Podcasts

The Origins and Significance of "Identity Economics"


Nobel laureate George Akerlof and Duke University economist Rachel Kranton talk about their book, Identity Economics and the insights that the concept continues to provide for economic analysis.

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Rob Johnson:

Welcome to Economics and Beyond. I’m Rob Johnson, President of the Institute for New Economic Thinking. I’m here today with George Akerlof, Nobel Laureate and his co-author and colleague Rachel Kranton, who’s the James B. Duke Professor of Economics at Duke University. Together, I think a little more than a decade ago, they created a book called Identity Economics. And I will say just personally, I’ve always found the exploration of what people aspire to, where their desire comes from and other things of this nature, to be what you might call a lockbox that we have to open up to make economics reach deeper, to a more sensitive and perhaps a better predictive place as well. Thanks for joining me.

So you start with Identity Economics. I’d mentioned to you both, you have a fabulous table of contents because you’re talking about how it addresses economics, how it addresses education, how it addresses economic methodology, five ways that can change things. And both of you’ve been involved in a project that you’ve shepherded on economic research and identity norms and narratives. There seems to be a great deal of enthusiasm around this, what I would call maypole that you led everybody attached to and start to explore.

But you say that the subtitle of your book is How Our Identity Shape Our Work Wages And Wellbeing. There’s an awful lot of concern about wellbeing in the conversation around the world today. So let’s start with, what was the seed of inspiration that inspired the two of you to go down this path and write this book?

George Akerlof:

Okay. So I could begin with that. I received a note from Rachel, which was not the most welcome note, which said that the last paper I had written was totally wrong and that I’d missed the concept of identity. I think I got the note, no, I think I was in Washington at the time and Rachel was at the University of Maryland. And so we agreed to get together and discuss this. So I think just to continue, that took us a long time to actually discover what that meant. So, Rachel, maybe you want to add to that.

Rachel Kranton:

Sure. Yeah. It was fortuitous that I had just finished my PhD, my doctoral program at Berkeley, and I had moved and had my first job at the University of Maryland. And George was also living in Washington at the time. And it was really fortuitous placed that we were both in the same place again. And indeed the paper George had written had a lot to do with conformity, how people wanted to do what other people do. And what’s important about conformity is that it’s not that people want to do what other people do, people want to do what other people like them do.

And so you have to think about the ways people act as conforming to particular norms for their behavior. And then how do we define what that is? Well, it depends on who you are within society. So the norms for how I behave would be different from how George would behave. So there’s gender norms, there’s ethnicity. And of course, once one starts talking about that, we realize our social space is divided up into different types of people and norms for how different types of people behave and how they behave with each other.

And it took us a long time. I’m now talking about this in a way that sounds systematic, but it took a long time for us to figure out how to use the vocabulary of economics to bring in these kinds of motivations into a basic model of economic decision-making, which is this utility function. So we read a lot, we talked a lot, we walked around DuPont Circle a lot because we would have lunch at Brookings. And so it was really, I think, a journey through the literature outside of economics who distill it and bring in key concepts into economics.

Rob Johnson:

What other disciplines contributed heavily, psychology or sociology, anthropology, or-

Rachel Kranton:

History.

Rob Johnson:

Yeah, I remember I’m Rene Girard who wrote a famous book called Deceit Desire and the Novel, which was his PhD dissertation, about the notion of mimetic desire, learning from people you admire, what good tastes means, is a simple way of putting it. But it led to all kinds of things, including if you admire somebody and you both go to the auction and only one of you can buy the painting, how do you resolve your disputes? And how did various sub-groups forum together in conflict with other groups? But he was at Stanford University for many years, and he wrote books like Violence in the Sacred or Scapegoating.

Scapegoating influenced me because I worked on a film about major league baseball and how the Boston Red Sox had a blunder by Bill Buckner in the ‘86 World Series and the Chicago Cubs had alleged blunder by a fan who reached out and touched the ball named Steve Bartman and how they were both scapegoats for the fact that their team hadn’t won, which in both instances, it had been many, many years like back to 1904, they were considered a manifestation of a jinx. So Rene Girard affected my work in the arts as well as thinking about economics. And I’m wondering who might be analogous in your lives that really catalyzed a different way of seeing?

George Akerlof:

So I think somebody might be George Homans. Rachel, do you think that rings a bell?

Rachel Kranton:

Oh, yeah. George Homans. I’m thinking of a Pareto. Remember we read Pareto? I also think outside Edward Said who wrote Orientalism way back when thinking about how cultures define themselves in opposition to other cultures. Who else, George?

George Akerlof:

So I think going back to Homans, Pareto was unreadable.

Rachel Kranton:

Right. But we did manage it somehow. We re-read it. I think in the end, I’m not sure, it’s a little bit like we did various side journeys and then came back. But I don’t think that there’s a single thinker that we could point to in that way. We read a lot in a lot of different fields. In the humanities, in the social sciences, then we read a lot of African-American studies, authors who are writing about the situation of African-Americans in the United States. We also read about people who were studying gender legal scholars. Law is another field, we read a lot about law because we used to have a piece in the book about sexual harassment law and how it evolved over time. So we read a lot of law.

Rachel Kranton:

So I don’t think we could point to a single person, there’s many, many different sources. Because I think in some sense, what we were trying to do or what we were realizing as we were formulating our ideas, is that identity is everywhere. And so the obvious ones are race, gender, ethnicity, but then there’s the perhaps less obvious ones, but they’re obvious ones you talk about them, it’s hierarchies within organizations. So there’s your boss and then there’s your coworker, and then there’s the staff member, and then there’s the person who delivers the mail.

Those are functional roles of course, within an organization, but on top of those functional roles, are notions of how it’s appropriate to talk to people in these different roles? Who’s supposed to defer to somebody else? Who’s an insider in the organization that feels a part of the organization versus who’s implicitly just not really accepted? And of course, that can also go on gender, race and ethnicity lines as well, but even just within a hierarchy within an organization, it’s not just a functional hierarchy. So that’s why, I think, the expansive readings were feeding our understanding that this framework that we were developing can be applied in so many different areas.

George Akerlof:

So there’s the real questions. One question is that economists, they simply assume that people have a utility function, they have utility function for this. And then they decide with their economic logic, the standard logic that’s taught in economics courses, what people’s utility must be. Something that they can sit in there at their desk and figure out. But there’s another thing, and that is at any moment that people are making some decisions, they are putting themselves in the place of the decision-maker. And so they’re telling a story of who am I when I’m making those decisions? So in some sense, whatever role you’re playing when you’re making decisions, that is the motivation that’s behind those decisions.

And that’s much more general than what the economists sitting in there at their desk or sitting at their offices, or even sitting on the beach, aren’t going to be able to think about. And so the real thing is that this greatly expands the realm of motivations that economics should consider. So Rachel just mentioned many of the ways in which this does make that expansion. But then all kinds of things can happen once you have this new space and you have a new one algebra. The algebra from the economics is greatly expanded and it becomes much more interesting.

Rob Johnson:

Well, I would imagine that from the mosaic you’ve created, there are two reactions. One, there are so many possibilities we don’t know how to rake them. And on the other hand, it’s so much more enriching, because it seems to resonate with many things that you observe and experience in your life.

Rachel Kranton:

That’s a typical criticism of people who write a more expansive model or utility function model, is that, well, you can just put it in the utility function. You can assume anything, too many degrees of freedom. And of course we heard all of that. But I don’t think the criticism is particularly apt, because one of the things that we did in our book, so the book is built on articles so we had a series of articles that then went into the book, is every single thing we wrote about was grounded in some evidence. So we couldn’t just make all of this up. I guess we could, but we didn’t. Everything we did was grounded in evidence. So these readings that we’re mentioning to you are not legal theorists only, it’s actually a lot of the law we read were about legal cases, about specific people in specific places. And this is what happened to them.

The same thing of the work we read about workplaces, where we read about what happens inside a workplace. What happens when the foreman speaks to a worker in a particular way and how that worker is so upset about what happens and then, what happens when that worker goes home? So we were reading and we were basing our modeling on real people in real places, making real decisions and in a real social context. And so we didn’t make it up. So our work is very grounded in evidence.

And I should say that now, 20 years hence from when we were first doing this or even longer, there are people who are now able to bring data. So when I say evidence we were reading a lot of this literature in anthropology, sociology, and so on, which included some data and more empirical exercises of that sort. And now there’s people who have found really, really clever ways to get at the norms that we were describing in our books. So that’s, I think, the rebuttal to the too many degrees of freedom argument.

Rob Johnson:

Well, the other argument, the rebuttal to the too simple is that we’re practicing the science. We’re trying to explain things and many of these presuppositions around the utility model are not scientifically derived, they’re arbitrary. And so, are you framing a fiction or are you exploring reality with such a simplistic framework that can, what you might call, project results or predict what should happen based on things that were not scientifically derived? So I see both sides of where the criticisms could come from. And I applaud that you reached out and went for that more textured, enlarged sensitivity, because a whole lot of things won’t be explained by that core frame.

George Akerlof:

So I think what we’re trying to do, and I shouldn’t make this so grandiose, but this is what we’re trying to do, trying to be like Darwin, who in the end These Mountains discovers a fossil of a fish. And he’s wondering why he’s found that fossil fish in the mountains. So that’s what we’re looking for. We’re looking for those fossils, we’re looking for the places where in fact, the standard economics with its standard points of view, would fail to take into account that people are motivated by their stories where that economics is deficient. And so that’s what we’re looking for.

So Rachel and I, we had a great deal of fun, I think, writing this book and finding these examples. So the question is, how do you find an example where the economics simply does not explain it? And the thing is, it turns out that, which unfortunately in the world today we’re now experiencing, there’re huge number of places where trying to explain it by standard logic of economics doesn’t make any sense.

Rachel Kranton:

Right. And I should say that any economist can write a model that can explain anything you want, and that’s what we’re good at. Give me something, I can write a model for it, and using a very “parsimonious” model based on some primitives of utility over consumption. But in the end though, they don’t really teach you much these models because I’ve created them and added bells and whistles in such a way that I’ve actually explained this phenomenon. Well, if I had directly said something, so I actually argue that we’re parsimonious, which George and I are doing, if we have directly looked at how people understand themselves and who they are in the world and what stories they tell themselves about who they are and where they come from, if we just used that as the basis for the decision-making, we would have been guided directly to the outcomes of interest or the phenomena we’re trying to understand.

So it’s in some sense, a more parsimonious understanding of decision-making and of interactions than a convoluted model that, of course we could orchestrate if we wanted to, but it doesn’t really teach us much in the end.

Rob Johnson:

George, you and I’ve had a number of discussions over the years which might be called the habit structures of the economics profession. And I’m curious, when you come up with this creative alternative thought through rigorously developed and so forth, did you experience affirmation or resistance, dismissal, being ignored, or what was it like to strap on doing something different in the context of a very fierce profession?

George Akerlof:

I think that there’s been quite a bit of resistance. That would be my… There’s been some acceptance. I think now we’re beginning to get more acceptance, but there’s still quite a bit of resistance. Why do I think there’s resistance? I think there’s a lot of resistance because I think there are things which are more easily explained by identity than they are by very constrained economic models. And when you think about whether it’s explained by[inaudible 00:19:31], and you ask whether that’s people’s motivations, you can go to actually, so this is what Rachel is talking about, you can go to the anthropological works and you can see that this exactly corresponds how the people have described motivations.

And so there are lots and lots of examples of this. And then furthermore, there are places where the economics has simply failed. Let’s give you one example where economics has failed. So it wasn’t until, I think, something like 2016 that economists saw how tremendously serious it was, the decline in labor force participation of men 25 to 54. So there’s this famous paper by Case and Deaton. But that is just really, really important because just think about what’s happening to the US today. US today there’re currently 10% of males who are simply out of the labor force at this age. And we know from statistics, Rachel statistics again, they aren’t staying home taking care of the kids. They’re not, they’re not there. I’m sorry.

Somehow there’re so many people who are having a hard time reaching an adult identity, and there’s this big statistic, it’s 10% of the of males. And that explains why there’s all kinds of bad things happening politically and economically. And there is a huge number of books which are written about this now, like a wonderful book by Nick Kristoff about his friends from childhood and many more. And the polarization here between Republicans and Democrats, part of that is explained by the fact, what are people doing? They are defending their identity, and so we don’t have a society. Remember Rachel, at the very beginning, she said, what was this abandon? Was that people want to do things like what other people do.

That’s the opposite of economics. The standard economics is about supply and demand. Basically supply and demand is something where you have a unique equilibrium, the supply curve, it goes up and the demand curve goes down, and when they cross that’s one equilibrium. Well, you don’t always get the unique equilibrium, but that’s the basis of this thing. On the contrary, if people want to do what other people do, then in fact it’s multiple equilibrium. So if all of us want to do what all the others, just the group of three of us here, then there’s an equilibrium where we’re all going to be doing the same thing. But one of us might choose one thing, one of the others might do another and so forth. So that’s a change in the whole nature of the equilibrium of economics.

And so fact is that’s so important, as Rachel said at the very beginning, that’s so important in identity economics. And that was the problem with my paper. I didn’t understand what was going on. Then this is changing economics, and then we see huge amounts of this stuff. So just to give you one example of that, think about global warming. How can anybody in this day and age think that this is not a very serious concern? How can some significant fraction of the population believe that this is a hoax? Now, there’s a reason for that. The identity is what’s important to them. The other people that they associate with it, they think it’s a hoax. So I have more to lose by contradicting this view that it’s a hoax than actually believing, okay, so it’s a hoax, I don’t lose very much. But then you have horrific public policy results from this.

Rob Johnson:

Yes. Well, as a matter of fact, I want to interject on this very theme because many times experts are not treated as though they were looking out for the public good, rather they were looking out to please the powerful to advance their own personal career, whether it’s appointments or consulting, or what have you. And a lot of the people who are despondent are saying everything is a hoax, these experts are all playing a game. And I have to say this myself. I grew up in Detroit, Michigan, and I watched the years of the decline of the auto industry after the cauldron of Vietnam and the riots and Martin Luther King’s death and all of these things.

And when I was going to college, I felt like there’s an elite that’s explaining Detroit by blaming the black public officials like Mayor Coleman Young, when America, in the aftermath of the Voting Rights Act and the Civil Rights Act had divorced Detroit and wasn’t going to come to its assistance. They were blaming the victim so they could inoculate everybody else’s fear that the American dream was dying. And when I went to college, the first economics course I took, they said something about equilibrium. And I wasn’t trying to be a smart alec, but I raised my hand, I said, isn’t that like assuming a happy ending? There’s a skepticism about expertise that’s continued to blossom when broad-based prosperity evaporates. And I think we have a formidable challenge in figuring out how, if you will, to restore faith in integrity, in expertise. And if we don’t, it’s dreadful, as you were saying.

Rachel Kranton:

So again, just to talk about how identity economics can understand the phenomena that you’re describing, a standard model would say, people are interested in information, they’re interested in information that will help them make the correct decision. That’s what standard model would do. When we introduce identity, you are a person who might be looking for information that confirms your understanding of who you are, not necessarily what to buy at the grocery store or whether or not you should be getting a vaccine. You’re looking for information, or you’re more receptive to information that helps you maintain a sense of who you are and then who you are within your community.

So let’s get back to that a second, is that what we get in these multiple equilibrium models if we were to expand it, is that there’s one set of people who are wearing black shirts, as we all seem to be doing on the screen, there could be another set of people who all wearing white shirts. And then the black shirt people don’t like the white shirt people. And then you can have the reinforcing of these divisions within the society. And to go one step further than that is what identity economics model would tell us to do, is look at how people talk about those divisions. And again in a standard model, what people say about things, like people just like black shirts or people just like white shirts, but in our understanding, no, it’s actually meaningful what people say about wearing a white shirt or wearing a black shirt.

And so the whole discussion about tastes and about preferences, that becomes part of economics. And of course it drives a huge amount of economic activity, is the discussion over what is correct, what’s incorrect, the economic activity is just people activity. Then people do things, they take actions to exert effort to influence the way other people think about things and the tastes that they adopt, the things that they buy and so on, which then of course then become part of who they are and part of these different communities and how they understand themselves.

Rob Johnson:

I’m reminded of, he’s now at NYU, the psychologist, Jonathan Haidt, who has a famous paper called the Rational Tail and the Emotional Dog. And I once made a video with him where he cited a poet who goes by the name IN-Q, for in question, and IN-Q has a poem called Evidence and in the essence of the poem is, you will always find evidence to support what you want to believe. It’s reversing the causation like you spoke of the curious model. Well, find the evidence to help you make the right decision. This upside down method is going out to justify what you want to feel.

Rachel Kranton:

Right. And I think behavioral economics of course is very famous now. So behavioral economics, which is a marriage of economics and psychology. And there are people who are working in behavioral economics, which would very much write such a model down where people are seeking information, for example, to evaluate the decisions they’ve made. I think one must make a distinction between those sorts of now somewhat have entered the mainstream types of models, is that our model brings in the social element. I’m interested in who I am as a person within the society, not just me as an individual.

So, going back to what George is saying, the story I tell about myself or the story I want to reinforce, it’s not just some arbitrary story about me, Rachel Kranton, it’s about me as a person in a society, as a member of a family, as a member of a political party, perhaps, or a member of a neighborhood or member of university, or of an ethnicity and so on. And so it’s those elements which make distinction from more of a cognitive psychology model, rather than a social psychology interpretation of how people are making their decisions and evaluating information.

Rob Johnson:

Yeah. You have a Chapter in your book called Identity in the Economics of Education. And I was inspired to reread that because I recently read a book by the late Jane Jacobs, the Canadian author who wrote so much about cities and so on, and the third Chapter of her book called the Dark Age Ahead, it’s her last book published in 2004, was called Education versus Credentializing. And I haven’t reviewed your Chapter, but how did you see identity in relation to the economics of education?

Rachel Kranton:

Well, I think we started out with this basic premise. So the classic economics of education is that there’s a student in the school and the student makes a decision between effort to excel in school versus the benefits of that effort, and the opportunity cost of effort in school. That’s the standard model of education. And I think George and I looked at it and said, okay, so what 13-year-olds does that model describe? This is not a model of a child or an adolescent or a teenager, because what does a child or an adolescent, a teenager, what are they often very concerned about? They’re concerned about their peer group, they’re concerned about who they are.

And so the basic model of a future-minded child or adolescent making this trade off between effort in school and the opportunity cost of that effort, which might be employment that might be a classic model, somebody would drop out of school because of employment, it just did not match the 13-year-olds or the 15-year-olds or the seven-year-olds. And also further did not match what a school was constructed to do and what schools even understood themselves as trying to accomplish. So that’s just the nuggets, we started there. The decision maker themselves is not this person. And then we started, of course, we read an enormous amount about schools and schooling and education. And now you want to continue, George?

George Akerlof:

Yeah. So what is successful schooling? Successful schooling is where the students learn that they want to be students. So instead of taking what they want outside, you have to have that inside, what the school has to do. And this is true in any organization, you have to teach the people in the organization that they identify with them. So if you’re a successful educator, you want the students to adopt the values of the institution. And then those values are extremely important. We had a good example. I think one of our examples was West Point. Do you remember that, Rachel? Yeah. So the amazing thing about West Point is they have these very strong views as to what you’re supposed to do when you’re at West Point.

Now, I don’t know if we ever talked about this, either any of us together, but a student who had graduated from West Point, and then he was back teaching there. And so I went up there and gave a talk on identity. And it was just an utterly fabulous place. Everywhere you went at West Point, you saw statues of heroes. The moment somebody arrives there, you’re inundated with this notion as to what you were supposed to be. That’s I think the opposite of most civilian schools. Civilian schools, what you’re supposed to do, you are supposed to go there, huh, then you’re spending your first two years as freshmen and sophomore and then, oh, am I going to do this? Am I going to do that? And students actually have a very hard time doing that.

The person that wrote the book about that, he was a reporter for Rolling Stone.

Rob Johnson:

Who’s the person, I’m sorry?

George Akerlof:

His name is David Lipsky. He wrote the book on West Point, Absolute American. He usually covered civilian colleges, just regular colleges, and he was assigned to go to West Point. He initially wasn’t enthusiastic about that. And then at the end, he covered them for something like three or four years. And at the end, he said, these were the happiest students he had ever seen. And why, because you go to West Point and you know who you’re going to be and who you shouldn’t be, you get an identity.

Rachel Kranton:

Right. And of course the students who go to West Point want to go to West Point. And so there’s a self-selection process. So there’s a reinforcement of the institution and the students who arrive there. And in other organizations or the school, as George was saying, a school is just an example of an organization. An organization to function well, people have to want to be there, and they have to believe in being there or feel like they belong there. And that’s reinforced in a company by the management or the leaders of the firms. So that’s where we also have this work on workplaces.

And you can see that the work on education is very related to the work on workplaces, because it’s the same fundamentals and feeling like you are an insider, like you belong, like you’re part of the organization, then you’ll work for that organization in ways that you might not work if you felt like you were an outsider, or you were continually not respected within that organization or the type of person you are, your background does not fit within that organization. Then you’re not going to put forth your best effort. Makes sense. And overall, the organization does not function particularly well.

So again, a school is as an example of, or looking across more or less successful schools. And we also looked at elementary school reform programs and so on. More or less successful schools figured out a way to bring students into the school, makes students feel like they belong, that they were students, that they had adopted the mission of the school.

George Akerlof:

So this addresses more generally the economics of organizations. So there is an economics of organizations. And the way this literature began was it said, people have to be given the proper incentives. So you give people the proper incentives, and then they’re going to do what the organization wants. And then Rachel and I, we both read intensively an article by Kenneth Prendergast and Kenneth Prendergast… It’s a wonderful article where it talks about all the ways that these incentives are not going to work. We’re fine. They can be gamed.

And actually, I think we never decided what he meant by this article. Our conclusion was, no matter what incentives you put up, then people could find that’s very ingenious. They could find some way to game it they didn’t want it, if they don’t identify. So the solution for this in almost all organizations was this, the organization has to get its members first, and there are many techniques for that, to want to share the goals of the organization, in whatever role they’re supposed to be playing. And that’s what you see at West Point.

Rachel Kranton:

Right. To give an example from education, if you’re going to pay teachers to increase according to higher test scores of students, now the teacher will figure out a way to get those test scores up, but it’s not necessarily by educating the students. So it’s a little bit like an ad. You get what you pay for, but perhaps literally so, but you don’t get what you’re looking for, the overall objective, which was of course, to educate students in a more fulsome way. Test scores are just one tiny indicator of what students are actually learning. And so that, again, brings back to, how do you accomplish that? You have to think about how teachers understand their position in the school. What is the whole mission of the school and how the students understand what they are doing? And the stories they tell themselves. When I say that, not as a fiction, but how people understand themselves and their relationships.

George Akerlof:

So one aspect of this is that, what are wages all about? So according to the incentive view, wages are about making people fearful that the reason you do your job’s is you might be fired if you’re caught shirking. That’s the standard economics of why wages are what they are. But there’s another view of that, which is the identity view that organizations are going to work if people identify as insiders, they are insiders of the organization. And so it’s like a family. They share the goals of the organization rather than being an outsider. An outsider’s somebody who doesn’t identify with the organization, may actually even disidentify with it. And so this is all about wages and this is why wages tend to be more than market clearing, which explains the phenomenon of involuntary unemployment. So all of these things, you talk about the whole scope of economic and social problems. This identity is actually utterly central to just huge numbers of major problems,

Rob Johnson:

I’m a grinning inside right now because I feel like I’m at school. I had a father who spent four years in the Navy, then other than when he played jazz piano, the thing he most sang about it and exuded enthusiasm for, was his time in the Navy. Years later, after growing up in the anti-Vietnam era and when Richard Nixon was taken out of office and so forth, my formative years, I got involved with a man named Alex Gibney who I partnered with in making a film called Taxi to the Dark Side, which won the Oscar for best feature documentary. And he, Bill Moyers and some other people, Seymour Hersh and others contributed. But the people who really helped us build the film were the people at West Point.

As you both know, I used to work in the financial industry and I worked in the Senate Banking Committee. They would pull me aside and say, we can’t stand how financial people act when they come into Government because they act like they’re still working for their firm, not for the public good. We’ve given our life to the public good. And I was getting all of these, what you might call statements of what integrity is, at West Point with a vividness I’ve never seen except for one other place, which I’ll tell you in a minute. And it was very inspiring. And they weren’t kowtowing or conforming, they were furious that torture was being used, not just because they might get tortured in return someday by another country, but they thought it was denigrating the greatness of what the United States aspire to be.

Years later, as people are trying to figure out what works in social organization, I was given an opportunity to spend about three days on an aircraft carrier, the USS Nimitz in honor of the fact that I was named after an Admiral when my father was the physician on the ship, those romantic days. And I went out there thinking, this is a nice memory of my dad. And when I got on that ship, I saw teamwork. I saw a bunch of young people of whatever identity, gender, color, race, ethnic, religious orientation, all acting like they believed they were in a system that was trying to help them get better and have a meaningful and successful life. The morale was very high. My entire Vietnam skeptic might step aside and say, I wish the government would apply these methods to activities that aren’t quite so damaging or dangerous. In other words, not defensive, but offense.

But leave that aside, there were miracles. I was perceiving day after day watching the morale of these people, and I started to understand my dad’s enthusiasm for his time in the military, from the West Point episode, and from the days on that aircraft carrier. And you just brought it back to the surface for me in a way that I hadn’t ever comprehended.

George Akerlof:

So I feel this, going back to your question that you asked Rachel, this is what happens when you run in a successful school, that students identify with the school and they fulfill the goals of that school. The school gives the people the goals. Of course, West Point, that’s a successful school. And I think there are many successful schools with different types of values, but the thing is that’s what defines it. And so this actually, when we were writing about US education, we were looking at people who were criticizing the US school system in the sense that… The ethic at that point was that you weren’t supposed to change who the students were. They called it Shopping Mall High, Shopping Mall because shopping mall, if you see something you’re willing to pay for, you can get it and you can take it home and it can be yours.

And this story was that the shopping wall isn’t supposed to change who you are, you’re just supposed to take who you want and what you want, you can go and get it. But that shouldn’t be what a school is all about. School should also be about creating students who want to identify with being good people, and not only being good people, but part of being good persons was to do the academic learning.

Rachel Kranton:

Right. And I think another element is that there will be school systems that would tell certain students from certain kinds of backgrounds, implicitly tell, or perhaps explicitly tell, but implicitly tell they don’t belong there. That they really can’t do the work, or they’re not really part of the school and so on. And so there are elements of race and gender and ethnicity that come to fore in the school systems as well when certain people or certain backgrounds are implicitly told or understood not to be the good students, for example. And so that of course is a school that is not successful that is telling a population of students that they are not insiders of the school.

And so of course the same theme over and over again is, for an organization to be successful, the people who are in that organization need to feel like they belong and that it’s their organization, it’s their school. And if people don’t feel like it’s their school, well, then the other objectives of the school, which are having students graduate with marketable skills, are much, much more difficult to achieve.

Rob Johnson:

This is fascinating. This is really fascinating because when I think about schools, I think about training skills, navigating the shopping mall, knowing how to add value so people will hire you. But I also think about the public good of being a citizen when our system of markets and capitalism is embedded in a democracy. How does democracy function to keep everything on course and in balance depends upon, which you might call the fiber or the spine or the imagination of those people in these schools. It’s a public good.

George Akerlof:

Yeah. So also we wrote namely about the student in the school and how the students related, but the same thing applies also to the teachers in the school. So there’ve been experiments where the teachers, rather than getting what they do from top down, have been more bottom up. That’s like in a university where the faculty have a great deal to say about what they do and how they’re going to do it. And in fact, that tends to also be successful. So when the teachers themselves describe what to do, so they would experiment in Massachusetts, especially centered at a special school in Brockton, Massachusetts, which was doing very badly… There’s a nice book about this by Andrea DeBower. And the teachers-

Rob Johnson:

Is the one after the education Wars?

George Akerlof:

That’s right, yeah.

Rob Johnson:

I once made a video with her about that book.

George Akerlof:

Oh, you did?

Rob Johnson:

I was really inspired. Yes.

George Akerlof:

Well, that’s it yeah. So that’s part of the idea. Now, we can talk about something else. We’ve been talking about the good things about identity. There can be bad things about identity. So you can have identity wars where, because you have this identity, I’m going to have that identity, and those are really disastrous. And we actually see many of that. Actually, I think at the moment, we’re seeing one of that happened in the United States at a very general level. And this is really serious, and unless we understand this, we’re not going to be able to get a solution to it. And so actually I’m worried about the future because we seem to have gotten into an equilibrium where we have identity wars. And in my opinion, the… No, no, I’m not going to say that.

Rob Johnson:

Okay. That’ll be for the next episode. Keep-

George Akerlof:

Yes. You can keep what I just said but yeah.

Rob Johnson:

Well, I think I wanted to ask you quickly in your conclusion, you mentioned, this will be the last question, you said there were five ways that you thought identity economics changed economics. We don’t have to go into depth, but to foreshadow so we make another episode. What five ways do you think you changed, how are we saying, learning about identity economics, changes economics.

Rachel Kranton:

I’m going to say, I don’t know, do I have to do five? I’m going to say one of the biggest ones. Which is that, it changes our notion of preferences. And once you change our notions of preferences, you realize that what people do is fight over preferences. And so the idea that we’re all born, somehow we have these preferences, identity economics tells us that, no you’re raised and you learn your preferences and therefore preferences can be fought over, discussed, battled and so on. And I think that’s a completely different view of preferences.

George Akerlof:

So those preferences are going to affect our welfare, or how happy we are, those preferences are some things that are going to be shaped by whatever environments we’re in. So that’s a part of the economic equation. Those preferences are going to have different equilibrium which is what was talked at the very beginning from standard supply and demand. And so you’re going to get different economic equilibrium. So all of these things go to the very core of what economics is about, can be situations like the demand wheat, I think and the supply of wheat where demand is equal to supply, and that determines the price of wheat and the quantity of wheat. But wherever you have people involved, rather than who are making their decisions regarding who they think they are going to be and how they’re going to act to all kinds of situations, then in fact, this identity is going to be there.

Let me just say one more thing. So what we think identity is, is it concerns the stories that people are telling themselves when they make their decisions. But why is it called identity? That’s a peculiar sociological word. It doesn’t mean what people necessarily think it means. It does mean all the standard things, but it means something more. Identity, as we said, it’s the stories that people are telling themselves. And what’s central to the stories that people tell themselves, reading in the New Yorker article, how does the New Yorker article begin? You can almost always tell, and from the very first paragraph who the protagonist is, who the protagonist thinks they are. Just to give you an example, go to the first paragraphs of Warren Peace, then you know who a person’s thinks they are. Just taking any great novel, you’re going to see that. And so you see who the people think they are, and then that’s central to the story, and I think almost all good writing, especially fiction writing, is going to give [inaudible 00:55:51]

Rob Johnson:

Well, I think I had a purpose today in bringing you on, which was this book and the whole set of imaginative pathways that were opened in me when I read it. I wanted to tease my audience into going to Princeton University press and buying this book and exploring as well. And why is that purpose so important right now? Because everybody can feel things are off course and that despondency and that fear or something that further ridicule, exacerbates and polarizes like the bad identities you talked about. But when someone sheds light on a way forward, it can be healing. And I would nominate your book to be in the front row of that healing. And I really want people to reach into it, and I want to thank you for writing it.

Thank you for both spending the time with me today, and I’m sure we’ll come back and explore again in a future episode.

Rachel Kranton:

Thank you so much. It’s been a real pleasure.

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