Economic Development: Institutions vs Culture

In attempting to explain the mechanisms behind economic development, economic historians have largely focused on institutions, which Hodgson describes as ‘integrated systems of rules that structure social interactions’. However, recent research has begun to focus on the possible channels by which culture could affect economic development. The idea is by no means new, with cultural norms serving to impose constraints on individual behaviour similarly to, but less formally than, institutions. A survey of the current literature suggests that there are concrete causal channels through which both culture and institutions affect economic growth, though the cultural channels are perhaps inevitably less fleshed out due to lack of research. Furthermore, it is clear that institutional and cultural factors feed into and interact with each other and with exogenous shocks, and that labelling one or the other as the ‘fundamental’ cause of economic would be misleading.

Economic historians have identified some mechanisms by which culture directly impacts the rate of economic development, alongside indirect mechanisms which work by affecting institutional change, which then in turn affects economic development. One such direct mechanism comes from Becker and Woessmann, who take Weber’s original ‘Protestant Ethic’ hypothesis, perhaps the first attempt at connecting culture to economic development, and identify an alternative causal mechanism which explains the correlation between Calvinism and development Weber correctly identified. They argue that, ‘as an unintended side effect of Luther’s postulations to enable everyone to read the Gospel, Protestants acquired the literacy that serves as human capital in the economic sphere’. This simple causal channel occurs independently of any institutional factors, though institutions may have helped the spread of Calvinist religion in the first place. Another direct causal channel is proposed by Voigtlander and Voth, who suggest that English culture interacted with the Black Death to produce the European Marriage Pattern (EMP) which laid the ground for the Industrial Revolution. They argue that, due to the traditional association between women and pastoral agriculture in England and other Norther European states, when the Black Death both stunted the labour force and increased the availability of land, incentivising land-intensive pastoral agriculture, employment prospects improved for women. This led to the emergence of the EMP, marked by comparatively late marriage, a small age difference between the spouses, a significant proportion of women who remain unmarried, and the establishment of a neo-local household after the couple has married. This meant Europe moved into a low pressure population equilibrium, experiencing declining fertility before its demographic transition, increasing output per capita and dampening the Malthusian effects that cancelled out productivity gains in the rest of the world. Voigtlander and Voth’s work show how culture can be dynamic; a cultural tendency for women to work in pastoral agriculture interacts with an exogenous shock to produce the EMP, a new shared culture. Culture can indirectly impact economic development by affecting institutions. Grief, for instance, argues that Genoese society’s individualism ‘led to a societal organisation based on legal, political and economic organisations for enforcement and coordination’. Similarly, Gorodnichenko and Roland argue that ‘when institutions are put in place, they correspond to a view of how the world works and are thus based on culture’, arguing that the Enlightenment, Renaissance, and reappropriation of Greek ideas all fed into institutional changes in the west ‘between the eighteenth and twentieth century from absolute monarchy and autocracy to republican and democratic regimes’. Clearly, recent scholarship has convincingly elucidated a number of direct and indirect mechanisms through which culture can impact economic development.

To describe culture as the fundamental cause of economic growth would be misleading. Not only is culture difficult to define, it is dynamic and does not exist in a vacuum. Institutions affect culture just as much as culture affects institutions, and exogenous shocks can also cause shifts in culture. One issue that emerges from current literature is the variability in definitions of culture. Institutional economics has established a clear definition of institutions, but the same is yet to be achieved for culture which has been described variously as ‘customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation’, ‘values and beliefs people have about how the world (both nature and society) works’, and as ‘the distinctive attitudes and actions that differentiate groups of people’. Difficulty in defining a concept as nebulous as culture inevitably leads to overlap with other factors. For instance, in Belloc et al.’s paper, the important difference identified was between episcopal and non-episcopal city states. This trait is both cultural in that it is rooted in shared beliefs passed down through generations, and institutional — separation of powers is a classic institutional arrangement attributed to successful states’ economies. They say their findings ‘highlight the important role played by cultural factors, such as religiosity, in affecting institutional change’, but it is unclear whether this was because the population was religious or because the institutional expression of this was one of a conjoined political and religious authority. This blurring of lines is not only restricted to institutions. Voigtlander and Voth’s thesis, which supposedly shows the importance of cultural differences, is also contingent on geographic factors. In explaining why the EMP did not emerge in Southern Europe, they argue that different styles of pastoral agriculture are to blame. Southern European transhumance, such as the Spanish Mesta, was the result of geographical necessity, but the exclusion of women was also cultural in that ‘traversing sparsely populated areas on their own was not compatible with women’s social role in early modern Europe’, demonstrating how the two interact. Meanwhile, the unusually fertile lands of Eastern Europe prevented a similar transition to pastoral agriculture, once again highlighting the blurred lines between culture and geography. Culture is not static, and it is clear that institutions and culture exhibit a two-way causal relationship. Institutions like states can create cultural changes, such as that seen in the Balkans in the wake of Ottoman conquest, or in the adoption of Protestantism in the English Reformation. Culture is also itself affected by economic development. The idea that people become more individualistic as they become wealthier dates back to Marx, and Roland argues, in the context of his thesis on individualism fuelling economic development, that this creates a virtuous cycle where shared culture tends towards individualism. Exogenous shocks can also alter a culture. In Voigtlander and Voth’s paper, an initial culture, that of women being associated with pastoral agriculture, interacted with the Black Death, an exogenous shock, to to create the conditions for the EMP, showing how culture is built on history, which in turn is shaped by institutions, culture and exogenous events. Clearly, it is impossible to argue that culture is the fundamental cause of economic development given the extent of its interaction with non-cultural factors.

To argue that either culture or institutions are the fundamental cause of economic development would be misleading. There is a nexus between culture, institutions and exogenous and endogenous change where each feeds into the other and none is fundamental in and of itself. Greig argues that institutions are constituted of ‘organisations and cultural beliefs’, whilst Roland argues for a two way causal relationship between institutions and culture. Regardless of the exact nature of the relationships, which must be further examined, it is clear that no one can be considered an independent and fundamental driving force for economic development. Despite, this, recent scholarship has begun discovering some promising channels by which culture can affect economic development, and if we are to understand culture as well as institutions, more work must be done in this vein.

BIBLIOGRAPHY:

  • Hodgson (2015). “On defining institutions: rules versus equilibria”, Journal of Institutional Economics, 11 (3), pp. 497–505
  • Greif (1994). “Cultural Beliefs and the Organization of Society: a Historical and Theoretical Reflection on Collectivist and Individualist Societies”, The Journal of Political Economy, 102 (5), pp. 912-950
  • Gorodnichenko and Roland (2017). “Culture, Institutions, and the Wealth of Nations”, Review of Economics and Statistics, 99 (3), pp. 402-416
  • Belloc, Drago and Galbiati (2016). “Earthquakes, Religion and Transition to Self-Government in Italian Cities”, Quarterly Journal of Economics, 131 (4), pp. 1875-1926
  • Becker and Woessmann (2009). “Was Weber Wrong? A Human Capital Theory of Protestant Economic History”, Quarterly Journal of Economics, 124 (2), pp. 531-596
  • Voigtlander and Voth (2013). “How the West “Invented” Fertility Restriction”, American Economic Review, 103 (6), pp. 2227-2264
  • Temin (1997). “Is it Kosher to Talk about Culture?”, The Journal of Economic History, 57 (2), pp. 267-287
  • Alesina and Giuliano (2015). “Culture and Institutions”, Journal of Economic Literature, 53 (4), pp. 898-944

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