 So you can have identity wars where because you have this identity, I'm going to have that identity. So, and those, those are really disastrous. And we actually see many of those. Actually, I think at the moment we're seeing one of that happen in the United States at a very general level. And this is really serious. Unless we understand this, we're never, we're not going to be able to get a solution to it. And so actually, I'm worried about the future because we seem to have gotten into an equilibrium where we have an identity wars. This is Rob Johnson, President of the Institute for New Economic Thinking. I'm here today with George Akerlof, Nobel laureate, and his co-author and colleague, Rachel Crampon, who's the James B. Duke Professor of Economics at Duke University. Together, well, I think a little more than a decade ago, they created a book called Identity Economics. And I will say just personally, I've always found the exploration of what people aspire to, where their desire comes from, and other things of this nature to be, which you might call a lockbox, that we have to open up to make economics reach deeper, to a more sensitive, and perhaps a better predictive place as well. Thanks for joining me. So you start with Identity Economics, and you have a fabulous table of contents because you're talking about how it addresses economics, how it addresses education, how it addresses economic methodology, five ways it can change things. And both of you have been involved in a project that you've shepherded on economic research and identity norms and narratives. There seems to be a great deal of enthusiasm around this, what I would call maypole, that you let everybody attach to and start to explore. But you say that the subtitle of your book is how our identity shape our work, wages, and well-being. There's an awful lot of concern about well-being in the conversation around the world today. So let's start with where, what was the seed of inspiration that inspired the two of you to go down this path and write this book? Okay, so I could begin with that. Okay. I received a note from Rachel, which is not the most welcome note, which said that the last paper I had written was totally wrong, and that I missed the concept of identity. And we were, I think I got the note. No, I think I was in Washington at the time, and Rachel was at the University of Maryland. And so we agreed to get together and discuss this. So I think just to continue, that took us a long time to actually discover what that meant. So Rachel, maybe you want to add to that. Sure. It, yes, it was a fortuitous that I had just finished my PhD, my doctoral program at Berkeley, and I had moved and had my first job at the University of Maryland. And George was also living in Washington at the time. And it was a really fortuitous place that we were both in the same place again. And indeed, you know, the paper George had written had a lot to do with conformity, how people wanted to do what other people do. And what's important about conformity is that it's not that people want to do what other people do. People want to do what other people like them do. Right. And so you have to think about the ways people act as conforming to particular norms for their behavior. And then, well, then it's, well, who are, you know, then how do we define what that is? Well, it depends on who you are within society. So the norms for how I behave would be the difference from now George would behave. So there's gender norms, there's ethnicity. And of course, once one starts talking about that, we realize there's, you know, our social space is divided up into different types of people and norms for how different type of people behave and how they behave with each other. And it took us a long time. I'm now talking about this in a way that sounds systematic, but it took a long time for us to really use, to figure out how to use the vocabulary of economics to bring in these kinds of motivations into economic, a basic model of economic decision making, which is this utility function. So we read a lot. We talked a lot. We walked around Dupont Circle a lot as we were because we had lunch at Brookings. And so it was really, I think, a journey through the literature outside of economics who distill it and bring in key concepts into economics. What other disciplines contributed heavily to psychology or sociology, anthropology or history? Who might be analogous in your lives that really catalyzed a different way of seeing? So I think somebody might be George Homan. Rachel, do you think that rings a bell? George Homan's, I'm thinking of Pareto. Remember, we read Pareto. I also think outside Edward Said, who wrote Orientalism way back when, thinking about how cultures define themselves in opposition to other cultures. Who else, George? So I think going back to Homan's, I think Pareto was unreadable. Right. But we did manage it somehow. I mean, we read it. I think in the end, I'm not sure. You know, it's a little bit like we did various side journeys and then came back. But I don't think that there's a single thinker that we could point to in that way. We read a lot in a lot of different fields. Right. In the humanities, in the social sciences, then we read a lot of African American studies authors who are writing about African American, the situation of African Americans in the United States. We also read about gender scholars, people who are studying gender, gender legal scholars. So it was really, actually, law. Law is another field. We read a lot about law because we used to have a piece in the book about sexual harassment law and how it evolved over time. So we read a lot of law. So it's quite, I don't think we can point to a single person. There's many, many different, many different sources because I think in some sense what we were trying to do or what we were realizing as we were talking, as we were sort of formulating our ideas is that identity is sort of everywhere. And so the obvious ones are sort of race, gender, ethnicity. But then there's the perhaps less obvious ones, but there are obvious ones we talk about them. It's hierarchies within organizations. So there's your boss and there's your coworker and then there's the staff member and then there's the person who delivers the mail. And all of, and those are functional roles, of course, within an organization, but on top of those functional roles are notions of how it's appropriate to talk to people in these different roles, right? Who's supposed to defer to somebody else? Who's really a member of the organization, who's sort of an insider in the organization that feels a part of the organization versus who's sort of implicitly just, you know, not really accepted. And of course, that can also go on gender, race and ethnicity lines as well. But even just within a hierarchy within an organization, it's not just a functional hierarchy. So that's why we were, I think, the expansive readings were feeding our understanding that this framework that we were developing can be applied in so many different areas. So there's the real questions. So one question is that economists, then they just, they simply assume that people have a utility function. They have a utility function for them. And then they decide with their economic logic, the standard logic that's taught in economics courses, what people's utility must be. They take it, something that they can sit in their, at their desk and figure out. But there's another thing, and that is, at any moment that people are making some decisions, they are putting themselves in the place of the decision maker. And so they're telling a story of who am I when I'm making those decisions. So in some sense, whatever role you're playing when you're making decisions, that is the motivation that's behind those decisions. And that's much more general than what the economists sitting in there at their desk or sitting at their offices or even sitting on the beach are going to be able to think about. And so the real thing is that this greatly expands the realm of motivations that economics should consider. So Rachel just mentioned many of the ways in which this does make that expansion. But then these roles, all kinds of things can happen once you have this new space, and you have a new algebra. The algebra is from the economics is greatly expanded, and it becomes much more interesting. I would imagine that from the mosaic you've created, there are two reactions. One, there are so many possibilities, we don't know how to rank them. And on the other hand, it's so much more enriching, because it seems to resonate with many things that you observe and experience in your life. So I think, yes, I mean, that's a typical criticism of people who write a more expansive model utility function model is that, well, you can just assume you just put it in the utility function, you can assume anything to new degrees of freedom. Of course, we heard all of that. But I don't think the criticism is particularly apt, because one of the things that we did in our book, so the book is built on articles, so we had a series of articles that then went into the book, is every single thing we wrote about was grounded in some evidence. So we couldn't just make all of this up. I mean, I guess we could, but we didn't. Everything we did was grounded in evidence. So these readings that we're mentioning to you are not legal theorists only. It's actually a lot of the law we read were about legal cases, about specific people in specific places. And this is what happened to them. The same thing of the work we read about workplaces where we read about what happens inside a workplace, what happens when the foreman speaks to a worker in a particular way, and how that worker is so upset about what happens, and then what happens when that worker goes home. So we were reading and we were spacing our modeling on real people in real places, making real decisions, and in a real social context. And so we didn't make it up. So our work is very grounded in evidence. And I should say that now, you know, sort of 20 years hence from when we were first doing this or even longer, there are people who are now able to bring data. So, you know, when I say evidence, we were reading a lot of this literature and anthropology, sociology and so on, which included some, you know, data and empirical more sort of empirical exercises of that sort. And now there's people who have found really, really clever ways to get at the norms that we were describing in our book. So that's the, I think the rebuttal to the too many degrees of freedom argument. Well, the other argument that rebuttal to the too simple is that we're practicing the science. We're trying to explain things. And many of these presuppositions around the utility model are not scientifically derived. They're arbitrary. And so are you framing a fiction, or are you exploring reality, such a simplistic framework that can what you might call project results or predict what should happen based on things that were not scientifically derived. So I see both sides of where the criticisms come from. And I applaud that you reached out and went for that more textured, enlarged sensitivity, because a whole lot of things won't be unexplained by that core framework. So I think what we're trying to do, and I shouldn't make this so grandiose, but this is what we're trying to do. We're trying to be like Darwin, who in the Andes mountain discovers a fossil of a fish. And he's wondering why he's found that fossil of a fish in the mountains. So that's what we're looking for. We're looking for those fossils. So we're looking for the places where, in fact, the standard economics with its standard points of view, which fail to take into account the people are motivated by their stories, where that economics is deficient. And so that's what we're looking for. And that's so Rachel, Rachel and I, we had a great deal of fun, I think, writing this book and finding these examples. So the question is, how do you find an example where the economics simply does not explain it? And the thing is, it turns out that, which unfortunately in the world today, we're now experiencing, there are a huge number of places where trying to explain it by sort of standard logic of economics doesn't make any sense. Right. And I should say that any economist can write a model that can explain anything you want. You know, I mean, that's what we're good at. Give me something, I can write a model for it. But in using a very quote unquote parsimonious model, based on some primitives, these are the kind of language, primitives of utility over consumption. But in the end, they don't really teach you much, these models, because I've sort of created them and added bells and whistles in such a way that I've actually explained this phenomenon. Well, if I had directly assumed something, so I actually argued that we're a parsimonist with George and I are doing, we had directly looked at how people understand themselves and who they are in the world, and what stories they tell themselves about who they are and where they come from. We had just used that as the basis for the decision making, we had been gotten directly to the outcomes of interest or the phenomena we're trying to understand. So it's in some sense a more parsimonious understanding of decision making and of interactions, then sort of a convoluted model that of course we could all construct if we wanted to, but it doesn't really teach us much in the end. George, you and I have had a number of discussions over the years about what you might call the habit structures of the economics profession. And I'm curious when you come up with this creative alternative thought through rigorously developed and so forth, did you experience affirmation or resistance, dismissal, being ignored, or what was it like to strap on doing something different in the context of a very fierce profession? I think that there's been quite a bit of resistance. That would be mine. There's been some acceptance. I think now we're beginning to get more acceptance, but there's still quite a bit of resistance. Now, why do I think there's resistance? I think there's a lot of resistance because I think there's things which are more easily explained by identity than they are by very constrained economic models. And when you think about whether it's explained by the identity and you ask whether that's people's motivations, you can go to actually, so this is what Rachel's talking about, you can go to the anthropological works and you can see that this exactly corresponds to how the people have described motivations. And so there are lots and lots of examples of this, and then furthermore there are places where the economics has simply failed. Let's give you one example where economics has failed. So it wasn't until I think something like 2016 that economists saw how tremendously serious it was, the decline in labor force participation of men 25 to 54. So there's this famous paper by Case and Deaton, but that is just really, really important because just think about what's happening in the US today. The US today, there are currently 10% of males who are simply out of the labor force at this age, and we know from statistics, Rachel, statistics again, they aren't staying home taking care of the kids. They're not. They're not there. I'm sorry. Somehow, there's so many people who are having a hard time reaching an adult identity, and that actually was, and there's this big statistic that's 10% of males. And that explains why there's all kinds of bad things happening politically and economically. And there's a huge numbers of books which are written about this now, like a wonderful book by Nick Christoff about his friends from childhood, and many more. But this is, and the polarization here between Republicans and Democrats, part of that is explained by the fact that people, what are people doing? They are defending their identity, and so we don't have a society which, so remember Rachel, at the very beginning, she said, what was this event? Was the people, the people wanted to do things like what other people do? That's the opposite of economics. So can I say why? Maybe I should talk. Okay. Please, please. Okay. So the standard economics is about supply and demand. Basically, supply and demand is something where you have a unique equilibrium, the supply curve. It goes up and the demand curve goes down, and when they cross, that's the equilibrium. There's like one equilibrium. Well, you don't always get the unique equilibrium, but that's the basis of the thing. On the contrary, if people want to do what other people do, then, in fact, you have multiple equilibrium. So if all of us want to do what all the others, just the group of three of us here, then there's an equilibrium where we're all, where we're going to all be doing the same thing. But one of us might choose one thing, one of the others might do another, and so forth. So that's a change in the whole nature of the equilibrium of economics. And so the fact that that's so important, as Rachel said at the very beginning, if that's so important in identity economics, and that was the problem with my paper, I didn't understand what was going on, then this is changing economics. And then we see huge amounts of this stuff. So just to give you one example of that, think about global warming. How can anybody in this day and age think that this is not a very serious conform? How can some significant fraction of the population believe that this is a hoax? Now, there's a reason for that. They have an identity, their identity is what's important to them. The other people that they associate with it, they think it's a hoax. So I am more to lose by thinking, by contradicting this view that it's a hoax than I actually believe. Okay, so it's a hoax. I don't lose very much. But then you have horrific public policy results from this. Right. So again, just to talk about how identity economics can understand the phenomena that you're describing, a standard model would say people are interested in information. They're interested in information that will help them make the correct decision. That's what a standard model would do. When we introduce identity, you are a person who might be looking for information that confirms your understanding of who you are, not necessarily which to buy at the grocery store or whether or not you should be getting a vaccine. You're looking for information or you're more receptive to information that helps you maintain a sense of who you are and then who you are within your community. So let's get back to that a second. What we get in these multiple equilibrium models, if we were to expand it, is that there's one set of people who are wearing black shirts, as we all seem to be doing on the screen. There could be another set of people who are all wearing white shirts, right? And then the black shirt people don't like the white shirt people. And then you can have, you know, these reinforcing of these divisions within the society. And to go one step further than that is what identity economics model would tell us to do is look at how people talk about those divisions. So and again, in a standard model, what people say about things, it's just like people just like black shirts or people just like white shirts. But in our understanding, no, it's actually meaningful what people say about wearing a white shirt or wearing a black shirt. And so the whole discussion about tastes and about preferences, that becomes part of economics. And of course, it drives a huge amount of economic activity is, you know, that is the discussion over what is correct, what's incorrect, running the economic activity is just people activity, right? You know, people do things, they take actions, exert effort to influence the way other people think about things and how and the taste that they, the taste that they adopt, the things that they buy and so on, which then of course, are then, you know, sort of become part of who they are and part of these different communities and how they understand themselves. I'm reminded of the, he's now at NYU, the psychologist, Jonathan Hyte, who has a famous paper called The Rational Tale and the Emotional Dog. And I once made a video with him where he cited a poet who goes by the name Inkyu for in question. And Inkyu has a poem called Evidence. In the essence of the poem is, you will always find evidence to support what you want to believe. It's, it's reversing the causation, like you spoke of the curious model. Well, find the evidence to help you make the right decision. Right. This upside down method is going out to justify what you want to feel. Right. And I think, I think, you know, behavioral economics, of course, is very famous now, right? You know, so behavioral economics, which is a marriage of economics and psychology. And there is, there are people who are working in behavioral economics, which would very much, you know, write this, write such a model down, you know, where people are seeking information, for example, to evaluate the decisions they've made. I think where we have what, if one wants to make a distinction between those sorts of now somewhat have entered the mainstream types of models is that our model brings in the social element. Right. I'm interested in who I am as a person within the society, not just me as an individual. So, so the things that the, going back to what George is saying, the story I tell about myself or the story I want to reinforce is not just some arbitrary story about me, Rachel Cranton is about me, as a person in the society as a member of a family, as a member of a political party, perhaps, or a member of a neighborhood or a member of a university, or of an ethnicity, and so on. And so that's the, those elements which make its distinction from a more of a cognitive psychology model, rather than a social psychology interpretation of how people are making their decisions and evaluating information. You have a chapter in your book called Identity in the Economics of Education, and I was inspired to reread that because I recently read a book by the late Jane Jacobs, the Canadian author who wrote so much about cities and so on. And the third chapter of her book called The Dark Age Ahead, it's her last book written or published in 2004, was called Education versus Credentializing. And I haven't reviewed your chapter, but what, how did you see identity in relation to the economics of education? Well, I think I'll just, I think we started out with this basic premise. So the classic economics of education is that there's a student in the school, and the student makes a decision between effort to exert in school versus the benefits of that effort, right? And so they're an opportunity cost of effort in school. That's the standard model of education. And I think George and I had looked at it and said, okay, so what 13 year old does that model describe? This is not a model of a child or an adolescent or a teenager because what is a child or an adolescent, a teenager, what are they, what are they often very concerned about? They're concerned about their peer group, they're concerned about who they are, right? And so the basic model of a future-minded child or adolescent, making this trade-off between effort in school and the opportunity cost of that effort, which might be employment, that might be a classic model, somebody would drop out of school because of employment, it just did not match the 13 year olds or the 15 year olds or the seven year olds. And how, and also further did not match what was a school was constructed to do and what schools even understood themselves as trying to accomplish. So that's just the nuggets. We started there. This model is not actually representing the decision-maker themselves is not this person, right? And so, and then we started, of course, we read an enormous amount about schools and schooling and education and now you want to continue, George? Yeah. So what is successful schooling? Successful schooling is where the students learn that they want to be students. So it doesn't, so instead of taking what they want outside, you have to have that inside what the school has to do. And this is true in any organization. You have to teach the people in the organization that they identify. So you want to have this, you want this, if you're a successful educator, you want the students to adopt the values of the institution. And then those values are extremely important. We had a good example. I think one of our examples was Westport. Do you remember that, Rachel? Of course, yes. Yeah. So the amazing thing about Westpoint is they have these very strong views as to what you're supposed to do when you're at Westpoint. Now, I don't know whoever talked about this, either any of us together, but I do. A student who had graduated from Westpoint, and then he was back teaching there. And so I went up there and gave a talk on identity. And it was just an utterly fabulous place. Everywhere you went at Westpoint, you saw statues of heroes. The moment somebody arrives there, you're inundated with this notion as to what you were supposed to be. That's, I think, the opposite of sort of most civilian schools. I think civilian schools, what you're supposed to do, you're supposed to go there, you know, spend your first two years as freshmen and sophomores and say, oh, am I going to do this? Am I going to do that? And students actually have a very hard time doing that. The person who wrote the book about this, so he was a reporter for Rolling Stone. Who's the person, I'm sorry? His name's David Lipsky. He wrote this on Westpoint. Absolutely American. And he usually covered civilian colleges, you know, just regular colleges. And he was assigned to go to Westpoint. He initially wasn't enthusiastic about that. And then at the end, he covered them for something like three or four years. And at the end, he said, these were the happiest students he had ever seen. And why? Because you go to Westpoint and you know who you're going to be and who you should be. You get and I get it. And of course, the students who go to Westpoint want to go to Westpoint. And so there's a self-selection process. So there's a reinforcement of the institution and the students who arrive there. And let's just talk about other organizations. So the school, as George was saying, a school is just an example of an organization. An organization to function well, people have to want to be there. And they have to believe in being there or feel like they belong there. And that's reinforced by the, you know, in a company by the management or the, you know, the leaders of the firm. So that's where we also have this work on workplaces, right. And you can see that the work on education is very related to the work on workplaces because it's the same fundamentals and sort of being feeling like you're an insider, like you belong, like you're part of the organization, right. Then you'll work for that organization, right, in ways that you might not work if you felt like you were an outsider or you were continually not respected in within that organization or the type of person you were, you know, that your, your, your, your background does not fit within that organization. Then you're not going to put forth your best effort, makes sense, right. And the overall the organization does not function particularly well. So, so again, a school is, is an example of, or looking across more or less successful schools. And this was also, we also looked at elementary school, school reform programs and so on. More or less successful schools figured out a way to bring students into the school, make students felt like they belong, that they were students, that they had adopted the mission of the school. So there's a, so this addresses more generally the economics of organizations. So there is an economics of organizations. And the way this literature began was it said people have to be given the proper incentives. So you give people the proper incentives and then they're going to do what the organization wants. And, but then Rachel and I, we both read intensely an article by Kenneth Prendergast. And Kenneth Prendergast, it's a wonderful article where it talks about all the ways that these incentives are not going to work. They can be gained. And we, we actually, I think we never decided what, what he meant by this article. Our conclusion was no matter what incentives you that were put up, then people could find, they're very ingenious. They could find some way to game it if they didn't, if they didn't want it, if they didn't identify. So the solution to this in almost all organizations is the organization has to get its members first. And there are many techniques for that to wanted to share the goals of the organization and whatever role they're supposed to be playing. That's what you see at West Point. So to give you an example from education, if you're going to pay teachers to increase according to higher test scores of students, no, the teachers will figure out a way to get those test scores up. But it's not necessarily by educating the students. Right. So, you know, so you, it's a little bit like at you get what you pay for, right? But literally so, perhaps literally so, but you don't get what you're, what you're, what you're looking for, you know, the overall objective, which was, of course, to educate students in a more fulsome way. Test scores is just one tiny indicator of what students are actually learning. And so that again brings back to, you know, how do you, how do you accomplish that? Well, you have to think, have to think about how teachers understand their position in the school. What is the whole mission of the school and how the students understand what they are doing. And, and the stories they tell themselves, when I say that, not as a, you know, as a fiction, but at, you know, how people understand themselves and their relationships. So one aspect of this is that what are wages all about? So according to the incentive view, wages are about making people fearful that the reason you do your job is we might be fired if you're caught shirking. That's the standard economics of what, why wages are what they are. But there's another view of that, which is the identity view that what, that organizations are going to work. If people identify as insiders, they are insiders to the organization. And so it's like a family, they share the goals of the organization rather than being an outsider. An outsider is somebody who may, who doesn't identify with the organization may actually even dis-identify with it. And so that's what, that's what, this is all about wages and the, this is why wages tend to be more than market clearing, which explains the phenomena of involuntary unemployment. So all of these things, you talk about, you talk about the whole scope of sort of economic and social problems. This identity is actually utterly central to just huge numbers of major problems. How does the democracy function to keep everything on course and in balance depends upon what you might call the fiber or the spine or the imagination of those people in these schools? It's a public good. So this also, so we wrote mainly about the students in the school and how the students relate it, but the same thing applies also to the teachers in the school. So there've been experiments where the teachers rather than being the, then getting there, what they do from top down has, have been more bottom up. That's like in the university where the faculty have a great deal to say about what they do and how they're going to do it. And in fact, that tends to also be successful. So when the teachers themselves described have what to do. So there was experiment in Massachusetts, especially centered at a special school in Brockton, Massachusetts, which was doing very badly. There's a nice book about this by Andrea Gabor. And the teachers after the education wars. That's right. I once made a video with her about that book. I was really inspired. Yes. Well, that's it. Yes. So that's, that's part of the idea. Now we could talk about something else. We've been talking about the good things about identity. There can be bad things about identity. So people, so you can have identity wars where because you have this identity, I'm going to have that identity. So, and those, those are really disastrous. And we actually see many of those. Actually, I think at the moment we're seeing one of that happen in the United States at a very general level. And this is really serious. And unless we understand this, we're never, we're not going to be able to get a solution to it. And so actually, I'm worried about the future because we seem to have gotten into an equilibrium where we have an identity war. And in my opinion, the, no, I'm not going to say that. That'll be for the next episode. Yes. You can keep what I just said. In the end, but yeah. In your conclusion, you mentioned, this would be the last question. You said there were five ways that you thought identity economics changed economics. We don't have to go into depth, but to foreshadow. So if we make another episode, what five ways do you think you changed that? How do you say learning about identity economics changes economics? Rachel? I'm going to say, I don't know, do I have to do five? I'm going to say one of the biggest ones, okay, which is that it changes our notion of preferences. And once you change our notions of preferences, you realize that what people do is fight over preferences. And so the idea that we're all born somehow, and we have these preferences, identity economics tells us that no, you're raised and you learn your preferences. And therefore, preferences can be fought over, discussed, battled, and so on. And I think that's a completely different view of preferences. Yes. So those preferences are going to affect our welfare or how happy they are. Those preferences are something that is going to be shaped by whatever environments we're in. So that's a part of the economic equation. Those preferences are going to have different equilibrium, which is what we talked about at the very beginning, from standard supply and demand. And so you're going to get different economic equilibrium. So all of these things go just very to the very core of what economics is about. Of course, there can be situations like the demand for wheat, I think, and the supply of wheat, where demand is equal to supply, and that determines the price of wheat and the quantity of wheat. But wherever we have people involved, rather than who are making their decisions regarding who they think they are going to be and how they're going to act to all kinds of situations, then in fact, this identity is going to be there. But let me just say one more thing. So what we think identity is concerns the stories that people are telling themselves when they make their decisions. But why is it called identity? That's a peculiar sociological word. It doesn't mean what people necessarily think it means. It does mean all those standard things, but it means something more. Identity, as we said, is the stories that people are telling themselves. And what's central to the stories that people tell themselves? Read any New Yorker article. How does a New Yorker article begin? You can almost always tell, and from the very first paragraph, who the protagonist is, who the protagonist thinks they are. Just to give you an example, go to the first paragraph of War and Peace. Then you know who the person thinks they are. Just take any great novel. You're going to see that. So you see who the people think they are, and then that's central to the story. And I think almost all good writing, especially fiction writing, is going to be written more well.