In this classic book, George A. Akerlof and Rachel E. Kranton write about decisions that shape our lives often hinge on our perceived place in society, not solely on a calculation of financial costs and benefits.
Highlights:
1. When we examine people’s decisions from the perspective of their identities and social norms, we get new answers to many different economic questions. Who people are and how they think of themselves is key to the decisions that they make. Their identities and norms are basic motivations. We call this approach identity economics.
2. People are born into socio-economic classes. They are either male or female. They have parents and family with existing identities. And they live in communities with certain norms and rituals that further provide them with identities. All in all, people are trapped in the identities they SEE THEMSELVES having. And they are trapped in the identities OTHERS SEE them having. The good news is that these "cages" can be opened if a person puts his or her mind to it. But they have to know the cages exist in the first place. By reading this book you will understand that cages do exist.
3. Military pay versus pay in civilian firms. Overall military pay is relatively flat – that is, it does not go up and down depending on performance, and it is also lower than for comparable positions in civilian firms. Nothing in standard economic analysis can make sense of such a pay structure – or of the rituals that are central to military tradition.
But with identity economics it all makes sense, and we gain an entirely new perspective on work incentives, not just in the military, but in all pursuits. In organizations that function well, employees identify with their work and their organizations. If employees feel more like insiders – a key purpose of military rituals – there is little need for incentive pay or pay-for-performance schemes. The military changes the identity of its recruits, inculcating in them values such as duty and service.
4. Good schooling occurs not as a result of monetary rewards and costs – the stock-in-trade of conventional economics – but because students, parents, and teachers identify with their schools, and because that identification is associated with learning. Moreover, whether students identify with being in school becomes the major determinant of whether they stay or drop out.
5. The children on a carousel: The toddler ride on their parents laps. The four and five year old children ride alone and wave to their parents on the sidelines. These children had a sense of identity which told them they were older and did not need to ride with their parents. They took great pleasure in riding alone, unlike the babies. The next older batch of kids were more daring. They'd switch positions, ride one-handed and no-handed, and find other ways to make the ride more exciting.
The thirteen year olds were the most interesting. They genuinely enjoyed the carousel but a part of them - their identity - told them they were too old. Carousels are for little kids. So they rode but pretended to be bored and indifferent. Eventually the cognitive dissonance got to be too much and they'd simply move on to something else. They show the key point: we have preferences for what we subjectively like, but we also have preferences based on our chosen identity. Sometimes they are in conflict. Think of the intellectual who reads "chick lit" or the Christian who listens to secular music.
6. Work effort: A firm is a little bit like a commune in that it only succeeds if everyone works hard for the common good. That means that firms suffer from the free rider problem because each worker has an incentive to shirk. There are a lot of market solutions but they tend to backfire. You can use monitors, but monitors only have an incentive to do a good job if they are the residual claim holder who gets the profits. Otherwise doing a good job as a manager won't benefit you, so you run into the "who will monitor the monitors" problem. You can try to pay people based on output, but that can't be easily quantified, so people will game the system to increase their performance in the things that are measured but slack off in the things that are unmeasured. Moreover, workers worry that if they do well, the bonus will be reduced. So workers punish fellow employees who work too hard with social scorn and ostracism and even sabotage. Instead what you get is a situation where people create workplace identities, which in turn sets the norms for work effort. Firms would be well-advised to put their energy into fostering high moral and cohesive workgroup identities than into trying to create incentive schemes or strict monitoring.
7. Norms play an important role in how economies work. In every social context, people have a notion about who they are, which is associated with beliefs about how they and others are supposed to behave. This notion has a critical bearing on an individual’s decisions.
8. Identity Economics would amend the economic theory of politics. Rather than thinking of citizens as voting according to their economic self-interests, citizens should be seen as voting for what they see as appropriate policies for the nation. We do often observe that people vote against their economic self-interest and support candidates who appeal more to their sense of social responsibility, for example.
9. Identity Economics would apply even more strongly in societies where individuals have strong attachments to a collective identity, such as family, tribe, or ethnicity. The basic argument is that people’s economic decisions are based on social norms for appropriate and inappropriate behavior. The more people adhere to these norms, the more powerful the economic implications would be.
10. Identity Economics would tell you to look for the social norms in a particular subculture, and these norms would help predict behavior.
[From the Great Books Series. Also see The Success Manual - Encyclopedia of Advice, which contains summaries of 100+ Most useful books.]
