Tuesday, May 3, 2011


Via Twenty-Cent Paradigms, three links from DeLong.

From Identity Economics by George Akerlof and Rachel Kranton:

A great strength of economics is its ability to examine how decisions are made from the point of view of decision makers. For example, economics can explain in this way why consumers buy what they do....

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.

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.

Wow. This isn't economics at all. It is How to make money by giving people what they want, or maybe How to change people's behavior and make more money. Dangerous stuff.

If you want to understand the economy, look at the money. And for God's sake leave everything else alone.

1 comment:

jbmoore said...

It could be that they are seeking a bottom up policy that helps or reinforces people making economic decisions in their best interests rather than policy makers making decisions that are counterproductive to people's best interests. One can see that happening in the Fed and in the government right now. The rich are being helped and their fortunes are being saved by central bank policies and government subsidies and nonenforcement of securities laws. Meanwhile, people who did not cause the crisis are losing their jobs and then their homes to the banks and they are the ones being blamed for the crisis. They are scapegoats. The central banks are saving the creditors and the wealthy debtors from their own bad business decisions and throwing the poor, elderly, sick, and Middle Class under the bus. Not only that, but the government is allowing looting of corporations by their own officers. Economic theory does not recognize fraud and criminal incentives to steal for the most part. Capitalism depends upon competition and market selection to determine healthy companies with the highest "fitness". Unfortunately, if competitors cheat and become unethical, the ethical companies are forced from the marketplace and go out of business. The selection process has become corrupted leading to corrupted companies. It doesn't take a genius to realize that crime pays handsomely with little effort, or we wouldn't have professional criminals. The incentives are now that skewed. Think of incentives as positive and negative feedbacks to economic behavior leading to booms and busts. Money is just a convenient marker for good and bad behavior that leads to the rise and fall of prosperity and societies which is really what you and the economists are trying to measure.