useful to make a habit of adding the considerations that I just described to people’s utility functions.
And it’s easy and it’s straightforward.
So there’s an easy, simple 3 step procedure for adding identity to standard economics.
So what's that procedure?
So that procedure goes as follows.
In any situation characterise how the decision maker conceives of herself.
A sociologist would say that this is her identity or also this is her social category, they have a fancy name for it.
And if you read the sociology book, unless you understand this, you know you just say gee they’re talking a lot of nonsense.
Ok that’s 1. 2: Corresponding to this identity, ask what is her ideal for how she should behave,
so we have a notation for that, we call that ideal e-star.
E-star depends upon how she conceive or herself, it depends upon her social category.
This ideal to remind you is e-star which depends upon c, it depends upon her social category of c.
Now we use the letter e because in many of these problems, ideal effort is a key variable, that’s why we use e.
Ok so that’s the second part of the procedure.
We ask what is our ideal for how she thinks she should behave.
We then go to the third part of the procedure, we then ask how unhappy she will be,
how unhappy she will be in so far as her actual behaviour which we denote as e,
departs from this ideal and then we add this to the utility function.
So what have we done, she has the standard economic utility, we have no objection to that,
we believe that’s very important in many problems and maybe even dominant.
And that depends upon the standard economic variables.
And she also has an additional argument to her utility function
which depends upon the distance between her ideal behaviour and her actual behaviour.
So it depends upon the distance between this abstract thing we call east star and her actual behaviour which we call e.
So knowing this will give you a prediction, how she will behave, ok.
So there’s an innovation here.
So this is central to sociology but we do not see it in economics.
Innovation here which every sociology takes as second nature is that the utility function is not fixed.
The ideal which is e-star depends on the person’s social category.
That’s the moving part here that makes this theory different from standard economics.
And then of course there’s an easy and important extension.
In addition according to procedure in many problems people not only care
that they are living up to their own identity but their identity is affected by other people’s actions.
And then they may be motivated to act on this in turn.
For many problems this should also be entered into the utility function.
Now I think your going to be surprised at how important concerns about identity are for your own happiness
and also for most of the decisions that you make.
And it turns out that this method of analysis explains a great deal of people’s motivations and it explains it naturally.
It’s just the way you yourself if you hadn’t been super trained in economics
would have actually described how people are behaving.
And it’s the stuff that People magazine is made of and it explains the modus of everyone,
from school children to the most ruthless dictators.
Alright, so that gives you.
So now the question is, these are good or bad depending upon whether it works.
So the proof of the pudding I guess we all say is in the eating,
the question is can we use this to describe economic phenomena with which we are all interested
and which are all of some importance.
So we have 6 of these, 6 applications and we have 6 applications of minority poverty,
economics of organisations, education, gender in the work place, gender in the household and macro economics.
And I’ll briefly describe how these come about, very briefly.
And I think maybe you can figure out, fill in some of the missing blanks.
So minority poverty.
According to plain vanilla economics minority poverty exists because minorities have few resources
and also they suffer from discrimination, ok.
But the standard sociological view adds something important to this, it adds the concept of oppositional culture.
In this view minorities that have experienced severe discrimination in the past
have a hard time accepting the culture of the group that has treated them so badly.
In our modelling they can choose to be insiders and accept the dominant culture and to suffer,
but then they suffer the psychological consequences of not being allowed to pass.
Or they have the alternative, the alternative is they can become outsiders,
they can become outsiders who reject the dominant culture but that has severe economic and also social cost.
Their identity choice is then to be either insiders or to be outsiders.
And corresponding to the different identities are going to be different ideals.
Insiders have ideals which say they should cooperate with the dominant culture and outsiders
have ideals which say that they should not co-operate with the dominant culture.
And then why does poverty develop in this model, poverty then develops from choosing to be outside.
So that’s minority poverty.
Now let me give you the economics of organisations.
So standard economics says that the motivation of employees in organisations mainly concerns their monetary incentive structure.
We agree with that, that this is important.
But our models say additionally that employees may identify either as insiders or as outsiders.
As insiders they will have ideals that accord with the goals of the organisation
or with the goals of their jobs within the organisation.
In that case they will need little inducement to perform well.
As outsiders their ideals will be contrary to the goals of the organisation
and in that case they will need additional incentives and perform well.
Making people insiders reduces the incentives that are needed to get employees to perform well.
It thereby solves the problem, it solves the problem of purely economic incentives.
Now a great deal of the economics of organisation concerns how with purely economic incentives and goals
workers are going to gain the system.
My reading and other people’s readings of the economics of organisations
is that organisations simply don’t work with economic incentives because those incentives tend to be so big and so large
in order to get people to do what they have to do, that in fact that people are going to game it and the system doesn’t work.
I think that is what I would say would be the dominant thing.
But then what solves that problem, what solves that problem in organisations
that tend to work is that the people know what they should do,
they identify with their jobs for the most part and then they go and do them.
So that the monetary incentives are important, they’re not unimportant.
But these other incentives are the cement of what causes the cooperation and brings the organisations together.
The economics of education.
Similar analysis applies to schools.
So education that works, education that works is education that gets students to adopt academic ideals.
So we can apply the same sort of model of insider/outsider analysis.
Such choice of identity of who students want to be plays a central role,
it plays a central role in the 3 major questions in the economics of education.
Now I’m going to go through them one by one.
So first what is the demand for education, the demand for education describes how long students stay in school.
So for example the plain vanilla economics of education says that students drop out of school
when the rate of return from an extra year of schooling has fallen to the rate of interest, that’s the standard theory.
So an identity approach says though that the major reason that students drop out of school
is that they no longer identify with being there.
So if you think you should go just to finish high school and you don’t think you should go to college,
then you drop out after you’ve finished, in the United States, your 12 years of grammar school plus high school.
That is what determines when you drop out.
And so it shifts in the utility from being in school as students advance in education
then is what causes the rate of return to fall to the rate of interest.
And the key role that’s being played here is not the rate of interest, it’s really,
the key role that’s being played here is that people at some point think they should be in school
and then beyond that they think they shouldn’t.
So the second and third questions in the economics of education are what makes school work
and what is the role of adolescent society in the educational system.
In identity economics this is largely determined by student’s choice of identity
and then their consequence ideals for how they should behave.
So now we go to the economics of gender in the work place.
So gender discrimination in the work place.
The plain vanilla economics of gender says that men do not want to associate with women in the work place,
that was the old gender economics.
Identity economics says the following, identity economics says that most gender discrimination occurs
because tasks are disparately but inappropriately described as male tasks or as female tasks.
The standard economics says the competitive markets will erode such distinctions.
Identity economics on the contrary says that it takes a political or social movement, such as the women’s movement to erode them.
So economics of the household.
The plain vanilla economics of the household has many different models of the division of work between husbands and wives.
What does identity economic models, identity economics models say that such divisions,
even today are largely determined again by norms.
In this case norms regarding what tasks should be done by men and what tasks should be done by women
are even today what mainly describes how household tasks are divided between men and women.
So there are men’s tasks and women’s tasks and women tend to do the women’s tasks and men tend to do the men’s tasks.
Ok macro economics.
This is the last of the applications.
Standard macro economics based on economic maximisation has many different neutrality results.
We all know all of these neutrality results.
Let me give you 2 leading examples, first in the plain vanilla model with rational expectations monetary policy
has no expected effect on equilibrium income.
Second in the plain vanilla model there’s no such thing as involuntary unemployment
since wages will be bid up to or bid down to the point where the supply of labour is equal to the demand for it.
Anyone who wants a job then at such wages will get one.
Now identity economics solves these problems because there are norms regarding the level of wages
so the wages may be above market clearing, in fact they will tend very often, especially in times of insufficient demand,
to be above market clearing and then there is involuntary unemployment.
There’s involuntary unemployment in this case because the rationing
and that gives us a very, very different model than what many people, how many people are describing the current crisis.
And then talking about the effect of monetary policy at least in normal times,
identity economics also tells us why in fact monetary policy will easily have an effect on the level of income.
So norms, why, because the norms may impart nominal stickiness in wages and prices
so that for example a 5% increase in the money supply will not just be accompanied by a 5% increase in prices and wages,
with no effect in relative prices or wages.
So that's why this identity economics is very helpful, even in looking at issues
as big as macro economics and answering some of the puzzles that have been given us over the last 30 or 40 years
as to why the old macro economics that people had in the 1960’s, why that was not working.
So this is the book and thank you very much, thank you for listening to me.
(applause).