By Sebastian Ille, Ph.D., Lecturer of Economics, New College of the Humanities (NCH)

A few steps away from my university, the British Museum opens its gates to anybody interested in exploring human civilisation. Circumambulating its premises a short while ago, I discovered the Makah and Nuu-chah-nulth, whose sharing norms and sustainable hunting practices were reinforced by a collective identity relying on whaling and the stories of its origin. Nearby, a handscroll depicted a Chinese settlement in Nagasaki during the Edo period; a multicultural city where rules of exchange and economic interaction were defined by a trader’s nationality. A little further on, the illustration of a Meiji official portrayed a gentleman whose dress and posture was nearly indistinguishable of that of a late-Victorian Englishman. On the other side of the museum, I spotted the last resting-place of a man buried in the surrounding of the tombs of the First Dynasty kings. In ancient Egypt, his dwarfism was considered a mark of divine favour and made him the king’s personal attendant and a powerful member of the court. These are but few examples in the British Museum that attest to the intricate interplay of identity and economics.

Therefore, it is much to be deplored that economic research throws nothing but very little light on this question- even seems to avoid it. In this dimly lit area of research, only a few economists have taken steps to integrate this essential part of human behaviour into their models and research thus far. Admittedly, economists, such as Gary Becker, Amartya Sen, and Douglas Bernheim among few others have addressed the impact of identity on economic choices to some degree, but only indirectly and in the larger context of social interactions. The early 2000s could have marked a paradigm shift as the works of George Akerlof and Rachel Kranton brought identity to the mainstream economists’ attention, but surprisingly, recent research has seen only little-marked progress. In addition, most of this research seems to rather impose pre-existing economic models on identity instead of the inverse.

The uninitiated might wonder why most economists remain so reluctant to acknowledge the importance of identity. Some economists may consider identity a cumbersome complication that renders elegant models of individual behaviour impervious and intractable; others may fear that such research could shake the very foundations of mainstream economic theory. But is this truly the case; is identity irreconcilable with the smoothly polished and elegant mechanical models so frequently used in economics? Perhaps, I might say. Easily tractable models can not replicate the entire complexity of identity formation in larger social communities. Such models cannot recreate in full the complex co-evolutionary forces at work in groups like the Makah and Nuu-chah-nulth. Frequently, affiliation to an identity goes hand in hand with the perpetuation of norms and institutions. In turn, these norms shape our own desires, perceptions, and beliefs – all subordinated to the economic concept of preferences. These preferences, on the other hand, guide our will to join or to leave an identity group, thereby changing its properties. Norms can become internalised and thus, embedded in our preferences or create conflict within and between identity groups.

These complications confront us with the following two problems. Firstly, we need to understand whether the enhanced sophistication outweighs the increase in complexity after theories of identity have been integrated into an economic model. In other words, we should ask: do we need to fully explore the co-evolving interdependencies within complex social systems, and if so, what are suitable means to elaborate analytically tractable models for this? Secondly, and this goes along with the former problem, we need to consider not only in which way current economic approaches fall short, but also how other social sciences can benefit from exploiting the sophisticated means used in economics in order to extend on their existing research.

I discuss all of this in detail here, but for the impatient, I will provide a short answer to these questions. The literature on Identity Economics focuses on two principal issues: 1) the motivation and primary decision variables for becoming a member of an identity group, and 2) the subsequent consequences for the group’s identity, its members, and the individual’s identity. As long as we keep these two principal issues apart and thereby discard most of the complication stemming from the system’s co-evolutionary forces, we observe that even simpler models can provide us with a deeper understanding. These models can, for example, be used to understand the adoption of new fads, the ability to coordinate, the participation in social movements, segregation, and gentrification, as well as the requirements for social justice and thus, also the reasons for exploitative social contracts. Once we turn to models that encompass the co-evolutionary processes better, more sophisticated approaches are required.
What are then the best methods to understand and model the impact of identity on social interactions? There are three distinctive analytical methods, especially when used in conjunction: evolutionary game theory, network/graph theory, and agent-based modelling. These mathematical tools are highly flexible and sophisticated and have been used by economists during the last decades to understand and model social processes. In addition, these tools can be complemented with the ever-growing research in behavioural economics. Although behavioural economics has not yet directed its attention directly to the interplay of identity and economics, it has studied several closely related preferential biases. Thus, the application of sophisticated mathematical tools along with existing research in behavioural economics offers valuable trans-disciplinary research opportunities both for economists and other social scientists interested in topics related to identity.

Link to article: http://onlinelibrary.wiley.com/doi/10.1111/sena.12228/full