There’s an old saying: you can take the girl out of the social context, but you can’t take the social context out of the girl. At least that is what the authors of “Identity Economics: How our Identities Shape Our work, wages, and Well-Being,” – George Akerlof and tonight’s guest Rachel Kranton -- might say.

Imagine, they write, a brand new cadet at West Point Military Academy. On day one, he gets a new haircut, a uniform and must endure onerous rituals such as saluting and adding “sir,” to the end of his answers. While the purpose of these rituals is about discipline, Akerlof and Kranton say it is also about identity: he is assuming a new identity as a future officer in the US Army and being indoctrinated with the norms of military life. This identity and commitment to particular values, like duty and honour – and not incentives – explain the cadet’s preferences and behaviour.

Recognizing these identities in action could be a useful tool for economists. After all, one of economics’ strengths is its ability to look at how decisions are made from the perspective of the decision maker: it can explain why consumers buy what they do or why employees work for some employers and not others. Identity Economics seeks to look at people’s decision from the perspective of their identity and social norms.

In a nutshell, Akerlof and Kranton argue identity affects economic outcomes. By identity they mean a person’s sense of self. Further, they argue that sense of self is associated with different social categories and each social category has its own norms, which spell out how people in that category should behave. Traditional economists might protest that this data is captured in classical models as tastes or preferences, but Akerlof and Kranton believe there is more at work than a matter of taste.

Taste is defined quite narrowly as what people like and don’t like. Some like oranges and others prefer apples; some prefer to enjoy life today rather than save for the future. In most economic analysis, they decide what to buy or how much to save based on price, interest rates and income.

If we apply the standard economic analysis to gender discrimination in the workplace, we see men do not like to associate with women on the job, prefering men to women much in the same way someone might prefer oranges to apples. Gender discrimination, however, is not simply a matter of personal preference, rather it is reflective of social codes. In the case of gender, men want to behave as men should behave and vice versa for women.

Maintaining our identity, obeying its rules, living by its norms is one of our central economic objectives, Akerlof and Kranton say, and you can’t understand our behaviour unless identity is part of the equation.

And that part of the equation is called the utility function. Utility is fancy economic-speak for a good thing; a measure of satisfaction. And the underlying assumption of most economic theory is that people do things because doing so gives them utility and people want as much utility as they can get.

Now, identity economics does not throw the standard utility function out, but rather adds a second part to it. The “identity utility” being the gain in satisfaction when a person’s actions align with the norms and ideals (sense of self) or the loss when they don’t.

Ross Gittens runs an example – gender disparity in particular jobs -- through the identity utility models:

There are two social categories: men and women. The relevant norm says the job is (we'll say in this case) appropriate for men. This creates either gains or losses in identity utility: women lose utility when working in ‘a man's job’ and men lose utility when asked to work alongside women in such a job. Thus employers will usually find it easier to perpetuate the norm than to challenge it. Of course, this describes the way the world is, not the way it should be. But that's a big improvement on the standard model, which describes a world that doesn't exist and never could.

For some, this might seem like common sense. But in the field of economics, it is akin to tipping a sacred cow – let’s call that cow homo economicus.

See, Akerlof and Kranton are part of a larger movement within economics toward a more realistic, human and, in their minds, reliable model of human behaviour and away from homo economicus: the perfectly rational, utility-maximizing autonomous creature used in standard economic models.

The beauty of homo economicus is that you can plop him into mathematical equations and get neat and precise results. Some argue it was this skeletal vision of man – mainly the assumption man was rational -- that made economics possible allowing economists to build elaborate models of human behaviour, thus bringing it closer to the realm of science.

Some economists might imagine themselves as pure scientists dealing with pure numbers, but they may just have a bad case of physics envy – believing they can achieve the kind of precise results scientists achieve in laboratories.

While economic models became more sophisticated, homo economicus remained simple, but this started to change around 1957 when Gary Becker developed ways to represent a variety of realistic tastes for things like discrimination, altruism and children.

More recently, some economists have shown human behaviour often deviates from the rational model and that irrational behaviour can be predicted. This group, dubbed behavioural economists, used models adapted from biologists and psychologists into the dismal science (as economics is sometimes called). And now, Akerlof and Kranton believe social context will add flesh to homo economicus’ bones making him better resemble real people in real situations.

If you want to learn more about behavioural economics, watch this interview with Dan Ariely, a professfor of economics at Duke University and author of author of "Predictably Irrational: The Hidden Forces That Shape Our Decisions."

But, as some economists like Akerlof and Ariely try to incorporate more psychology into economics – to make it a better predictor of real life – the discipline became less precise in some people’s eyes.

So on one side stand the neoclassical economists hanging onto homo economicus and on the other, the humanist economists building a more human homo economicus. Economics is stuck between science and art.

And now, the argument that the discipline is a science is further weakened by its failure both to foresee and explain the recent economic crisis.

As economists begin to model more and more complex human behaviour, David Brooks predicts they will blow up their whole field. Economics will return to its humble beginnings as an art – a subsection of history and moral philosophy. It will be realistic, sure, but it won’t be a science anymore.

Akerlof and Kranton note at the end of the introduction to their book, economics pervades how policymakers, the public and the press talk and think, and they believe identity economics provides a more reliable model thus making economics a more useful tool for improving society -- a pretty lofty proposition.

But the question is, if economics continues to move more into the realm of art and away from science, can we trust it to have a beneficial influence on public policy?