The Currency of Crisis: Empathy and Identity in Political Economy

Abstract

While economists have increasingly acknowledged behavioral theories of preference formation, political economists have been more apprehensive about bringing in social psychology. Specifically looking at the global financial crisis and the ensuing sovereign debt crisis, I put forth a behavioral theory of preference formation in political economy. Empathy and identity play a critical role in shaping how individuals form groups, how crises are framed in public discourse, and how the issue framing affects policy outcomes. I use newspaper text and machine learning to demonstrate the prevalence of competing crisis frames based upon creditor, debtor, and outsider frames. I then look at government reports and provide a qualitative analysis of the reforms enacted as a response to the economic crises in the European Union. I argue that policy preferences, post-crisis, stem not from calculations concerning one’s own pocketbook, or from purely pro-social calculations regarding the country’s economic position; rather, preferences form in a manner consistent with more hedonic, experiential, calculations stemming from empathy for one’s own perceived community and identity group that are molded by prior held beliefs, biases, and race.