Does identity economics predict happiness in different societies?

The key idea of 'identity economics' - as discussed in the recent book of that name by George Akerlof and Rachel Kranton - is that people gain utility when their actions conform to the norms and ideals of their identity (or social category e.g. gender, race, social class, age group) and lose utility when they do not. We should expect this to be so if we accept that individual behaviour is strongly influenced by socialization and that norms of behaviour can differ between people in different social categories.

This key idea of identity economics suggests that, other things being equal, people are likely to be happier when they live in societies where there are few economic or social pressures for them to act in ways that are contrary to the norms and ideals of their identity. It is important to define what we mean by happiness in this context. I think the appropriate concept in this instance is emotional well-being, as measured in happiness surveys, rather than an all-inclusive concept of well-being explicitly incorporating such factors as wealth, health and education. It seems reasonable to expect that, other things equal, people with high levels of identity utility would be more likely to say that they are happy or satisfied with life than would people with low levels of identity utility.

I get the impression from the methodology chapter of 'Identity Economics' that the authors are not particularly interested in econometric tests of the predictive power of their theory. They suggest that it is difficult to falsify any theory because ‘even the most straight forward test has literally millions of possible specifications’ (p. 115). I think they are exaggerating, but even accepting their point it seems to me that useful knowledge may be gained by considering what predictions might follow from a new theory and how well those predictions describe aspects of the real world.

It seems to me that one prediction we could make on the basis of identity theory is that people in homogeneous societies are likely to be happier than those in societies in which individuals have to interact with people who have different cultural backgrounds. We might expect that this effect would depend on the strength of ties to particular groups in multi-cultural societies, but we would expect homogeneity to be a plus for average happiness.

Is the evidence from happiness research consistent with this prediction? When I did a Google search using the words ‘happiness’ and ‘homogeneity’ the first results I saw seemed consistent with the prediction – people in countries that are homogeneous (as well as affluent) tend to be the happiest. However, delving deeper, I found a more careful study for 65 countries, using multiple regression to control for other variables, which suggests that ethnic homogeneity may actually have a negative effect on average life satisfaction (Douglas Barrett, Kristen Van Rensselaer and Bruce Gordon, ‘Possible effects of national population homogeneity on happiness’, Journal of International Business Research, 6 (1), 2007).

The authors comment as follows:

‘The results suggest that life satisfaction is significantly negatively related to ethnic homogeneity in the presence of our control variables. This is consistent with the “melting pot” concept, as multiple cultural influences create a richer living environment’ (p. 55).

I’m not sure what a richer living environment actually means. Perhaps one way of thinking about it is that a richer living environment enables us to get some of the benefits of foreign travel (e.g. sampling foreign food) without leaving the country. I think the result may also be consistent with identity economics if we view successful multicultural societies as providing learning experiences in which a substantial proportion of the population from all major ethnic groups have come to view themselves as tolerant of diversity. We should expect tolerant people to gain utility from acting in accordance with their ideals.
Winton Bates

Why should we be concerned that paternalism will foster dependency?

While reading the current discussion of ‘Slippery slopes and the new paternalism’ on Cato Unbound the thought occurred to me that the slippery slopes associated with libertarian paternalism could possibly take us in the direction of libertarianism rather than paternalism. If governments apply opt-out provisions to some existing paternalistic regulations it is possible that many of those who choose to opt out will be so successful in running their own lives that others will follow their example. This could result in political pressure for opt-out provisions to be applied to a wider range of regulation.

Has that train of thought filled me with optimism that citizens will tend to become more self-reliant and less dependent on government in the years ahead? Not exactly! I think widespread acceptance of the view of libertarian paternalists that it is possible for governments to act paternalistically without infringing individual rights is more likely to increase paternalistic regulation than to reduce it. That must follow if we can presume that protection of individual rights has had some influence in restraining the growth of regulation.

I think we should be concerned that increased paternalism will foster increased dependency on government. I see two particular areas of concern, the first of which is probably more manageable than the second.

My first area of concern is the development of cycles of dependency on welfare benefits in which several generations from one family become dependent on government hand-outs as the major source of their income from cradle to grave. This seemed to be a growing problem in the 1980s and 1990s, but increased paternalism in the manner of providing assistance may actually be reducing this problem and preventing it from spreading. Instead of income-support being provided as an unconditional entitlement it is now increasingly provided with conditions that require the beneficiaries to take action that will enable them to support themselves.

I have previously discussed (here) how attaching paternalistic conditions to welfare assistance can be consistent with both freedom and flourishing. If as much publicity is given to some of the ideas in ‘Identity Economics’, the recently published book by George Akerlof and Rachel Kranton, as is being given to the concept of libertarian paternalism, then I think we have grounds to hope that future welfare policies will be developed in the light of a better understanding of the role of identity in influencing behaviour. Policies that encourage people receiving welfare benefits to recognize their potential as productive members of the community are likely to help free them from cycles of dependency on government.

My second area of concern is an increasing tendency for people from all walks of life to look to government to provide protection against all kinds of risks. This has become so prevalent that it is difficult to choose an example to illustrate the point from the huge number available. When I was having breakfast this morning, however, a particularly appropriate example leapt out at me from the pages of ‘The Australian Financial Review’ (20 April). I think the example is particularly appropriate because it shows that even people who have a well-deserved reputation for rationality on public policy issues are now lending their support to proposals for government regulation to protect people who have hitherto been thought of as quite capable of looking after their own interests in the market place.

Tony Harris - a columnist whose views have hitherto generally deserved a great deal of respect – argues that the Australian government’s response to public concerns over executive remuneration has been ‘paltry’. Tony makes clear in his article that he wanted to see the government intervene in the executive pay market to address the problem of pay schemes that enable managers to earn substantial sums in good times, but lose little in bad times. He presents a logical argument that such pay schemes do not do a good job of aligning the interests of shareholders and executives.

The main problem with the article is that the author doesn’t even seem to think it is necessary to attempt to make a case for the government to intervene to protect shareholders in this instance. What is it that prevents major shareholders in public companies from insisting that executive pay packages provide appropriate incentives for executives? What prevents fund managers from taking the incentives provided to executives into account in making investment decisions?

The article doesn’t attempt to answer those questions. I think the answer to both questions is that nothing prevents the market for executive remuneration from working efficiently. The mistakes that have recently been made can be explained by the fact that this is an area where substantial innovation has occurred over the last couple of decades . Investors and fund managers have the strongest possible incentive to learn from this experience. It seems likely that as a result of recent events an increasing proportion of firms will pay executive bonuses in the form of shares that will be vested gradually, but some firms may consider a different approach to be preferable. No case has been made for governments to regulate how remuneration must be paid in all companies at all times.

When even sensible people argue that governments should protect people who are quite capable of looking after their own interests it is time for everyone to be concerned that government paternalism has fostered attitudes of dependency. We have already slid a long way down the slippery slope to dependency on government.

Author: Winton Bates.

What if people want governments to regulate them?

This post has arisen from a brief exchange with Scott Sumner about paternalism on his blog, The Money Illusion. Scott’s post expressed views relating to the current Cato Unbound seminar on libertarian paternalism.


In one of my comments I asserted: ‘Most people don’t like others interfering with their lives’. Scott responded:

‘I’ve seen polls that show most people think there should be a law requiring the wearing of seat belts. Indeed I find people I meet usually favor all sorts of restrictions on freedom. On the other hand most people do value a certain amount of freedom for non-utilitarian reasons. So this might help prevent excessive regulation from developing’.

When I read that my initial thought was that Scott was certainly right about seat belts. I have used seat belt regulation as an example when I had written previously (here) about people wanting governments to impose paternalistic regulations to help them cope with their self-control problems. My bottom line was that if people have self-control problems they should seek help from family and friends or professionals, rather than seeking government regulation. I still think that if people want a nanny to regulate their behaviour they should consider hiring one rather than expecting taxpayers to provide one for them.

However, I am having second thoughts about whether people support seat belt regulation because they think they need a nanny to help regulate their own behaviour. When I see roadside signs telling motorists that the police are currently targeting compliance with seat belt regulation I feel amazed that police apparently think that prevention of potential self-harm should have priority over offences that involve a threat to the lives and property of other people. How would supporters of the regulation react to those signs? According to the nanny theory they would see the signs as a reminder to wear their seat belts. But I don’t think many supporters of seat belt regulation would need reminding. Surveys suggest that these days a very high proportion of people in Australia wear a seat belt whenever they are in a car. I suspect that a lot of supporters of seat belt regulation might feel a warm inner glow as they drive past the signs threatening police enforcement because they hope that these signs will influence the behaviour of loved ones whom they consider to be more foolish than themselves.

Perhaps a significant proportion of supporters of seat belt regulation initially supported it to help them to develop the habit of wearing a seat belt. After they developed the habit, however, they probably joined the ranks of the paternalists who support the regulation to influence the behaviour of others. One way or another the regulation seems to have been widely viewed in Australia as a cost-effective way to help people to develop a good habit that might save their lives if they are involved in an accident.

What implications does this example have for the view (which I supported in a recent post) that individual rights are metanormative principles? One point that should be made is that even when there is widespread support for regulation such as this there are likely to be some people who have reason to see it as an interference with their lives. For example, a relative of mine sees the seat belt regulation as unwarranted interference because she has a strong conviction that God will protect her if she is involved in an accident, provided she demonstrates her faith by not wearing a seat belt. Some might scoff, but I can assure readers that this person is of sound mind and has thought deeply about the matter – she can provide examples of people who would have been more seriously injured or killed if they had put their faith in seat belts rather than in God. In my view her rights and those of others with reasoned objections to wearing seat belts should be respected, even if the vast majority of the population see the regulation as beneficial. If libertarian paternalism enables objectors to obtain exemption from such regulation then it is consistent with giving primacy to individual rights and is therefore consistent with the view that rights are metanormative principles.

This does not make me a strong supporter of libertarian paternalism. I think we should be wary of encouraging people to depend more heavily on choice architects within government to nudge them toward better decisions. I will probably write more about that later.

Should we welcome globalization or fear it?

Having just finished reading Gregg Easterbrook’s new book, ‘Sonic Boom’, I'm not sure how he would answer that question. He sees fantastic potential for social progress, but improved living standards are likely to be ‘wrapped with ribbons of stress, anxiety and dissatisfaction (p.34). His bottom line seems to be that globalization is inevitable and that we just have to learn to live with it.

Easterbrook expects the forces of globalization to grow stronger. That means that the insecurity that people often associate with globalization is likely to accentuate:

‘Job turmoil, the economic roller-coaster, financial bedlam, media superficiality, celebrity inanity, political blather, targeted advertising, scream-and-shout discourse, the paving over of nature – they’re all going to get worse. A lot worse in some cases. Most likely, global economics will be blamed for whatever about coming decades we don’t like.’

He also suggests, however, that much of what people tend to like about life will get better:

‘Prosperity will increase, especially in the less affluent nations where improvement is most needed. Democracy will flourish on five and perhaps six continents ... . Information and knowledge will proliferate as never before, while art and culture become available to everyone. Many aspects of this evolving sonic boom will be really terrific.’

Then comes the recommendation:

‘The terrific aspects and the anxiety inducing aspects will be intertwined and we’re just going to have to live with this’ (p. 209).

Why is globalization inevitable? I think Easterbrook discusses this in several places but I have noted one place in particular. (I’m glad I made notes as I read the book because there are few clues offered in the contents page about where to find stuff and the index doesn’t seem to be as helpful as it could be. But I digress!) Easterbrook suggests that we can’t stop global change because it is associated with the spread of freedom – ‘most of the world’s nations are acquiring the same core structures (democracy, free-market economics, emphasis on education) that makes the United States the current world leader ... . The more America-like the world becomes, the faster the pace of economic change will be’ (p. 192).

I think Easterbrook is basically right about this. It would probably take a world war to stop globalization and there doesn’t appear to be one of those on the horizon. Perhaps some people said similar things around 1900 - prior to a few decades of disruption in global trade and investment. Even so, the main point is that the forces shaping the future of the global economy are beyond the control of any individual, firm or government. At a national level it is possible to shield some groups from the forces of global change but only by reducing the opportunities available to others.

Easterbrook acknowledges that it is possible for governments to provide a safety net that will provide citizens with some degree of security, particularly in relation to health care. He argues that people in the U.S. suffer more stress than do people in western Europe because of problems associated with the U.S. health care system (pp. 200-202). I don’t know whether or not this is a valid point. Evidence from the Gallup World Poll suggest that people in the U.S. tend to experience more stress than do people in western European countries and Australia. But Mexicans report experiencing a lot less stress than Americans and less stress than Europeans and Australians - so there is probably more involved than health care.

My main reservation about this book, as with Easterbrook’s earlier book ‘The Progress Paradox’ (discussed here), is that I think he overstates the insecurity that people actually feel as a result of the forces of globalization. The book seems to be full of colourful phrases to describe this insecurity. For example, Easterbrook writes of ‘change-based anxiety’ (p.34), ‘Multiple Media Personality Disorder’ which he defines as a ‘a universal low grade nervous tension from which there may be no realistic escape’ (p.70), ‘the Super Bowl of stress’ (p. 72) and ‘collapse anxiety’ (p. 168).

I acknowledge that job insecurity has increased. Easterbrook makes a strong case that each year it gets easier for someone to come along with a superior idea and put an established firm out of business (p. 134). He could be right that in future there will be a greater risk that people who have risen to the middle classes will ‘fall back’ down the economic ladder and end up bitterly unhappy (p. 196). I also acknowledge that the insecurity of modern life is a popular topic of conversation, particularly in the media. But I don’t think insecurity is having a large impact on behaviour and the way people feel about their lives. If a lot of employed people were feeling a high degree of insecurity about their jobs I think they we would see more precautionary saving and less willingness to go into debt than we have seen in recent years. Survey evidence suggests that the vast majority of people in high-income countries feel that they have a great deal of control over their lives.

This leaves me thinking that there must be a huge gap between the fears that a lot of people express when they talk at a superficial level about the challenges and insecurity of modern life and the deeper feelings that they have about opportunities and threats in their own lives. By the way, returning to the original question, I think we should welcome globalization for the potential it offers for ongoing improvements in living standards.

Postscript:
Gallup poll data for the U.S. shows, not surprisingly, that people working in firms that are hiring more people are more likely to be thriving than are people working in firms that are letting people go. However, even in the firms that are letting people go the percentage who are thriving exceeds the percentage who are struggling. It seems that most people who have a job are optimistic about the future even if their job is insecure.