Reading List: Why Culture Matters?

30.07.2022

Economists are increasingly turning to culture and history when trying to explain economic processes of our time. This does not mean that they completely abandon their usual instruments, theories and concepts (like market, equilibrium, individual behavior to maximize utility), rather new approaches come into play in combination with the traditional ones, Maxim Ananyev, a Research Fellow at the Melbourne Institute of Applied Economic and Social Research and NES graduate, says. He suggests three books that describe this cultural turn in the social sciences.

 

What Can a Children's Carousel Tell Us about Society?

Identity Economics: How Our Identities Shape Our Work, Wages, and Well-Being. George Akerlof, Rachel Kranton

More than 20 years ago, Nobel Prize winner in Economics George Akerlof and Rachel Kranton, a Professor of Economics at Duke University, published an article that applied game theory to the analysis of "identities": how people distinguish themselves and how this affects their behavior. In a book written 10 years later, they develop this approach and apply their findings to the analysis of poverty, gender discrimination, education systems, incentives for workers – "the discussion of identity and utility has ranged from merry-go-rounds to genocide." The authors offer the principles of "economics where tastes vary with social context." For example, what is fair treatment in one society will be considered unfair and even cruel in another.

Akerlof and Kranton illustrate the economics of identity at the very beginning of the book with the Price Waterhouse v. Hopkins case of the early 1980s. Ann Hopkins achieved phenomenal results in her work, but never became a partner of the firm, because, according to colleagues, she was too aggressive for a woman. Such were the stereotypes of that time. Hopkins' boss, who supported her, said that if she wanted to make partner she should "walk more femininely, talk more femininely, dress more femininely." "The partners were applying contemporary norms for behavior: men were supposed to behave one way, women another," Akerlof and Kranton write.

Economists describe "an individual as having a ‘utility function’," they say. Most methods of economic analysis focus on monetary motivation: for example, the desire to earn an income. However, it is also necessary to study non-monetary reasons. An example is the employee motivation system. Akerlof and Kranton object to purely monetary motivation (for example, a manager whose remuneration depends on the stock price will seek to raise it, ignoring the long-term consequences) and believe that identity is central to motivation. They divide employees into two categories: insiders and outsiders – those who identify themselves with the firm and those who do not. It may seem more beneficial for a company to have insiders, since they would be willing to work more for a lower pay. But changing an employee's identity requires certain investments: training, targeted bonuses, etc. Is it worthy to bear these costs and in what situation? Akerlof and Kranton give a positive answer to this question, adding that investing in an employee's identity is likely to increase the company's overall profits. 

The symbolic figure of the ‘economic man’, who lived in economic models since the beginning of the last century, concerned only economic goods and services. Then [Nobel Prize winner] Gary Becker and his followers have added all kinds of preferences to the utility function. After that, psychological deviations from ‘rationality’ were added, particularly cognitive biases. Identity economics is the next step in this evolution.

The authors illustrate various manifestations of identity with numerous experiments. For example, the experiments of economists Karla Hoff and Priyanka Pandey have shown how belonging to a particular caste in India affects people's behavior. The subjects were asked to solve a puzzle for a significant reward. In India, surnames indicate belonging to a certain caste, and if the organizers of the experiment carried out a roll call, the results of the participants belonging to the lower castes began to deteriorate.

We can observe a vivid manifestation of identity in playgrounds, how the behavior of children at a merry-go-round depends on their age, Akerlof and Kranton write. This is a natural experiment that shows the role of norms: "Children understand norms for age-specific behavior well: they know that big kids should act differently from little kids." Their behavior – the way toddlers enjoy the merry-go-round, and older ones are torn between the desire to ride and the understanding that they are too old for this – illustrates an important conclusion: "When people are doing what they think they should be doing, they are happy."

And what did the Supreme Court decide in the Hopkins case? It admitted that the company had applied a policy of double standards: "<...> an employer who objects to aggressiveness in women but whose positions require this trait places women in an intolerable and impermissible catch 22: out of a job if they behave aggressively, and out of a job if they do not."

 

Why We Should not Fight?

Why We Fight: The Roots of War and Paths to Peace. Christopher Blattman 

Christopher Blattman from the University of Chicago became famous for an article about the consequences for child soldering (co-authored with Jeannie Annan). Since then, Blattman has written numerous articles about wars, their causes and consequences. In some way, Why We Fight sums up the preliminary results of Blattman's own research and the works of other scholars in this field. The book was published in 2022, which certainly adds to its relevance.

Blattman knows firsthand about the horrors of wars and murders. He saw them in Uganda and post-war Liberia, he met with the leaders of the famous Medellin drug cartel and Chicago gangs. He saw that a bad peace is better than a good war. That is why conflicts rarely lead to wars, he writes: the warring parties try to avoid the costs of war by using other ways to defeat the enemy.

Blattman identifies five common factors that lead to the fact that the parties to the conflict begin to ignore the possible damage from the war:

- uncontrolled interests of the elites;

- intangible or ideological incentives;

- uncertainty (for example, incorrect assessment of the costs of war);

- distorted ideas about reality;

- the problem of fulfilling obligations (one side of the conflict does not believe the other side and wants to consolidate its advantage faster while it is possible).

These five rules are universal and applicable to any conflict. Blattman gives an example of Chicago gang violence. The gang leaders, whom he knows personally, do not want a war, because it threatens them with death and reduces profits. But gang leaders are uncontrollable; they have intangible incentives (usually revenge); they need to eliminate uncertainty (prove their strength). Blattman tells about a gangster who was killing to attain an intimidating reputation. In a world where everyone knows that you are strong, it is not necessary to fight (the reputation of the army protects the country from an invasion), Blattman explains, but in an unstable world, a fight is sometimes the best way to show that you are not worth messing with.

There are five causes of war, and the path to peace must eliminate them. According to Blattman, the Medellin Cartel has about 12 000 armed men, but the murder rate is about 70% lower than in Chicago. The reason is simple: conflicts are unprofitable for criminal lords. Everyone in the city knows this (uncertainty is eliminated), which helps to reduce the overall violence. Therefore, we need international instruments that increase the costs of war for the conflicting parties, while they must understand that punishment (for example, in the form of sanctions) is inevitable, Blattman believes.

 

Is There a "Silver Bullet" of Economic Growth?

How the World Became Rich: The Historical Origins of Economic Growth. Mark Koyama, Jared Rubin

Mark Koyama from George Mason University and Jared Rubin from Chapman University are prominent representatives of the economics of religion, a new field of research that studies how religious doctrines and religious communities affect economic and social development. In How the World Became Rich, they address the main question of development economics: why at a certain moment in history did the world GDP per capita begin to grow sharply and steadily and why have the fruits of this growth been unevenly distributed? While more than 90% of the population were poor throughout almost the entire history of humanity, why did the situation begin to change 200 years ago?

There are a great many possible answers to these questions, and even thinkers of the ancient world thought about the causes of prosperity, even though they looked at the value of economic growth differently. "In fact, there is almost certainly no right answer," Koyama and Rubin state, adding that there is also no silver bullet that can lead a country to wealth, and economic growth itself is not a silver bullet (for example, during the Industrial Revolution, life expectancy in the UK decreased).

The authors offer both conventional explanations of the growth phenomenon of the last two centuries (related to the development of markets and labor productivity), as well as more interesting and intriguing concepts: the influence of religion and culture. The book is based on a great volume of historical and statistical material. Why was it the UK, and not in the Netherlands, where an economy was born that had stable growth that did not reverse? Why was it the first to have industrialization? How did its breakthrough open up a path of catching-up growth for other countries? Why did the Soviet path to industrialization lead Russia to a dead end? (Here we also recommend the work of Ekaterina Zhuravskaya, Andrei Markevich and Sergei Guriev on the new economic history of Russia, and an episode of the "Economics Out Loud" podcast about the collapse of the USSR.) What features have allowed the US to turn into an industrial giant? What supported China's growth? Why have not all societies been able to use the opportunities for catching-up growth?

The history of Soviet industrialization teaches us two lessons. First, communism is incompatible with long-term growth. Second, an autocratic government can stifle economic growth in the long term, the example of the USSR remains a reminder of the potentially devastating economic consequences of uncontrolled political power.

The first part of the book provides an overview of the economic growth theories (geographical, institutional, cultural, etc.). Koyama and Rubin admit that geography played an important role in the development of different societies (influencing institutions, culture, demography, colonization), but it cannot explain everything. Otherwise "our fate would have been written thousands of years ago." Institutions can explain a lot, but again not everything. For example, why do institutions work differently in different parts of the world? Why has democracy succeeded in some countries, especially in Europe, but failed in the post-Soviet and many other states?

From these questions, the authors turn to culture, while stipulating that modern approaches are much more subtle than those of the beginning of the 20th century "which at best were Eurocentric, and at worst racist." According to Koyama and Rubin, researchers today consider culture as a phenomenon that shapes people's worldview, and focus on factors such as trust, gender norms, etc.

By culture, we mean the conceptual lens or heuristics that people use to interpret the world.

For example, the scholars identify culture as one of the reasons why the Roman Empire, which had a developed market economy in its heyday, did not achieve anything close to the industrial revolution: its wealthy and prosperous people sought not to work, but to live an idle life.

The authors recognize the great role of religion and its influence on long-term economic development. They turn to Max Weber's famous thesis about the connection between Protestantism and capitalist ethics. New data and empirical methods allow us to verify how correct Weber's theory was, which researchers have been arguing about for more than a century.

Koyama and Rubin highlight demographic changes among the factors that have made economic growth sustainable. During the Industrial Revolution, per capita income rose quite slowly, after all, it followed the GDP. When population growth slowed, per capita income began to grow steadily. Increasing investments in human capital contributed to demographic transition and a more sustainable economic growth.

"The world is richer than ever. It will probably continue to get richer in the foreseeable future. More and more people can avoid horrible poverty. Wealth frees human minds, <...> allows us to live longer and healthier. <...> This achievement deserves to be celebrated and understood," Koyama and Rubin say. And we do not necessarily have to choose between economic growth and other important things, such as preserving the environment or a fairer society. The authors of How the World Became Rich are convinced that it is rather economic growth that can help us achieve these goals.

You can also read about the economic growth theories in the books recommended by the NES rector Ruben Enikolopov and NES Professor Gerhard Toews.