To What Degree Does "Identity" Affect Economic Performance?

Recently I have revisited a topic that has intrigued me for years, ways in which an organization's culture affects its economic performance. The basic working hypotheses are that: (1) people put forth more effort and produce better results for organizations whose values they identify with, and (2) therefore, it's in the best interests of organizations to clearly formulate those values and make them clear to prospective employees in the process of building an organization of people who subscribe to those same values and generally want to "fit in."

There is some amount of evidence that satisfaction with one's workplace, as characterized by the poll results for "best places to work" both in the U.S. and the U.K., is related positively to economic performance. Further, intrinsic rewards, such as capable colleagues and recognition for good work, play a larger role in worker satisfaction than extrinsic rewards such as monetary compensation.

A new book, Identity Economics, by Nobel Prize-winning economist George Akerlof and Rachel Kranton, takes this thinking to a macro-economic level. In their view, an organization (and even entire societies) works well when people personally identify with it, so that their self-esteem is tied up with its activities. Identity helps explain why people do things, everything from getting tattoos to volunteering, that aren't in their immediate best interest. I'm reminded of this when I recall the dedication with which my South Korean business friends doggedly pursued success during the rapid growth period of the country in the 1980s even if it meant weeks of travel and significant strains on their personal lives. They were doing it in part as a personal sacrifice in pursuit of national goals for a better life for future generations of South Koreans.

One has to ask whether citizens in the U.S., who have experienced little loyalty on the part of their employers, can any longer identify with their organizations and, in a broader sense, their economy? Economist Robert Shiller's response to this question is sobering. He says: "In most civilian fields, job satisfaction may not be a life-or-death matter, but a relatively uninterested, insecure work force is unlikely to bring about a vigorous recovery." He concludes that "Solutions for the economy must address not only the structural instability of our financial institutions, but also these problems in the hearts and minds of workers and investors-problems that may otherwise persist for many years."

The questions this raises are: Just what solutions address Shiller's concerns? How can they be achieved? Can businesses, for example, be provided with incentives to retain their employees and generally improve employee "identity"? Does this require yet one more intrusion by government into the private sector? In fact, is it even achievable in countries like the U.S. at this late date? Will such efforts result in the same slow responses to an economic crisis and sluggish recovery in productivity being experienced at this moment in European countries with their more "humane" laws regarding employment? Or are we confronting a crisis of "identity" so critical that some kind of effort will be well worth the long-term benefits that it might yield in terms of citizen "identity" with the economic success of countries like the U.S.? What do you think?

This article was provided with permission from Harvard Business School Working Knowledge.