Monday, October 19, 2009

The Identity Theory of Economic Choice

The assumption that individuals are rational utility maximizers is one of the cornerstones of virtually all modern economic thought. This is commonly referred to as "rational choice theory".

This does not mean that individuals are infinitely and inherently selfish. Gary Becker, Nobel-winning Chicago school economist, argues that "...individuals maximize welfare as they perceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic."

This argument reveals rational choice theory with greater nuance than most economists, but I think it misses the most crucial point. It answers the question "how do individuals maximize their welfare?" but ignores the larger question "what entity's welfare do individuals maximize?"

Discerning what entity's welfare the individual maximizes concerns the ends of economic activity (what people work for), whereas the traditional theory focuses on the means (how people work for something). The individual as articulated by the traditional theory would say, "I work for my welfare by ______", but in reality, individuals say "I work for _____'s welfare by _____".

Insofar as I identify with an entity, I work for it's welfare. For example, insofar as I identify with my nation, I work for it's welfare. Insofar as I identify with my family, I work for it's welfare.

We all identify with multiple groups, to a greater or lesser extent, and at the most basic level, we identify with our selves. When our multiple identities conflict with one another, this is a true conflict of interest. Conflicts between duty and personal interest are commonly called conflicts of interest, but a rational utility maximizer would not have an emotional dilemma dealing with it. They would simply calculate the costs and benefits. When true conflicts of interest occur, we face a deeper question: who/what do we identify with?

Economics, and all rational choice theories that I know of, assumes that individuals use groups as a tool to maximize their individual welfare. The traditional theory would argue that when we help others, we don't actually identify with others, we satisfy our preference for altruism by giving to others. However, I think in reality we belong to groups for more primal, less calculated reasons, which I will discuss later in this essay.

Some might argue that my concept of identity is too imprecise, and not suited to the positive science of economics. This may be partially true, but my explanation clarifies another eternal mystery of economics - what determines individual preferences?

The theory of evolution has strongly established that the overriding interest of any entity is to ensure its survival. I believe this is to be true of all entities, whether they are groups of people or single celled organisms. Whatever we identify with, we work to ensure its survival.

In a modern economies, where we find it unnecessary to worry about our personal survival most of the time, we still constantly exercise our reflexive drive to survive by channeling it into other identities - groups. This makes self-sacrifice possible.

The only phenomena I can think of that this theory can't explain are suicide, masochism, and other forms of self-destruction. Economics cannot explain these either, they are not rational activities.

As to the question of how we form our identities, that is better left to psychology to discuss.

Here are a few examples that help me illustrate my point:

When you vote, you know that there is a very slim chance your vote will affect the election, and the cost of your time and effort required to actually vote outweighs the potential benefit of your vote being pivotal, but you still do it anyway. Why? Because you identify with the your country and you wish to see it steered in a positive direction.

When you help a family member in need, you aren't doing it for personal benefit, you do it because you identify with that person as a member of your family, and you care for the common good.

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