The Relationship Between Identity and Economic Theory

The Relationship Between Identity and Economic Theory

by D Bhargav - Tuesday, December 15, 2015 10:41 PM IST
The Relationship Between Identity and Economic Theory

Is there a link between  identity and economic theory?

After graduating with a PhD in economics from the MIT in 1966, this young economist decided to spend a year at the Indian Statistical Institute, to develop a programme for allocation of waters of the Bhakra-Nangal dam. While not much headway could be made in the water allocation, he wrote a paper on the centre-state fiscal policy. Not only that, he went on to learn Hindi and Urdu for a year, and study the institution of caste in India. Based on his study of Indian economic history, he included examples of incomplete markets in his paper, now a classic, “The Market for Lemons”, for which George Akerlof was awarded the Nobel Prize for economics in 2001.

The Relationship Between Identity and Economic Theory

This article is not about Akerlof or asymmetric information. It is about Identity Economics, which he and Rachel Kranton have pioneered. Identity has been studied extensively in behaviourial sciences, but Arkelof and Rachel realized that identity was not sufficiently captured in economic theory, and they went on to develop a linkage between the two.

In economics, the concept of utility function indicates one’s preferences, that is, what one likes more and by how much. Arkelof and Kranton postulated that in addition to one’s set of actions and externalities (which the standard economics theories deal with), one’s identity also determines one’s utility function.

Akerlof’s and Kranton’s model posits that a person’s identity depends on four components: (i) his or her social category, (ii) the prescriptive behavior or the norm for the category, (iii) one’s personal characteristics matching the norm, and (iv) one’s own actions and interaction with others, based on the norms.

Development of the dominant political norm in modern India

The focus here is to show how the founding philosophy of the young nation led to the development of the prescriptive behavior of the intelligentsia. The early generation of leaders in the Congress in the late nineteenth century set the tone for economic nationalism. They believed industrialization would combat economic backwardness and poverty. With the arrival of Gandhi in the early twentieth century, he brought in a perspective of rejecting industrialization, reviving labour intensive industry. World War I and the heady Russian Revolution acted as catalysts spreading the ideas of socialism. Fabian socialism took root in India under Nehru who had travelled widely across Europe and came back with a reverence for Soviet-style communism.

The Relationship Between Identity and Economic Theory

The spirit of political leadership at the time of independence was undoubtedly to establish a “democratic socialist” state. While this defined the political structure of the nation, secularism, given our ancient Indian heritage, provided the bedrock, and Gandhian philosophy too played a role. The Preamble of the Constitution described India as a “sovereign democratic republic”. In the words of one of the leading figures of subaltern studies, Sudipta Kaviraj, the Constitution as drafted at the time of independence, “reflected the accepted social plan or design of the ruling elite” and goes on to add that there have been “disingenuous insertions of ceremonial socialistic principles” subsequently.

Over a period of time, the state intervention morphed into populist policies. There were concessions to vote banks and the licence regime favoured the more influential. The Forty-Second Amendment gave shape to this transmogrification, by describing India in the preamble as a “sovereign, socialist secular democratic republic”. The two additions to the preamble, “socialist” and “secular” summarized the norm of political consciousness that had taken root since independence. The perceptions and connotations of these two words are many though.

The social category “civil society”

In an system dominated by centralized planning institutions it can be expected that much of the “civil society” consisting of intellectuals, NGOs and various institutions, all apparently neutral and objective, have been influenced by the state and the ruling class which dominated the political spectrum. Various connotations of “socialist” and “secular” emerged as a norm guiding this civil society, as it veered towards the centre of the left.

The utility function for this civil society is a summation of the utility derived from its beliefs (secular, socialist), the utility derived from its interaction with the ruling class, and the utility derived from its objectivity.

Shift in norms post-liberalization

A series of events in the early 1990s – political, economic and technological created the perfect storm for change. In 1991, a balance of payments crisis pushed India into the globalization waters. On a wintry day in January 1991, Baghdad replaced the Christmas tree, as aerial bombs lit up the city in the First Gulf War. The media walls started crumbling along with Iraq across the world as satellite TV invaded homes. Prannoy Roy’s “The World this Week” no longer was our eyes to the world. Public Internet access and mobile telephony entered in 1995. It took time to cover India, but access to communication – data, voice or entertainment could be taken for granted within a decade.

It would be instructive to study the change in attitudes related to “socialist” and “secular” as defined by the dominant polity post-globalization in India. The World Values Survey by a global network of social scientists has extensive survey data on changing values in 100 countries. For India, there is data from 1989 to 2014. Data were accessed from the online analysis tool, on two questions (i) In political matters, people talk of “the left” and “the right.” How would you place your views on this scale, generally speaking? (ii) “Private ownership of business and industry should be increased” versus “Government ownership of business and industry should be increased” and aggregated. For example, “Left” in the graphs ranges from the left of the centre to the extreme left. The two graphs summarize the response by a sample of people having at least some university education, over the last twenty-five years.

The Relationship Between Identity and Economic Theory
The Relationship Between Identity and Economic Theory

The results are striking. The trends of the curves for “right” and “private ownership of business” have an early peak, followed by a trough, and then an upward slope. With the opening up of the economy in 1991, there seems to be an initial peak of heightened expectations. The two attitudes peaked in the 90s. The educated ones may have expected more opportunities with globalization. However, the early part of the first decade of this century saw a drop, only to rise after 2010. One hypothesis for this is that with globalization, also came the challenges, and the structural adjustments required in almost every sphere of activity in India. The sharp turn towards right after 2010, could possibly be attributed to the policies of UPA-2 and the disillusionment due to the scams that plagued UPA rule.

One can infer that the attitudes of the educated class are evolving, away from leftist orientation.

Dissecting identity based interactions – the “intolerance” debate and award returns

What happens if the utility function of civil society is reduced? Identity economics helps us to analyse it, as illustrated below.

Born in the same year that Marx died, a young British civil servant began his career at the India Office in 1906. He left it soon, and moved on. John Maynard Keynes, later in his magnum opus, “The General Theory of Employment, Interest and Money” observes, “Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.

This remark explains the inertia of the civil society to move away from its norms anchored on socialism and secularism which are coated with layers of historical grime.

John Maynard Keynes
John Maynard Keynes

The Sahitya Akademi, India’s National Academy of Letters, presumably represents the most learned among Indian society, and some of them may be a part of the civil society being discussed. The Award was first given in 1955, and till date there have been a little over 1100 Sahitya Akademi award winners. As on the date of writing this article, 35 out of an estimated 700 who are living, returned the award. Based on the publicly available information, the median age of the 35 intellectuals returning the Sahitya Akademi awards is 69 years.

The age profile of the award winners suggests that they were products of the pre-liberalization era, and they may have been influenced by the prevailing version of “socialist and secular” culture during their youth. However there is a shift in attitudes towards the opposite pole, as inferred from the World Values Survey data. The influential left oriented civil society’s non-acceptance of the changing attitudes seems to drive the debate on “intolerance”.

With the ascent of BJP, the civil society may have seen an erosion in their utility function, as the utility they derived from their interaction with the ruling class that was earlier in power may have become marginal. What would it do in such a scenario?

They would campaign against the new incumbents to inflict a loss, and restore their identity. The loss can be inflicted through propaganda, disproportionate focus on small events etc to cause ideological or personal discomfort to the individual.

A friendly media is a useful ally in this battle, as media specializes in creating an anchoring bias. Anchoring is a cognitive bias wherein an individual tends to focus excessively on an initial piece of information to make subsequent judgments, and prevents one from deviating significantly from that initial position despite any new information offered.

Dissecting identity based interactions – the case of Sita Ram Goel

Breaking from the dominant ecosystem comes at a cost. In an “intellectual” world dominated by people with leftist orientation, an individual who thinks and professes an opposite philosophy would feel out of place, as much as an atheist in a devotional congregation.

The Relationship Between Identity and Economic Theory

The actions of the non-comformist would also cause discomfort to the dominant “civil society” class. They would suffer a loss in their identity due to the actions of the non-confirmist, and would not let the apostate go away lightly. They would attack the individual in many ways. An outstanding example is the case of Sita Ram Goel, a dyed-in-the-wool communist in the 1940s, who later became a staunch anti-communist, a prolific writer and relentlessly worked for the cause of Hindu nationalism.

Koenraad Elst in his short biography of Sita Ram Goel writes, “the most remarkable feature of Sita Ram Goel’s position in the Indian intellectual arena was that nobody even tried to give a serious rebuttal to his theses: the only counter-strategy has always been, and still is, “strangling by silence”, simply refusing to ever mention his name, publications and arguments.” By applying the framework of identity economics, as shown below, one can analyze various scenarios possible in the interaction between Sita Ram Goel and the “Intellectuals”:

The Relationship Between Identity and Economic Theory

The above illustration reveals the how to make the reaction of the dominant category irrelevant by: (i) making the cost of reaction by the “Intellectual” class sufficiently high, or,  (ii)  making the loss for the individual moving away from “Intellectual” class sufficiently low.

One realizes that there are lessons to be learnt by analyzing the interactions using this framework. The amorphous right wing needs to develop the intellectual ecosystem to challenge the status quo, so that the cost of identity related interactions are higher for the left oriented incumbents, and any loss of self-identity for those moving away from the dominant norm becomes low. The time is ripe, with the mandate in 2014, and the changing attitudes among the educated class, to offer a good intellectual alternative and create a more diverse civil society.

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