Lawrence Harrison’s essay (and his long–time work in general) seeks to answer a central mystery in human history by reference to differences inherent in people. Social scientists have been dancing around the “culture matters” thesis for well over a century. The pressing puzzle at the end of the 19th century in the social sciences was Max Weber’s “Why No Capitalism in China?” and we begin the 21st century asking Bernard Lewis’s question, “What went wrong with Islam?” or Jeffrey Sachs’ question, “How can we end world poverty?” with special reference to the tragedy of Africa. Even the most technical of economists are drawn to these questions concerning differences in well-being among the populations of the world. Robert Lucas in his 1988 essay “Making a Miracle” states:
Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s? If so, what, exactly? If not, what is it about the ‘nature of India’ that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.
The attempt to find the answer in different characteristics of the people or the land has involved a lot of loose thinking. Economics has been one of the most powerful counter-balances to this style of reasoning. At one time, the argument that a country’s economic well-being was solely a function of geography and abundance of natural resources was seriously entertained. This explanation of differences failed, however, when confronted with the economic performance of Hong Kong, which is not particularly blessed in terms of location or natural resources, yet has experienced high economic performance. Alternatively, we could argue that differences in performance are due to the people that populated the country (e.g., levels of human capital investment). But the emphasis on human capital alone failed to explain why some countries which invested heavily in science education nevertheless had poor economic performance, such as the former Soviet Union.
Alvin Rabushka in The New China makes the economic argument as clearly as anyone. He takes the culture thesis head-on and argues that the evidence doesn’t support it. Differences in economic performance between Mainland China, Taiwan, and Hong Kong cannot be explained by cultural differences, but instead can only be explained by different economic institutions and public policies. Countries that do not respect private property rights, limit the scope of regulation, practice monetary restraint and fiscal responsibility, and practice free trade will have hard time experiencing long-term economic growth and development. Economic freedom—not the cultural traditions of a people, or the geographic advantages of a country—leads to economic growth and development. Culture and geography may have an impact on human affairs, but the main causal factor in determining differences in economic performance among nations is the rules of the game that govern the way that people interact with one another (within and beyond national borders) and with nature’s resources.
To put this argument in a slightly different way, think of a basic lesson from economics. The only way to increase real income is to increase real productivity. Increases in real productivity are a function of improvements in labor skill (human capital), technology (physical capital and know-how) and organization (managerial skill and team-production). But the willingness to make those investments is a function of the incentives actors face in any given economy, and the feedback from the local environment, which provides (or obscures) information about how best to use time and energy given the incentives. It is our ability to bet on ideas and find the financing that brings those bets to life that determines the pattern of exchange and production, and the rate of innovation in any given society. And our willingness to bet is a consequence of the institutions that are effectively operating in any society. The rules of the game and their enforcement provide the structure of incentives and the informational feedback in the system. If the rules of the game reward predation (by either public or private actors), then the time horizon of investment will be shortened, improvements in labor, technology, and organization will be stifled, and growth and development will not follow at the pace hoped for.
As Adam Smith wrote long ago:
Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.
We have to unpack this sentence, but the bottom line is that differences between the economic performance of countries is a function of institutions (i.e., the rules of the game and their enforcement). Low-income countries might realize the gains from small-scale and self-enforcing trades, but do not have the institutional framework in place to realize the gains from extensive specialization and trade. Property rights are insecure, contracts are not enforceable, and thus social cooperation is limited rather than extensive. As Mancur Olson put it: “The intricate social cooperation that emerges when there is a sophisticated array of markets requires far better institutions and economic policies than most countries have.”
But this brings us full circle back to the “culture matters” hypothesis. Yes, we do need to have market prices to allocate resources efficiently. The “getting the prices right” mantra is not wrong, just incomplete. In order to get market prices, we do need to have private property rights and the enforcement of contracts. The “getting the institutions in place” mantra isn’t wrong either. Many of the significant advances in political economy during the 1990s, when the problems of socialist transition were at the forefront of professional and public policy attention, were related to a change of emphasis from “getting the prices right” to “getting the institutions in place.” But as the problems of post-communism and the frustration with development assistance programs have lingered, the question of how precisely you get the right set of institutions in place has become paramount.
The Rabushka challenge to the “culture matters” hypothesis is where we must start, but in an ironic twist, the question is begged by “natural experiments.” Cultures are not homogeneous across nations, and thus differing cultural attitudes and beliefs are either more or less prone to accept certain institutional environments. In economic terms, culture is a tool for the self-regulation of behavior, and as such it either lowers or raises the costs of enforcing the rules of the game. A free society works best when the need for policemen is least. If the rules of conduct correlated with high levels of economic well-being are viewed by a culture as illegitimate, then those rules will be violated unless there are strong monitors. The costs of monitoring may be so high that the social order cannot in fact be sustained. In his forthcoming After War: The Political Economy of Exporting Democracy, Chris Coyne has documented in gruesome detail just how perilous progress is when efforts are made to establish liberalism at the point of gun.
In short, culture either legitimates or delegitimates institutional structures, and different institutional structures affect the incentives actors face and the informational feedback available to guide their plans and choices. So the “culture matters” hypothesis is not merely an empirical correlation. This invites a theoretical investigation of the causal mechanisms at work when some countries successfully adopt institutions correlated with high economic performance while others seem unable to “get” those institutions and thus must forgo the associated gains from specialization and exchange.
Work by scholars such as Lawrence Harrison provides very helpful empirical information on cultural beliefs and attitudes, but the causal mechanism through which this impacts economic performance is often left unexamined. This is an area where intellectual arbitrage between the economist and the historically informed and cultural sensitive social scientist must be pursued if we hope to make progress in understanding the process of economic development. Scholars such as Joel Moykr in The Levers of Riches have documented the great technological innovations that fueled growth during the Industrial Revolution, but Mokyr also documents the underlying belief systems and attitudes that had to be present for those innovations to be discovered, implemented, and put into common practice. Without that underlying cultural commitment to scientific discovery, innovation would have been stifled. We can say the same for beliefs and attitudes that undermine private property, mutually beneficial exchange, and commercial development.
The causal mechanism, I want to suggest, is the cost of monitoring and enforcing rules, and policies that respect persons and property. As Steve Pejovich has argued, “It is the Culture Stupid.” But the important point to stress in all of this, from my perspective, is precisely how it is that culture matters. The bottom line is that while there are an infinite number ways in which people can live together, there are very few ways they can live together (as both friends and strangers) in peace and prosperity. And it doesn’t matter whether a society is Muslim, Christian, Jewish, or purely secular; unless it has institutions and policies that provide for secure private property, freedom on contract, limited scope of regulation, monetary restraint, fiscal responsibility, and open trade, the society will not experience economic growth and development.
Whatever advantages a culture may have, they will not be realized under bad institutions. And whatever disadvantages a culture may have, they will slowly erode, and the culture will improve, when people get to live under institutions of political and economic freedom. Culture can act as a constraint, but it is also a malleable constraint. The important causal variable is the set of rules that governs the way we interact with one another and with the resources at our disposal. Those rules must enable our ability to realize the gains from specialization and exchange, and reap the benefits of innovation.
The economic well-being of a nation and its people is ultimately a function of a horse race between three S factors: Smithian gains from trade, Schumpeterian gains from innovation, and Statist stealing and stupidity. In this horse race, culture raises or lowers the costs associated with the different S’s. As long as the “invisible hand” of Smithian and Schumpeterian forces dominates the “grabbing hand” of the state, economic growth and development will follow. Sadly, the stealing and stupidity of Statism still outcompetes Smithian and Schumpeterian forces in far too many places, to the detriment of the far too many poor souls who populate our world .