Economic evolution is the process by which extant structures of knowledge – including markets, firms, technologies, institutions and industries – endogenously change through the selective process of variation and differential replication as an ongoing, self-organizing process of ‘creative-destruction’ (Schumpeter 1942). Economic evolution is thus defined as a dynamic process at the level of populations of economic ideas or knowledge (Nelson and Winter 1982; Metcalfe 1998; Mokyr 2002). Yet unlike biological evolution, this does not depend upon differential replication of the organism, but rather on differential origination, adoption and retention of the knowledge or ‘generic rules’ that economic agents carry (Dopfer and Potts 2008). In the course of economic evolution, agents thus experience
Economic evolution, by definition, implies that agents become different as they adopt new ideas and knowledge. Yet despite the enormous significance of the concept of identity in the humanities, neuroscience, and cultural and social sciences (Breger 1974, Greenfield 2008), the process of identity dynamics in agents has not been a central analytic concern of evolutionary economists. Instead, it is often presumed that new knowledge is effortlessly ‘updated’ in the internal scheme of each agent and therefore that the co-evolutionary dynamics between socio-cultural domains and the individual agent’s social network position (i.e. status, sense of self, etc) remain in continuous equilibria. Curiously, they often make exactly the opposite assumption with respect to firms, institutions, regions and macroeconomies in respect of structured knowledge dynamics.
This paper argues that the same principles apply at the level of the micro agent in respect of identity dynamics. Economic evolution is argued to be constrained by identity ‘catch-up’ (in the language of macro-growth theory) and also driven by the emergence of new identity differentials in the form of consumer or cultural imagination and entrepreneurship (Witt 2001). Such instances may be usefully thought of as ‘structural change’ at the level of the micro agent in terms of their internal and external connections (Potts 2000). These structural changes – as identity dynamics – are associated with changes in a person’s ‘sense of self’ due to the effects of the adoption of new ideas or shifts in their position in a social network or institutional milieu. This leads to endogenous changes in agent preferences, consumption, risk propensity, expectations, and other factors affecting the relative position and connectivity of the agent in an organizational, economic or socio-cultural system. Identity dynamics are thus a general process that occurs, differentially and irregularly, to all economic agents in an evolving economic order.
Identity dynamics are complex because agents simultaneously seek to maintain internal coherence amidst such change, while ever seeking to maintain differentiation (i.e. individual and economic identity), as well as social connections (i.e. social and cultural identity). The optimization problem of the evolutionary economic agent is thus not over utility, but rather over identity. Put differently, the limits of economic (and socio-cultural) evolution are the limits of identity dynamics: if agents cannot change
In turn, it is the capability to undergo such changes that will, in part, determine the rate of evolutionary dynamics. Unlike biological evolution, where the rate of reproduction determines the speed of evolutionary processes, in socio-cultural and economic evolution it is the not simply the rate of learning or of the supply of new ideas, but rather the rate at which identity is able to be reconstructed and re-construed that determines the potential of evolutionary growth.
This paper endeavours to define and unpack the evolutionary economic of identity dynamics by illustrating how the generic
The ‘evolutionary investment’ approach to identity offers additional insights to the ‘augmented utility function’ approach of Akerlof and Kranton. By focussing on the generic evolutionary dynamics of identity, rather than equilibrium statics, an analytic space is opened into such phenomena as creativity, learning, social networks, preference endogeneity, etc, as well as providing a basis for integrating identity and creativity analysis in contiguous disciplines (sociology, cultural studies, humanities, etc) that are already based on identity dynamics, yet remain often inadmissible because of their poor fit with equilibrium static arguments.
The evolutionary economic approach to identity seeks to go beyond models of genetic determinism of identity (as in biology and psychology) and also beyond models of socio-cultural or environmental determinism of identity (as in cultural studies and sociology). Instead, while allowing that both innate endowments and environmental circumstances powerfully shape identity, identity is also subject to ‘entrepreneurial’ experimentation and investment. Furthermore, agents differ in their capabilities for such due to the effect of cumulative past investments. Thus by treating identity as a kind of ‘investment’ in personal ‘technology’ we bring it within the ambit of economic analysis. And by recognising that this investment has systematic affects on the rate and direction of change in the economic system we bring it within evolutionary economic analysis.
Identity has not traditionally been part of the standard arguments of microeconomic agency – whether equilibrium or evolutionary – but instead, along with creativity, is mostly associated with psychology, cultural studies, sociology and the humanities. Nevertheless, the concept of identity has recently entered microeconomic theory via the works of Akerlof and Kranton (2000, 2002, 2005), Davis (1995, 2003, 2006), Kirman and Teschl (2004), Fang and Loury (2004), Livet (2006), and Sen (1999, 2004, 2007). The various arguments broadly converge about the notion of identity as a useful concept in modelling rationality in complex socially-framed or categorized situations, in modelling utility losses due to expectational losses, and in framing preferences and modelling preference endogeneity.
George Akerlof and Rachel Kranton (2000, 2002, 2005) have recently sought to integrate modern psychology and sociology on the behavioural and motivational aspects of identity into neoclassical economics by augmenting the standard utility function with a
The Akerlof and Kranton model argues that identity affects choice and behaviour. It can be accommodated in neoclassical economics by an additional argument to the utility function in terms of a loss function calibrated on the difference between the utility of actual and expected identity. Identity is thus a form of ‘personal capital’ due to the endowment of individual actions and social context. This enables an economic perspective on the concept of identity by viewing it as a prime asset of the individual that is accumulated through ongoing ‘investments in identity’ in order to create an asset that they then capitalize on in routine social contexts. This is then analysed in a game-theoretic formulation, as Akerlof and Kranton suggest, in which identity is defined as a form of human capital with social spill-overs.
Yet the Akerlof and Kranton model is contentious. Within the neoclassical camp, there remains concern that this is an illegitimate extension of the utility function. On the other hand, many behavioural and institutional economists argue that this is what they have been saying all along, although in a different analytic language. In particular, Davis (2005, 2007) has argued that the Akerlof and Kranton model fails to distinguish between
In Akerlof and Kranton’s (2000: 718-20) utility maximization model, the concept of identity
The identity function of agent
Identity depends on
The neoclassical model of identity is thus analysis of
The evolutionary critique of the economic identity of the socially construed individual focuses on how economic change affects the identity of the agent. As above, in an evolving economic order, individual positions and thus identities change. Economic growth and evolution is a consequence of change in individual actions and behaviours, which implies a change in identity. This can occur in many ways, as when once entrepreneurs become large business holders, or when once general employees become highly-paid specialists. Or it may occur over generations, as when a working-class father provides resources to train a professional-class daughter. Most commonly it occurs as people change jobs or careers, or experience changed income, or learn new skills or knowledge that lead to different lifestyles and opportunities. Indeed, this process plays out both individually and demographically as agents move through the various stations of life. These are normal events in an evolving economy. Yet they are also an evolutionary generic process at the level of the individual agent that remains to be integrated into the micro-model of evolutionary economic dynamics.
From the economic perspective, identity is individually constructed through the sequence of choices made about the adoption of ideas. These choices happen in an open evolutionary space. They are affected by social structures, but also by individual behaviours. A general theory of identity should thus seek to account for both aspects of individuation and socialization, not just in terms of how identity arrives at equilibrium, but also the mechanisms and consequences of change in identity.
The evolutionary critique of the neoclassical model of agent identity is analytically equivalent to the critique of the neoclassical model of technological change, namely that it renders the prime variable, namely the dynamics of identity (
The concept of identity can thus be integrated into evolutionary economics differently to how it is integrated into neoclassical economics (i.e. an augmented utility function) by effectively collapsing the entire generic (i.e. growth of knowledge) logic of economic evolution with respect to the macro or
The generic model of economic evolution is based on the distinction between
The same point applies to agent identity. An agent is composed of generic knowledge as well as operational actions and resource endowments. Yet the concept of identity does not relate to the agent’s operational actions and endowments, but rather to their underlying knowledge-base and generic connections. Change in identity (
Identity is thus generically constituted by the rules an agent carries and the sense and extent to which they work as a coherent system. Of course, such a ‘system’ will rarely be in equilibrium, and agents may often be internally inconsistent and externally unrepresentative. The utility maximization model of identity presumes the continual operation of psychodynamic or homoeostatic mechanisms (e.g. ‘anxiety’) to maintain personally constructed identities in the vicinity of social templates. However, the evolutionary model of self-organizing trajectories is of rule populations and of agents ‘investing’ in different rules. Identities thus form (i.e. is not preformed) as the ongoing construction of agent niches in economic and socio-cultural space. This conception is somewhat different to the standard psychological and sociological conceptions of identity, which are based on a ‘sense of self’ or a self-image that is connected to social categories. As Akerlof and Kranton (2000: 720) explain: ‘Identity is bound to social categories; and individuals identify with people in the same categories and differentiate themselves from those in others’. However, rather than
In this model, agents then ‘identify’ with other agents who have also internalised and externally signalled similar rules. Some generic rules are institutionalised as social categories, but others are only weakly defined. Identity defined with respect to generic rules rather than social categories still carries the implication of identifying with other such carriers and differentiation from non-carriers, but has the advantage of much greater generality and analytic flexibility. This is of particular relevance when addressing issues of novelty that have not had sufficient time for social categories and other such socio-cultural institutions to form and stabilize. Instead, the emergence of such social categories can be explained as a process of an ‘
Identity dynamics are to the individual agent what technology dynamics are to a macroeconomy, namely a change in underlying generic structure though a micro process of ‘creative destruction’. It follows that the model of evolutionary growth through technological (or meso) trajectories of new ideas in a macroeconomy can similarly be applied to the process of identity dynamics in an individual agent: just as a new technology enters into a macroeconomy as a
A micro trajectory is the process by which an agent originates, adopts and retains a novel generic idea. It is also an identity dynamic as an agent goes from one generic state to another, becoming generically different. This concept should be immediately distinguished from learning dynamics in relation to new information, which are operational dynamics. Generic dynamics instead relate to the affect of a micro trajectory that changes the knowledge base, and thus the identity, of the agent. New information changes what the agent
A micro trajectory has three phases:
Modelling identity dynamics in terms of micro-trajectories has several implications. First, it provides a way of conceptualizing the
Second, the rule-based multiple-selves model enables a consistent treatment of
Third, and continuing with this observation, the micro trajectories model provides a way of representing the environmental structure of identity in terms of emergent
Fourth, as identity evolves over a three-phase micro trajectory through origination and adoption (micro 1 and 2), and which is then retained as new identity in micro 3, the
Evolutionary economics is therefore rightly concerned with identity in terms of the role it plays in the process of economic evolution. Like price and quantity changes, identity dynamics in microeconomic agents are a mechanism of economic evolution. Yet although identity dynamics happen on a different time and operational scale than price and quantity effects, they are no less significant in the explanation of ongoing coordination dynamics. An evolutionary dynamic interpretation of identity does not just reinterpret the standard economic analysis of identity, as argued by Davis (1995, 2005), Sen (1999) and Kirman and Teschl (2004), but can further open a new line to economic analysis of socio-cultural dynamics by unpacking the various generic dimensions involved. Consider the consequent implications for evolutionary meso-economics and macro-economics.
Economic evolution is the process of a meso trajectory, and a meso trajectory unfolds as agents adopt and adapt a rule in a growing population. A meso trajectory is stabilised when a population of agents adopt and retain a rule, such that it becomes an element in the knowledge-base of the economic system in the form of an institution. Yet the micro-structure of an institution is that of identity conformity across a significant sub-population. The question, then, is how does this occur, and what role do identity dynamics play in this process?
A particular application of evolutionary
The creative industries thus ‘produce’ social network markets (Potts
As economies grow in wealth, they are characterized not just by higher levels of production and consumption, but also by a greater variety of goods and services (Beinhocker 2006). However, a widely overlooked hypothesis is that this greater variety may also extend to identities. Economic evolution involves the multiplication of identities in the same sense that it involves the multiplication of specializations and knowledge. Furthermore, if the social network markets model of identity matching is correct, we would also then expect that a greater variety of identities would then feed back to drive a greater variety of goods and services as niche identities and niche markets are stabilized and institutionalized. At the meso level, economic evolution thus drives identity evolution, which in turn drives market evolution.
Akerlof and Kranton (2005) argued that identity considerations are important explanations of the efficiency of organizations with respect to the motivations of workers and institutional solutions to the principal-agent problem. They argued that agents identify with a job, and that their motivations to work and effort are dominated by considerations of identity, not remuneration. However, a different approach to identity in organizations and consumers can be constructed by considering the relation between identity and creativity among both firms and consumers. A variation of their model is that both creative work and creative consumption constitutes an important identity that may be distinguished from non-creative work or consumption identities (Quiggin and Potts 2008). This is a theme developed by Florida (2002), who argues that creative workers are different from other sorts of workers in that they are motivated to live in certain places if those places provide the sorts of environmental conditions and amenities consistent with their creative-class identities (Currid 2007). Organizations, regions and places themselves have an ‘identity’ that is perceptible to individuals who, in turn, may adopt this as part of their own. Firms, organizations, cities, regions and nations spend considerable resources in creating and managing such identities to make themselves attractive to peripatetic individuals who seek to connect their personal identities with such meta-identities.
Agents often value a creative identity. In aggregate, this is observable in income elasticities of demand. As income increases, individuals spend an increasing proportion of that income on creative goods and services. Identity dynamics can help explain this consumer behaviour in terms of not just increased utility accruing from consumption of previously income unavailable goods, but also by the identity signalling effect such (public) consumption accrues. This is, in effect, the social network market working from the inside, as displays of creative consumption function as signalling mechanisms to socially networked or otherwise connected agents, not just of the particular value of the particular good or services in question (the restaurant, car, clothes, or furnishings, etc), but also of the identity of the agent who leads such endeavours (Earl and Potts 2004).
In evolutionary economics a meso trajectory is a population dynamic of ‘creative destruction’ as the new idea replicates and displaces extant ideas and structures. However, this process also involves micro-level identity dynamics associated with the changes induced in individual agents. What we may add is that the facilitation and coordination of such identity dynamics is both part of the meso process and one that gives rise to distinct and specialised organizations and industries to provide this service. This evolutionary ‘meso’ function both explains the significance of the ‘creative industries’ in an evolving economy, the nature of these industries in terms of social network markets, and the construction of aggregate identities associated with regions, industries or even nations (Potts, forthcoming).
The macroeconomics of identity dynamics does not concern the identity profile of a macroeconomy, but the role of identity dynamics in the context of macro growth and development. In relation to the macroeconomics of identity, Akerlof (2006) argues that identity considerations explain why Keynesian macroeconomic analysis may be more relevant in explaining the effects of changes in policy variables than New Classical macroeconomics in which strong rationality assumptions imply that policy changes should have no effect. They argue that these neutrality results ignore the role of identity in determining how people feel they should respond, which, they argue, returns the standard Keynesian conclusions of the role of government in stabilizing macroeconomic fluctuations and expectations. Yet a different approach to macroeconomics and identity may follow when viewing the macroeconomy not as the sum of individual transactions or expenditures (as in the Keynesian and New Classical approach), but instead as the emergent product of individual actions subject to ongoing change in the content of that activity due to entrepreneurship and innovation.
A Schumpeterian approach to identity and macroeconomics thus seeks to emphasise the role of agents investing in the construction of new identities derived from new technologies, businesses or lifestyle opportunities. Indeed, rather than the Akerlof and Kranton model of policy, in which government seeks to manipulate identity to stabilize the economy,
The process of creative destruction that underpins Schumpeterian economic evolution and growth by definition involves identity dynamics in at least two ways. First, as entrepreneurship and innovation leads to the destruction of some markets and therefore jobs, some identities will need to be shed and replaced with new ones. For example, identities associated with horse buggy manufacture, or working with horses generally, were decimated by the arrival of the auto industry. A failure to change a once-proud identity in many cases doomed agents (and families) to a slow but inevitable economic decline.
Identity dynamics may thus be an important explanation for relative growth rates, but in terms of resistance to change and in the acceleration of the effect of new technologies and knowledge on economic growth. For rather than government being involved in stabilization of economic activity, as in the Keynesian model, or of expectations, as in the New Classical model, it may be more efficacious from a growth perspective for government to be involved in the management of identity dynamics toward facilitating shifts in identity away from declining sectors, technologies and business models, and toward emerging sectors, technologies and business models. The limits of individual adaptation to change are the limits to macro change: the growth of knowledge is ultimately a statement about the limits of micro identity possibilities. Economic evolution is limited by identity dynamics. Yet identity dynamics in turn carve the possibility space of economic evolution.
The concept of identity refers to an individual’s sense of self and is a major focus of inquiry over many analytic domains that include philosophy, neuroscience, cognitive, behavioural and social psychology, anthropology, sociology, political and cultural studies, and history. However until very recently identity has not been a concern of economics. Akerlof and Kranton (2000) sought to fold identity considerations into neoclassical economic analysis by integrating the concept of identity into the utility function as a way of explaining systematic biases in the framing of choice. Identity thus matters in economics because of its effect in biasing and framing choice.
Following Kirman and Teschl (2004) and Herrmann-Pillath (2008), this paper has sought instead to develop an evolutionary economic interpretation of identity that is not based on choice biases, but rather in terms of
This approach makes identity endogenous to economic analysis (
I have argued that a focus on identity dynamics exposes a significant lacuna in the theory of economic evolution in respect of the conditions for economic evolution to occur. If micro agents can not or do not change in the generic knowledge they carry, then economic evolution cannot occur. Economic evolution is thus conditional upon micro identity dynamics. It is often presumed that such dynamics ‘just happen’. Yet there are many instances in which they don’t, or in which identity dynamics are arrested or deviated such that the adoption and retention of new ideas is frustrated in individual agents. These may be cultural, socio-political or experiential. They may be due to social network effects, or lack of material or cognitive resources. But whatever the case, it remains the case that economic evolution requires agents to