Does Culture Matter for Economic Growth? Part Deux.

NOTE: The Growth Economics Blog has moved sites. Click here to find this post at the new site.

I ended up getting a lot of feedback (pushback?) on my post regarding culture and economic growth. The TL;DR version is this: if culture influences utility functions, then comparing economic development levels between cultures not very interesting because it doesn’t ultimately inform us about welfare.

Several people got back to me about ways that culture could matter for economic development without necessarily implying differences in utility functions. While not doing full justice to each comment, I think the common thread was this: coordination failures.

Perhaps you have some cultural norm that says to distrust strangers. In some kind of repeated dynamic game, your first choice is to deviate/defect/cheat, and this leads to a bad equilibrium where everyone continues to deviate/defect/cheat. This means you do not take advantage of mutually beneficial transactions. In contrast, a culture that says to trust strangers will choose to cooperate as a first choice, and this leads to a good dynamic equilibrium where everyone continues to cooperate (lend to each other, transact with each other, make long-term contracts with each other) and allows for greater economic specialization.

Now, if the cultural norm of distrusting strangers is there to minimize the utility loss (shame?) from being cheated, then its still just a utility function difference, and we can’t really say that people are worse off from distrusting strangers. They are, after all, avoiding something that hurts them very badly. But if the cultural norm of distrusting strangers is just some odd historical outcome, then I could see how this cultural norm is really affecting not just economic development, but also welfare. People would like to coordinate on “cooperate” and achieve the good long-run equilibrium, but no one has any incentive to act alone.

That said, cultural norms of distrusting strangers (or trusting them) aren’t random. They must have some basis in past cultural experience, and so I’d be worried that it directly influences utility in some manner. But as a general proposition, the idea that culture has an influence on economic development and welfare because of coordination failures seems like a good avenue to pursue.

The idea that culture is tied up with solving coordination problems runs through a lot of the work of Avner Greif. His 1994 paper on cultural beliefs and economic outcomes compares an individualist culture (Genoese traders) with a collectivist one (Maghribi traders) in how they dealt with severe principal-agent issues. Summarizing, the Genoese developed a vertical structure that relied on formal institutions to mediate disputes, while the Maghribi developed a horizontal structure that relied on intra-group cooperation to mediate distputes (i.e. punish cheaters).

Greif does not explain why the Genoese or Maghribi adopted these different attitudes, he just documents that the choice of vertical versus horizontal structure makes sense given their cultural attitudes. He’s also clear about ranking these systems:

Hence although in the long run the Italians drove the Muslim traders out of the Mediterranean, the historical records do not enable any explicit test of the relative efficiency of the two systems (p.942-43)

So it’s not immediately obvious whether the collectivst culture was worse for economic outcomes (perhaps the Genoese had other advantages we don’t know about). But to my prior point, even if the collectivist culture was demonstrably worse for the economic outcomes, we don’t know anything about how individualism and collectivism entered the utility functions of these groups. Hence we don’t know whether the Genoese or the Maghribi were better off with their system.

The one way I see that you could definitively argue that the collectivist culture was “worse” was if the Genoese and Maghribi shared a common utility function, and the move to collectivism by the Maghribi was the result of a random historical event unassociated with that utility function. By random I mean, if we re-ran world history 1000 times, then in about half of them we should see the Genose ending up with collectivist institutions and the Maghribi with individualistic ones.

That seems like a tall order. I’d be shocked if the Maghribi’s collectivist culture, and hence adoption of a horizonatal structure that (might have) had a detrimental effect on their economy, was just random noise.

Obviously world history didn’t start with the Genoese and Maghribi, and their predisposition for collectivism and individualism was the result of historical events leading to that specific time and location. So perhaps there were a series of random occurrences over history that snowballed into the collectivist culture of the Maghribi and the individualist of the Genoese.

Which is a long way of saying that countries could share a common utility function (making GDP or income comparisons meaningful), have different cultures due to a series of historical contingencies, and that those cultural traits could have meaningful economic effects because of how they influence coordination problems. In that case, then it would be meaningful to talk about culture’s effect on GDP, because culture is essentially capturing some kind of historical path dependence.


12 thoughts on “Does Culture Matter for Economic Growth? Part Deux.

  1. I suppose there is a tendency to look at this question from the angle of first versus third world. But it need not be to prove the point. Not do long ago during the European crisis a question debated was the differential between retirement ages of the Germans and the Greeks. It may not be a factor causing poorer economic growth for the Greeks but it did seem to be thought about that way. It would also seem clear that more of the population in an unproductive phase of life will give lower growth compared to a country with less of the population in an unproductive phase of life, i.e. retirement.

    • So the Greeks have a culture that values leisure time in retirement more than the Germans do. Let’s say that definitively lowers Greek GDP per capita relative to Germany. So what? Who’s to say the Germans are better off from a welfare perspective? Sipping ouzo while staring out at the Aegean may be so great that the Greeks don’t care if they have fewer BMW’s or washing machines than the Germans. If different cultures imply different utility functions, then GDP per capita does not necessarily tell you anything about welfare.

      • Do you mean they may have a higher gross national happiness indicator rather than GDP.

      • Sure, the Greeks could be happier. Or not. The point is that we can’t measure their utility with GDP per capita.

        As an aside, I’m of the opinion that “utility” and “happiness” are not the same thing. My utility may be maximized by taking certain actions, even if they don’t make me happy (i.e. exercise).

  2. Oh, grief. The difference between Northern and Southern Italy has long been a poster boy for the coordination failure thesis. It’s much clearer than Grief and persists to the present day; so much so that there is a movement in Northern Italy to secede to rid themselves of the corrosive culture of the South.

    I’ve seen a treatment of the difference between Stockholm and Moscow along the same lines.

    Whatever one thinks of Grief, the coordination thesis is not controversial. Examples can be multiplied more or less indefinitely.

    • I’m not questioning whether coordination failures are important – it could well be the best way to think about differences in economic development. What I’m wondering about is whether coordination failures (or successes) are an outcome of culture? And if they are, do these cultural differences imply different utility functions, so that we cannot look at things like GDP to judge “success” or failure.

  3. We know that collectivist cultures outperform individualistic ones. That’s why most of our large business organizations are government chartered collectives.

    • That’s too broad of a generalization to make. The general suggestion of the empirical literature is that economies with more individualist cultures (they think individuals are responsible for themselves, they don’t have strong ties to large family groups) tend to be richer.

  4. Pingback: BLOG MASH-UP OF THE WEEK | FocusEconomics Blog

  5. This is a little tangential, but this idea that different cultures = different utility functions is not for me a reason to embrace relativism. It is rather one reason for re-connecting economics and ethics and in particular considering how one goes about evaluating different utility functions. It obviously can’t be done on the basis of preference satisfaction! This is not a minor problem: Consider that for many early critics and defenders of capitalism, it was taken as given that market economies created different sorts of people – with different utility functions, as we might now say. Smith and Marx agreed on this point. For Smith, making explicitly ethical arguments that would be proscribed be the profession today, the sort of people created would be better people – more autonomous, with more self-command, and so on, then the people created by pre-market institutions. A good cite here is Jerry Muller’s The Mind and The Market.

    For development in particular, Sen has been making the same point for years, using the concept of adaptive preferences. In cultures where it is unthinkable that women should be educated, women may well prefer not to be educated. For Sen, these are preferences that ought not be satisfied by a decent society. And he had no problem saying this as an economist (one who is not accidentally deeply conversant with Smith.)

    By the way, this is a very interesting blog. I only recently learned about it – probably from the invaluable Mark Thoma. I’m a huge fan of Jones-Vollrath. Best text on growth by far.

  6. Professor Blattman has a useful link on his site on the Chinese who grow wheat and those that grow rice. It shows the ones who grow wheat are more indvidualistically minded but what it says about wealth I cannot recall. It did make me think of the old saying: you are what you eat.

  7. I finally come across this fascinating blogpost!
    I have a paper trying to look at whether decisions that entail different costs of deviation are more or less prone to cultural norms. More specifically I study birth timing decisions of second generation migrants to France. The idea is that shifting age at first birth from 22 to 20 may have a large negative impact on subsequent education and labor market outcomes of mothers and their children (because it interrupts human capital accumulation early on), while shifting age at third birth from age 32 (or even never) to age 30 has little effect on the same outcomes. What I find is that women coming from a high fertility country tend to be more likely to have a third child, but there is absolutely no difference in the timing of the first two births across origins (2nd generation migrant women from Senegal and the UK actually have the same age at first birth).
    What I take from that is that when decisions entail large costs of complying to the cultural norm, people do rationally choose to adapt to the local context.
    Now when I speak of “cost of deviation”, I have in mind some welfare cost. Thinking about where this cost would come from is tricky. From the point of view of a social planner who could play with how cultural traits are transmitted, there are inefficiencies to correct as cultural inertia may allow to coordinate on good equilibria sometimes, so much as it could impede from adapting to a changing environment. Another way of seeing where an inefficiency could come from is that some people could ex-post be willing to pay in order not to inherit the cultural legacy of their parents, because it would prevent them from reaching the highest level of utility (while maximizing over cultural traits).

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