Economic Growth and Culture

Dr Bijoy *

The search for drivers of growth inevitably brings us to the role of culture in economic growth. Cultural economics is very young. It is increasingly found that that certain cultural variables determine many economic choices and influence the speed of development and accumulation of the wealth of nations. We have now turned our attention to better understanding the mechanisms linking culture to various economic outcomes, the speed of its evolution over time, and the relationship between cultural variables with others such as institutions and human capital. Culture is an endogenous variable, determined largely by geography, technology, wars, and other historical events.

Before we proceed any further we should understand the concept of culture as understood by economists. We use two different definitions of culture. One refers to the social conventions and individual beliefs that sustain equilibria as focal points in repeated social interactions or when there are multiple equilibria. Cultural beliefs are defined as "the ideas and thoughts, common to several individuals, which govern the interactions between them … and other groups and differ from knowledge in that they are not empirically discovered or analytically proven." Particularly important are rational cultural beliefs, which are those "that capture expectations that others will take in certain circumstances."

Based on this insight, several authors have developed models where culture on the one hand is considered as beliefs about the consequences of one's actions, but which can be manipulated by earlier generations or by experimentation. Individuals' beliefs are initially acquired through cultural transmission and then slowly updated through experience from one generation to the next. They do so by using an overlapping generation model in which children absorb their trust priors from their parents and then, after experiencing the real world, transmit their updated beliefs to their own children. Their beliefs get updated on the basis of their experience.

The other definition of culture views it as a more primitive sentiment, such as individual values and preferences. This definition, also used in psychology, emphasizes the role of emotions in motivating human behavior. Culture may also be defined as decision-making "rules of thumb" used in an uncertain or complex environment. The use of rules of thumb in decision making can be optimal, if acquiring information is either costly or imperfect. Those decision-making rules manifest themselves as "gut feelings" about what the "right" or "wrong" thing to do is in certain circumstances. These gut feelings are cultural values—for example, the extent to which others can be trusted, whether women should work outside the home, or how important hard work is versus leisure. We simply do it.

Thus the first definition of culture stresses beliefs; the second is closer to preferences. Most empirical work use the definition where culture is defined as "those customary beliefs and values that ethnic, religious and social groups transmit fairly unchanged from generation to generation." Our attitude about women's participation in the labour force has evolved with technology and it can evolve very quickly as a result of technological progress in home production, like cooking appliances, dishwashers, medical progress and learning. Their role has to be redefined as they have lots of spare time after completing the domestic chores. Culture can also be shaped by the current social, economic, or political environment.

The most studied cultural trait is a measure of generalized trust toward others. Arrow, a nobel laureate in economics writes, "Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence." Individuals tend to trust more members of their own nationality relative to their trust of foreigners. Trust has been shown to be relevant as an explanatory variable of economic development and individual performance, financial development, participation in the stock market and trade innovation and firm productivity.

Individualism, another important cultural trait, is the degree to which individuals are integrated into groups. In individualistic societies, the emphasis is on personal achievements and individual rights. People are expected to stand up for themselves and their immediate family, and to choose their own affiliations. In contrast, in collectivistic societies, individuals act predominantly as members of a lifelong, cohesive group or organization. Individualism is said to spur innovation, whereas collectivism spurs cooperation and makes it easier to diffuse innovations developed elsewhere. Societies close to the technological frontier, where innovation is critical for growth, suffer from collectivism much more than societies that are still in the "imitation" phase.

Another important cultural value is the relevance of family ties in society. Societies based on strong ties among family members tend to promote codes of good conduct within small circles of related persons (family or kin); in these societies, selfish behaviour is considered acceptable outside the small network. On the contrary, societies based on weak ties promote good conduct outside the small family/kin network, enabling one to identify oneself with a society. Strong family ties are also at the core of industrial structures based on family firms. In cultures with strong family ties family capitalism is more common. However such an industrial structure is suboptimal: nepotism in hiring normally decreases the average quality of the firm; in addition managers, who are normally family members, tend to be too risk-averse.

Morality is another cultural trait relevant in fostering economic development. "Limited morality" exists where cooperative behaviour is extended only towards immediate family members, whereas "generalized morality" exists where cooperative behaviour is extended toward everyone in society. In hierarchical societies, codes of good conduct and honest behaviour are confined to small circles of related people (such as members of the family or the clan). Outside this small network, opportunistic and highly selfish behaviour is regarded as natural and morally acceptable. By contrast, in modern democratic societies the rules of good conduct are valid in all social situations, not only in a small network of friends and relatives.

Attitude towards work is crucial. The Weberian theory of the birth of capitalism relies on this trait: the Protestant revolution, according to Weber, implied a different attitude towards hard work and success in the current life. .Hard work is the road for success which leads to a relatively high level of social mobility. Others believe that success is determined instead mostly by luck and personal connections; as a result social mobility is low. These views tend to be deeply ingrained: people whose views differ may face the same reality and maintain for a long time different opinions about whether hard work is the key to success.

Religion is an expression of cultural norms. Weber attributes the emergence of the spirit of capitalism to the development of a Protestant ethics. The Catholic tradition whichemphasizes the vertical bond with the Church rather than a horizontal bond with fellow citizens, negatively affects people's average level of trust in others. There are two relevant issues related to religion. One is religiosity, namely the extent to which people devote time to attending religious services or, more generally, their involvement in religious activities. The second is whether different religious doctrines have different implications for economic behaviour. These two issues have different implications. Economic growth responds positively to the extent of religious beliefs but negatively to religiosity as measured by attendance in religious places.