George Akerlof and Rachel Kranton propose ‘Identity Economics’

By | May 19, 2010

The idea is that standard economics is often too simplistic:

But in most economic analysis, the decision makers’ point of view is quite narrow. It starts with what people like and don’t like. People may have a taste for oranges or bananas, or a preference for enjoying life today instead of saving for the future. They then decide what to buy or how much to save, given prevailing prices, interest rates, and their own income. Economists have included in such analysis that people interact with others, but they have largely treated such social interactions in a mechanical fashion, as if they were commodities.

Their proposal:

As economists and policymakers, we could be content to continue looking only at prices and income and related statistics to explain people’s decisions. In some circumstances, that might be enough to understand what is happening. But in many other situations, we would miss major sources of motivation – and thus would adopt useless, if not counter-productive, measures aimed at producing the outcomes we seek. Identity Economics provides the broader, better vision that we need.

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  • Saratu

    I sympathize with the notion that economics tends to be rather simplistic, but isn’t that the point? Economics is a bit like math in that it is purposely abstract, creates a world where things always add up and a suitable explanation for exceptions. It’s the world of 1+1=2, models and graphs, two-country models, two-good economies. I venture to say that all such things are meant to show the world not as it is, but as it should be.

    Which says to me that the challenge of the economist is to take all this chaos of exogenous factors that ruin the perfection that economics should be and create a more streamlined system where these factors no longer count, so that we can truly attain a laissez-faire society.