The impact of culture on economic behaviour

Most modern neoclassical economists have ignored the important role played by culture in explaining fluctuations in economic behaviour, hence, they were more concerned about economic variable such prices, output, interest rate etc. However, culture (values, norms, believes and religions) have a profound influence on economic behaviour (Hogeland 2003:2). In contrast those interested in the matter, consider that culture explain differences in economic outcomes however, they face challenges of finding a credible technique to show that the influence of culture can be separated from institutions and economic variables (Tabellini 2007).

In the recent two decades economists became seriously concerned about the effects of culture on economic behaviour and found that culture (religious beliefs, values and preferences) has a significant positive relationship to economic growth. However, the economists find it difficult to explain because they are mainly concerned about economic measurements and because of the broad complexity of culture that makes it difficult to measure and test. Therefore, to overcome the situation variables that include normative values (beliefs, religious, ethnicity, etc) were included in the model as proxy variables. The results suggest that causality between culture and economics is likely to go two way directions, that is, culture may influence economic behaviour and economic behaviour may also affect the culture (Qin, Shuhao, Heerink, & Futian 2008).

In common sense or stylized facts also suggest that culture indeed influence economics behaviour. Thus, government policy toward economic growth may be successful or a failure in different geographical areas dues due individual behaviours influenced by cultural backgrounds.

Therefore, if we can not test the role of culture in economics we cannot assure its implications on economic behaviour (Greif 1994). However, in recent years better techniques have been put in place to identify systematic differences in individual values, beliefs and preferences. These new techniques are now able to measure and test the influence of culture on economics behaviour.

This paper examines the effects of culture on economic behaviour by using proxy variables of culture such as trust, respect, self determination and religious beliefs. The paper will try to answer the question “does culture influence economic behaviour?” To answering this question the paper will provide some theoretical back ground including: definitions of terms in section two, section three discuss empirical evidence, relationship between culture and institutions etc….

Definition of terms

The definition of culture is very broad and complex. However, according to Tabellini (2007) culture is defined as “individual values and convictions about the scope of application of norms of good conduct, is an important channel through which distant political history influences the functioning of current institutions”. Similarly, Qin, Shuhao, Heerink, and Futian (2008) define culture as “customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation. In other words, culture is a system of shared beliefs, values, customs, behaviour, and artefacts that the members of a society use to cope with their world and with one another, and that are transmitted from generation to generation through learning”. However, culture that is inherited by an individual from previous generations rather than voluntarily accumulated, such as religion and ethnic background, can largely be treated as exogenous for that individual’s life.’

A Religion is defined by Nath (2007) as “a set of common beliefs and practices generally held by a group of people, often codified as prayer, ritual, and religious law. Religion also encompasses ancestral worshiping or cultural traditions, writings, history, and mythology, as well as personal faith and mystic experience”.

However in this paper culture will be referred as the customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation.

Historical Perspectives on Economics and Culture

The debate on culture as influencing economic behaviour started with the classical economist such as Adam Smith and John Mill who used culture to explaining economic phenomena. The former in the Theory of Moral Sentiment advocated that culture is an important factor in explaining the Wealth of Nations and the later regarded cultural behaviour as more important than the pursuit of personal interest. In contrast Karl Marx advocated that the technology changes determine the kind of structure dominant in the culture. That is “the hand mill produces feudal society and steam mill produces capitalism (Marx 1859). Moreover, Weber (1905) regarded religions as a key factor for economic development. He defended that protestant religious taught that the creation of wealth should be regarded as a duty. Weber also recognized that culture plays an important role in influencing in pursuing wealth through production and establishment of markets.

Other researchers’ non economists such as Hirschman (1967) also found a link between culture and economics, and culture causes differences in economic output within and across countries. Banfield (1958) suggests that culture is reason for underdevelopment in Southern Italy, that is, the pursuit of narrow self interest by the population contributes to underdevelopment of the region. Consequently the Italian government imposed identical forms of governance within the country, however, the areas with poor government intervention continued to perform poorly.

In the late 1990s and early 2000s neoclassical economist went beyond the formal institutions into informal ones and started considering explicitly culture as a key factor to explaining economic phenomena. Therefore, Fukuyama (1996), Landes (1998) and Guiso, Sapienza & Zingales (2006) emphasized the link between culture and economic outcomes. In their studied they found that cultural factors such as honesty, trust, tenacity and tolerance drive to success of countries economies.

Empirical evidence

Studies conducted by Guiso, Sapienza & Zingales (2005) found that beliefs and religious are highly correlated to trust, thus, when it is associated with savings, taxation or trade it turnout to impact positively the economic outputs. Similarly, Tabellini (2007) studied the effects of culture on economic development in Europe and found that religious values and beliefs have a significant impact on economic success.

Weber advocated that culture have a significant influence on economic performance. He further argued that protestant religious contributes greatly to the capitalist accumulation. Likewise, Landes (1998) and Putnam (2000) found that culture (beliefs and values) explain the differences in economic performance across countries. However the later put more emphases in the role played by social capital (trust) in stimulating trade and government efficiency.

Carroll, Rhee, and Rhee (1994), studied the effects of emigrant culture on savings in Canada and fund that culture affects savings behaviour. Barro & Mc Cleary (2003), Tabelline (2009) studied the effects of culture on economic growth. The former stressed more on the degree of religiosity by capturing the church attendance and religious beliefs in hell and heaven, they found that the magnitude of church attendance and the degree of religious beliefs explain significantly the differences in growth performance across countries. Thus, the religious belief matter to explaining growth. The later, emphasised on the degree of trust across European countries and found that regional variation on trust explain differences in growth rate. Algan & Cahuc (2007) demonstrated that cultural behaviour toward families has an impact on employment patterns of different regions in the Organization for Economic Cooperation and Development (OECD) countries. They also show that civic culture and ethnicity has an influence on the structure of the labour market institutions including employment benefits and protection.

Relationship between culture and economics behaviour

In general most of the studies done on culture and economics found a relationship between culture and economics, however, they confronts with the problem of causality since it is likely to go in both directions. According to Becker (1996:16) “Individuals have less control over their culture than over other social capital. They cannot alter their ethnicity, race or family history, and only with difficulty can they change their country or religion. Because of the difficulty of changing culture and its low depreciation rate, culture is largely a ‘given’ to individuals throughout their lifetimes.” likewise, religious practices respond slowly to economic conditions (Botticini & Eckstein 2005).

Culture affects economic behaviour in different ways, however, this paper will focus on production, institutions.

Culture and Production

Norms and values of groups or individuals varies significantly not only within or across cultures but also within regions, industries or sectors, that is, countries can be more open to trade or be more flexible in decision making than others, and can also allow external influence. Firms may have more or less hierarchical structure than others, for example the British economy had a decline in the growth rate in 20th century due to the fact that the middle an upper class values did not consider practical education and technological innovation (Fernández 2006).

In Latin America, the population was characterised as having the “culture of poverty”, thus, the poverty was not a result of structural economic problems but caused by social beliefs that dominated the groups, they would prefer not to engage into economic activities (Barro & Mc Cleary (2003). Similar cases occur in some areas Mozambique where although the population grow and hundreds of cows and goats they would prefer not to eat or even sell due to cultural beliefs. Other studies focussed on studying how culture of elite are as compared to poor and found that some elites would prefer leisure to investment thus, impacting economic outcomes.

Culture and Institutions

Studied found that social capital or culture affect the way institutions in different countries are set and managed that is institutions are dependent on the problem faced by each societal groups including cultural beliefs and preferences, individualists or collectivists (Greif 1994) . For example in post war Japan and Korea engaged into industrial policy to encourage economic growth whereas adopted economic planning bureaucracy, however this kind of institutions are not inclusive to the entire populations and is vulnerable to promote rent seeking. Similarly, institutions set in Latin America and Africa were also not effective compared to the North America counterparts. However, empirical results suggest that causality effect is likely to go in both directions. That is culture affects institutions and institutions also affects the evolution of the culture (Fernández, 2006).

Conceptual Link of Culture to Growth Performance

Hypothesis 0: Culture impacts on economic behaviour of societies with high degrees of trust, respect, and self-determination.

Hypothesis 1: Culture has no impact on economic behaviour of societies with low degrees of trust, respect, and self-determination.

The above definite of culture (section 3) helps in understanding how would culture affect economic outcomes. According to Porter (2000:14) economic culture are “the beliefs, attitudes, and values that bear on economic activities of individuals, organizations, and other institutions”. Therefore, the variables that compose the culture (trust, respect, self determination and religion) can constrain the economic behaviour and function as rules governing the interaction between individuals, employment, market operations.

Trust

Trust influences economic performance in different ways. According to Boettke (2009: 437), Knack & Zak, (2001), trust affects economic outcomes through decrease in transaction cost, thus when an individual is trustworthy he reduces the monitoring cost and secures property rights. Moreover, high degrees of trust are consistent with high economic performance and development. In contrast lower degrees of trust would result in lesser trading networks and small market operations caused by the increased monitoring and transaction costs. For example trust is mostly relevant when the transaction involves unknown counterparts (Fukuyama 1996, Francois & Zabojnik 2005).

Using data on relative trust within the European countries Guiso, Sapienza & Zingales (2006) studied the effects of trust for bilateral trust among the European counties and found that, countries that trust each other tend to trade more goods and financial assets as well as engage more in direct investment compared to other countries, thus, impacting in the economic performance of the countries. In summary, under circumstances of good environment (trustworthiness) individual would dedicate their time in economic activities whereas under poor environment (untrustworthiness) individual engage into unproductive activities due to lack of incentives.

Self determination and Respect

Self determination is a measure of control over individual determination of their actions. If individual can control their choices, that is, predict success or failure as a result of own actions, then, they will be more innovative, and would invest and work more hard and carefully for greater returns. Therefore, high degrees of innovation combined with high levels of productivity would lead to high growth performance as well as economic growth (Tabellini 2009, Coyne & Williamson 2009)

Respect, is also an important factor since it measures the morality within individuals and societies. High degrees of respects imply high levels of tolerance and lower level of respect would result in poor interaction within individuals and societies. Therefore, high degrees of tolerances connote acceptable attitudes towards trade partners, thus, boosting and increasing the market and increasing economic performance. In contrast lower tolerance would reduce economic interactions and trade can be hindered (Platteau 2000). Moreover, Coyne & Williamson (2009:13) state that “in societies with lower levels of social capital, and hence lower levels of respect, the extent of the market will be limited to close kin and friendship networks.” Clearly, higher degrees of respect should increases economic outcomes.

Religion

The impact of religious on economic can me measured by the rate of church attendance and the religious belief about afterlife in hell or heaven. Individual who attend churches at regular bases tend to build better economic attitudes (respect and self determination and trustworthiness), thus impacting positively on economic outcomes. Similarly, those groups who believe in heaven and hell also tend to participate effectively in church services so as to build confidence on heaven, thus influencing positively economics outcomes through trust, respect and self determination (Barro and Mitchell 2004).

Weber in his study on the rise of the capitalism found that the industrial capitalism developed rapidly in the protestant Europe and North America. He also fund that Hinduism and Buddhism were promoting asceticism, thus, hindering technical innovation and impeding adaptation of foreign innovation, therefore not promoting economic growth and development of these groups. Similarly, Williamson (2009) asserts, that the failure of India to achieve a successful development rate was due to laws of Hinduism that do not allow individual motivation and commitment to perform secular roles. However, there were some Hindu who did not abide with the rules of the Hinduism and show an inclination to economic activities. These minorities are the ones who boosted the modern Muslim in Indonesia.

Moreover, religion also affects economic behaviour through, honest, work ethics and openness to people. For most religious hard work is a norm and should be done diligently. Additionally, work helps people to stay away from immorality, unproductive activities so that they maximize their time in economic activities. Being unproductive is connoted to evils. That is religion increases economic growth through promotion of positive attitudes towards, trust honest and self determination, and reduction of corruption and criminality (Guiso et al. 2003).

Religions may also impact negatively on economic behaviour through restriction on credit markets, profit, resources accumulation, as well as interest. Some religious may allocated massive time and resources on church activities including the construction of cathedrals, thus, deviating resources from economic activities (McCleary 2008). Similarly Beed and Beed (1999) argue that some fundamental Christian and Islamic terrorists promote violent and intolerant behaviour and civil unrest among Christians and non Christians, which impact negatively on the values and norms of secular economics.

Conclusion

This paper attempts to answer the question “does culture influence economic behaviour? The paper found that yes Culture affects significantly the economic behaviour. Cultural behaviour also shapes the structure of institutions in a country. Culture affects positively economic performance through trust, respect, self determination religious and institutions. However, it faces problems of causality, thus it is likely to go in both directions from culture to economics and from economics to culture.

Trust affects economic behaviour through decrease in transaction cost, thus when an individual is trustworthy he reduces the monitoring cost and secures property rights. Moreover, high degrees of trust are consistent with high economic performance and development. In contrast lower degrees of trust would result in lesser trading networks and small market operations caused by the increased monitoring and transaction costs.

Self determination promotes innovation, investment and hard work and diligence for greater returns. Therefore, high degrees of innovation combined with high levels of productivity would lead to high growth performance as well as economic growth. Moreover, high degrees of respects imply high levels of tolerance and lower level of respect would result in poor interaction within individuals and societies. Therefore, high degrees of tolerances connote acceptable attitudes towards trade partners, thus, boosting and increasing the market and economic performance.

Religious beliefs also have a causal relationship with economic behaviour. It promotes economic growth through teaching of positive attitudes towards productive activities including hard work, trust, respect and self determination and absenteeism from unproductive activities. For example Barro and McCleary found that religious beliefs are important factors to explaining economic behaviour and to a certain extent why some nations develop than others. For example Protestantism in Europe and North American has boosted economic growth in these regions through promotion of capitalism. In contrast other studied found a negative effect of religion on economic. Thus, Beed and Beed found that Hinduism and Islam hindered growth and development of South Asia through promotion of violent behaviour.