Why culture matters more than you think for economic development

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By José Azel

Are some cultures more conducive to economic growth than others? This is the uncomfortable, and politically incorrect, question raised by economist Gregory Clark in his new book A Farewell to Alms, subtitled “A Brief Economic History of the World.”  Why, do we have a world where some countries enjoy unprecedented wealth while others languish far behind?

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When I studied international economics in the 1960s, the explanations offered for development focused on geography, climate, soil fertility, resource endowments, religion, work ethic, ignorance of economic principles, and more. Professor Clark provocatively argues that culture is the main determinant of the wealth or poverty of nations.  He asks:  Why hasn’t industrialization made the whole world richer? After all, the key technological, organizational and political innovations propelled by the Industrial Revolution are well known to all societies, and all societies can employ them. So, why isn’t the whole world economically developed?

In Dr. Clark’s thesis, one reason for this intellectual puzzle is that some societies “cannot instantly adopt the institutions and technologies of the more advanced economies, because they have not yet culturally adapted to the demands of productive capitalism.” The modern production technologies employed by the rich countries require labor forces that are disciplined and engaged, and this discipline and engagement are often lacking in the labor forces of the poorest countries.

To phrase it differently, whereas production technologies themselves can be replicated, it is not so easy to replicate the social environment that supports productive cooperation and innovation. For many poor countries, their social environment constitutes a culture trap of inefficiency.  They are able to replicate production technologies, but not the social environment required to use those technologies efficiently.

Trade, commerce, and business stimulate and are in turn stimulated by innovations. Yet, the application of innovations can be impeded by a reluctant social culture.  For example, in medieval Europe, the demands of commerce propelled the replacement of cumbersome Roman numerals with Arabic numerals. But in that same Europe, the state and religious organizations, shielded from market demands, were very slow to adopt this mathematical innovation.  Arabic numerals were widely used in business from the thirteenth century onward, but the English Treasury was still keeping its accounts in Roman numerals in the sixteenth century.  The reader may be able to provide examples of small businessmen today still bookkeeping in paper ledgers.

In economic terms, poor countries are principally characterized by inefficiency in production as well as deficiency in innovation.   But the problem has not been one of access to technologies; rather, the problem has been one of using the new technologies ineffectively. It turns out that when poor countries use the same production technology as rich countries they end up using much more labor per unit of output.  Research shows that poor countries add so much labor to the production process that they end up losing their inherent lower labor cost advantage.

However, the problem may not be all due to a lack of discipline and engagement in the labor force. The poorest countries also have the least effective management. In these societies, a sort of socially-induced lethargy appears to be widespread with reference to work.  It is not clear what foments the cultural characteristics that enable economic growth.  As Dr. Clark’s points out, there is no satisfactory theory to explain the underlying causes of the differences in labor productivity among societies.  

That said, the social interactions that govern the attitudes of people towards work and cooperation are magnified by the economic system in place. This is evident in productivity differences between efficient free market societies and inefficient government controlled economies, and between free-thinking peoples and those where authorities sought to enforce fallacious dogmas about economic development.

Just as importantly, this cultural thesis challenges the idea that poor societies can be economically developed through outside intervention.  Thus, it is incumbent on each nation to promote, not just the application of modern technologies, but the capitalist culture of a free, accomplished, disciplined, and engaged population. Only then can we aspire to an economically developed world.

 

Dr. Azel‘s latest book is Reflections on Freedom.

 

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