There is a joke about economists that I have come across twice in the last couple of weeks. Charles Murray opens his book In Our Hands (about which I will blog in due course) by telling us about three men stuck at the bottom of a pit, discussing ways to get out. When it comes to the Economist, he begins by saying “First, assume we have a ladder.” G. R. Steele began his lecture on Friedrich Hayek by criticising microeconomics for being too theoretical: the economist on the desert island imagines he has a tin opener. Last night Nobel Laureate Professor George Akerlof sought to provide one explanation for why homo economicus failed to fully explain human behaviour.
Akerlof’s lecture was entitled Economics and Identity, and began with a self-effacing admission that he had originally discounted identity, feeling that it had nothing to say about economics. Identity is summed up by desire, and desire is the basis of the utility function upon which economics is based.
Groan not! I will try to keep the rest of this jargon free.
Basically, the usual assumption is that I need something, that need can be weighed, it can be compared to my resources, and then I decide whether it is worth the cost. Is an mp3 player worth three day’s work? Is the view from the top of the mountain and the sense of personal achievement worth the gruelling climb? Usually, it is assumed that these are either objective, or that where they vary this is according to taste and that taste is as far as identity goes.
Professor Akerlof has come to think otherwise. He believes that our desires are fundamentally affected not just by who we are but by who we feel we ought to be. This creates a gap between what we want (which he quantified as “e”), and what we feel we ought to want (which he quantified as “e*”, and then spent the lecture repeatedly using the term “e-star” until it became quite irritating!). This gap has various negative outcomes, and dealing with (or exploiting) it should be a significant influence on public policy.
Some examples might help – though he was running out of his ill-managed time when he came to address the specific impact, and so chose to skip many of the examples (including, annoyingly, one entitled “Macroeconomics”, which is economic code for government meddling). One was education. For Akerlof, one of the greatest tragedies in America today is the underperformance of black Americans, and the resulting economic and social problems they face (and cause, in heightened criminality, for example). Interestingly, this is also a major concern for Murray, who has concentrated for some time on policies aimed at helping the “underclass” (not just black Americans but all those drop out within society).
Akerlof noted that American society is still influenced by an us-and-them mentality, and that this has a profound effect on inner-city black children. Within their schools cultures develop whereby they deliberately flout rules, reject a system which they believe is stacked against them anyway, perform badly at school and drop out of school early. Their identity is influenced by negative stereotypes and they begin to believe that they should behave in a certain way – even if this conflicts with their inner desire to behave in a different way. This is reinforced by socialisation and sanction: their peers disregard education, if they are too eager they are bullied, so they come to believe that they ought to want to stick two fingers (or rather – as they are American – one finger) up at the system.
It should be noted (though Akerlof failed to do so) that this is a generalisation – there are many children who resist the pull of the culture within their schools. However, economists tend to work in abstractions and aggregates.
How does this influence policy. Akerlof cited examples of where schools have made strenuous efforts to overcome the negative culture within the school, and have as a result turned schools around. It requires good teachers and small class sizes, however (no surprise there!). Indeed, argued Akerlof, black children from inner-city schools derive more benefit from small class sizes than other groups. The public policy impact is that this suggests that efforts should be made to bring the best teachers to inner city school and reduce their class sizes – the exact opposite of what generally happens, where good teachers work in schools with excited and engaged pupils, and the money (private or public) ensures small class sizes.
There were other examples; education was just one. However, when all was said and done I was left wondering what was so novel about Akerlof’s suggestion. So homo economicus is nothing more than a flawed model. It’s hardly news. Poor kids from inner-city schools need better teachers and smaller class sizes. I can see why they gave him the Nobel Prize!
Akerlof has produced four publications on this subject so far, and promises more to come. It may be that they better explain the usefulness (or even utility!) of incorporating identity into economic modelling and public policy. Until he does, however, this remains nothing more than an intriguing idea.