I get the impression from the methodology chapter of their recent book, ‘Identity Economics’, that George Akerlof and Rachel Kranton 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.
The key idea of identity economics 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.
The 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.
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 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:
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 a 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.