For much of human history, the function of an economy has been centered on the allocation of scarce resources to meet material needs. The standard utility function, the foundational concept of consumer theory, has primarily measured a person's satisfaction derived from the consumption of goods and services. This framework, populated by a rational Homo Economicus, treats preferences as largely fixed and focused on pecuniary motivations.[1]
Yet, in societies that have achieved broad material affluence, this model becomes insufficient. The "scarcity hypothesis," which posits that individuals prioritize pressing material needs like security and sustenance, also implies a profound shift in values once those needs are met. As prosperity rises, a new orientation emerges, de-emphasizing economic growth and physical security in favor of "non-material" goals such as self-expression, autonomy, environmental protection, and quality of life. This societal transformation does not eliminate the economic problem, but rather redefines it.
In such an economy, the standard utility function for consumption effectively merges into an identity utility function. Consumption is no longer an end in itself; it becomes an instrument for the performance and construction of the self.[2] Economic actions, from purchasing decisions to career choices, are recast as signals meant to confirm one's identity.[3] As affluence increases, more economic resources are, in fact, required to successfully confirm this identity. Individuals do not just consume goods; they consume the symbolic meanings of those goods as provided by the "ideological ideas" of the social groups with which they identify.
This merging of utility functions means that material utility becomes conditional upon identity utility. The value of a good is gated by its symbolic meaning. A product that offers significant material comfort but signals the wrong identity—one that violates the prescriptions of a chosen social group—may produce net negative utility. For an individual whose post-materialist identity is built on environmentalism, a core value in such societies [4], the material comfort of a large, inefficient vehicle would be overwhelmed by the "identity loss" from violating a central prescription of the group. The utility function, therefore, is not a simple addition of U = U(material) + U(identity), but a more complex, hierarchical relationship: U = U(identity(material)).
This shift also transforms the nature of scarcity. The post-materialist condition, characterized by material abundance [5], does not end competition. It merely shifts the terrain. When material goods are abundant, they lose their power as effective signals of status. Scarcity is transferred from the object itself to its meaning. The new scarce resource becomes authentic identity and the social status that validates it.[6] While anyone may be able to purchase a product, only a select few may be able to have that purchase recognized as an authentic signal of a desirable, high-status identity. The economy, in large part, becomes a playground (and battleground) for this social recognition.
To understand this new economic landscape, one must first analyze the "micro-economy" that operates within a specific identity group. Identity economics provides a formal framework for this, centered on social categories, prescriptions, and identity utility.[7] An individual's utility is a function of their assigned social category (C), the set of behavioral "prescriptions" (P) associated with that category, and their own actions (a). Utility is gained by matching one's actions to the prescriptions of their group; utility is lost when one deviates.
Adherence to these prescriptions generates the group's primary internal currency: social status, reputation, and esteem. This is not a metaphorical currency. Social status is an intangible but highly valuable economic good that can be earned and, in its own way, "spent" to acquire other things of value, such as influence or favors. The group, as a collective, defines the "prescriptions" that dictate which actions are rewarded with this status. These prescriptions are endogenous—they are not fixed, but are actively "created and contested" by social movements, political leaders, families, and even advertisers seeking to manipulate the "ideal" associated with a group.
A critical feature of this internal currency is its non-fungibility. Fungibility, the defining trait of conventional money, means that any unit of an asset is perfectly interchangeable with any other unit. A dollar is a dollar, regardless of its source. Social status is the opposite; it is inherently context-specific and qualitative. The reputation earned by a "pious elder" for acts of charity is not interchangeable with the status earned by a "daring artist" for acts of creative rebellion. The value of this status is locked within the group that recognizes its associated prescriptions.
This logic of non-fungibility is so powerful that it can even capture and "earmark" fungible assets that enter the group's social sphere.[8] Studies of informal financial arrangements show that the flow of money is dictated by social structure, not pure market logic. In kin-based societies, money flows across generations from grandparents to grandchildren, but not to age-cohort peers. In age-based societies, the exact opposite pattern is observed: money flows to members of one's cohort, but not to family members in different generations. This has measurable, real-world effects, such as on child malnourishment rates, which are reduced by pension payments in kin-based societies but not in age-based ones.[9] The fungible dollar is "earmarked" by social identity, its use restricted as if it were a non-fungible token.
By defining the prescriptions for behavior, a social group effectively controls its own "monetary policy" for this internal status-economy. A social movement that successfully changes a group's prescriptions—for example, shifting the ideal from "wealth accumulation" to "environmental stewardship"—is engaging in a profound economic act. It is devaluing the old currency (status-from-wealth) and revaluing a new one (status-from-stewardship), thereby controlling the "inflation" of status [10] and redirecting the behavior of group members.
This non-fungible nature of reputational wealth is precisely what makes it such a sticky and powerful incentive. Because the status an individual earns in Group A is worthless in Group B, this wealth is not transferable. This creates an enormous exit cost, binding the individual to the group, as leaving would mean forfeiting their entire "reputational" net worth. This makes the group's prescriptions a far more potent and durable behavior-shaping tool than simple financial incentives, which can be earned and spent anywhere.
The high-trust, internally coherent economic model of the single group generates a profound, systemic problem: how does exchange function between different groups? When two or more of these identity-based economies, each operating on its own non-fungible internal currency, attempt to interact, they encounter a crisis of incommensurable values.
Incommensurability describes a situation where there is no common unit of measurement to compare two different kinds of "good". The values are not just different; they cannot be reduced to a common scale for comparison. This is the precise situation when Group A, whose status currency is "environmental piety," meets Group B, whose status currency is "traditional craft." A direct, barter-like exchange is not merely difficult; it is conceptually paralyzed.
The problem is not a lack of trust, but a fundamental value-paralysis. The products of Group A (e.g., highly-efficient, 'clean' technology) are valuable to them precisely because they embody their prescriptions. The products of Group B (e.g., handmade, non-industrial goods) are valuable because they embody theirs. When they meet, their value systems are mutually negating. Group A may view Group B's product as "inefficient" and "polluting," assigning it negative identity utility. Group B may view Group A's product as "soulless" and "inauthentic," also assigning it negative identity utility. There is no "exchange rate" between "piety" and "authenticity."
This fundamental friction manifests in several ways. Economically, it leads to low information sharing, as actors from different identity-based subgroups are less likely to share technical or political information, even when trust is present.[11] It also encourages strong in-group favoritism.[12]
This dynamic can actually invert the classical "gains from trade." In standard economics, trade creates value. In an identity-economy, inter-group trade can destroy value. If an individual's identity is constructed on the social-psychological distinction between "us" and "them", then engaging in fluid, cooperative exchange with the out-group blurs this distinction. This blurring can be perceived as a violation of the in-group's prescriptions, causing a direct loss of identity utility.
Research shows this effect clearly: individuals who adopt "universalistic" strategies (cooperating with both in-group and out-group members) are often evaluated negatively by their own group, which prefers an "in-group favoring" strategy, especially in competitive contexts.[13] This friction can escalate to a political level, where changes in social identification patterns, such as heightened ethnic or class tensions, lead directly to pronounced changes in trade policy and a rise in protectionism.[14]