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.
To grasp the relevance of identity economics, and how it differs from standard economics, consider an otherwise puzzling fact. Men and women in the United States smoked cigarettes at vastly different rates at the beginning of the twentieth century, but these rates largely converged by the 1980’s. Women now smoke just as much as men.
We cannot explain this convergence in terms of standard economic arguments, such as changes in relative prices and incomes, because no such changes were sufficiently large. But we can explain it if we ask how people think about themselves – that is, if we examine changes in gender norms. Women early in the twentieth century were not supposed to smoke; it was inappropriate behavior. By the 1970’s, however, advertising campaigns targeted “liberated” women, telling them that smoking was not only acceptable, but desirable.
I’ve found the idea of tribalism to be increasingly useful in understanding political behaviour. Faced with the need to make a decision based on incomplete information, people may often attempt to understand how others like them are behaving and behave in that fashion. This isn’t really a new insight; politicians have been playing to group identities forever. But it certainly seems that economists have been slow to incorporate it into their models of consumer behaviour. As in: I buy this phone because those I recognise as being like me buy this phone, I borrow against my home in this way because others like me do too, I develop expectations about the proper level of educational attainment because those like me have similar expectations, and so on.
Economists are sure to be uncomfortable with this kind of behaviour because it’s much more difficult to model than simple rationality. But if they hope to contribute to the policymaking process, economists need to work harder to understand when a simple price incentive will work appropriately, and when identity filters mean that price changes will generate unexpected results.