Thursday, April 24, 2014

24/4/2014: Culture and Economics: The Opposites Attract

This is an unedited version of my column in the Village Magazine, April 2014

Back in the late 1970s, George Stigler and Gary S. Becker wrote a famous paper, titled "De Gustibus Non Est Disputandum" that mapped out the view of economics as a field that treats with suspicion the idea of preferences-based explanations for human choices and behaviour. Differences in individual preferences, they said, can “explain everything and therefore nothing”.

This position has informed much of the mainstream economics thinking for at least two decades, creating an erroneous perception outside the field that economists ‘do not do personal attributes’ of individual and collective behaviour. Thus, culture, aesthetics and ethics, should, according to popular beliefs, be automatically falling outside the scope of economic inquiry.

This perception is wrong for at least two basic reasons. Firstly, cultural, aesthetic and ethical foundations of our social interactions contain much more than a purely atomistic, individualised component. In fact, culture is more systematic in nature than atomistic, and as such can be studied using economic models and techniques. Secondly, economics as a field of inquiry has moved substantially from the 1970s worldview to embrace many aspects of individual-specific or idiosyncratic behaviour, including historical, psychological, neurological and cultural drivers of individual and collective choices.

From this point of view, it is worth looking at the ways in which economics and culture interact today in the mainstream economic research.

To start with, consider the basic building blocks of rational modeling of choice as applied to culture. Is there a systemic framework that can be used to think about culture and cultural issues on the bias of economic system of thinking, a system that is based on the concepts of marginal utility and constrained optimisation?

The answer to this question is an affirmative one. There is and more - it yields far-reaching and highly useful outcomes for the field of economics, while generating a feedback loop to enrich our ability to understand and model cultural aspects of our behaviour and choices.

As Luigi Guiso, Paola Sapienza and Luigi Zingales, in their paper "Does Culture Affect Economic Outcomes?" clearly state: "Until recently, economists have been reluctant to rely on culture as a possible determinant of economic phenomena. Much of this reluctance stems from the very notion of culture: it is so broad and the channels through which it can enter the economic discourse so ubiquitous (and vague) that it is difficult to design testable, refutable hypotheses. In recent years, however, better techniques and more data have made it possible to identify systematic differences in people's preferences and beliefs and to relate them to various measures of cultural legacy. These developments suggest an approach to introducing culturally-based explanations into economics that can be tested and may substantially enrich our understanding of economic phenomena."

The starting point for thinking about culture in economic terms is to posit a question as to what distinguishes cultural value from economic value.

In economics, value of an object, an action or a service is determined by referencing to the marginal utility derived from each additional unit of this object, action or service made accessible to the user or consumer. Under certain rather restrictive conditions, this can be translated or mapped into a pricing system, but the concept of price is more restricted and more restrictive than the concept of value.

Cultural value, as Guiso, Sapienza and Zingales note in the previous quote, is harder to define, at least in rational or mathematical terms and systems. It is usually thought of as a set of attributes, values, beliefs etc that can be grouped together on the basis of having some identifiable, but not necessarily quantifiable (in ordinal or cardinal terms) value to a specific group of people.

Imposing some constraints, just as with translation of marginal economic value into prices, we can think of cultural values as goods, actions and services that reflect intellectual, ethical and aesthetic aspects of humanity collectively or atomistic individuals. Thus, work of art has a cultural value and it can be mapped into a 'cultural price' but only under very restrictive conditions.

There is a clear difference between cultural and economic value systems. For example, a price-like system does not apply as well to measuring artistic achievement as it does to measuring the quality of oranges or cars. But this clear distinction does not mean that complex systems, like aesthetic or ethical values of a particular culture, cannot be partially modelled by references to well-definable preferences. Being humble about the scope of economic models application to such subjects as arts or sciences or folklore does not mean rejecting completely the idea that economics can provide useful tools for studying these phenomena.

Key concept of scarcity - driving the existence of defined preferences and prices in traditional economics - also applies to culture. Utility functions that value positively some desired scarce good and that change these valuation on the margin as quantity of good available to consumer changes also apply to works of art, religious beliefs, social rules. Concepts of time discounting and budget constraints that drive decision making in mainstream economics also shape cultural evolution, as well as guide emergence, propagation and survivorship in arts, cultural and social values and norms.

The core limitation - when it comes to applying economics models to arts and culture - arises from the mathematical problem of not being able to assign to cultural phenomena stable and well-deigned preferences.

Think of the determination of value in culture. Traditionally, we distinguish several methods for assigning cultural value to any particular object or act. These, normally, include analysis of the object content and context in relation to a specific group of people or time period or both. Tools used for such analysis are surveys of experts and/or users, and in more extreme cases also psychometric surveys and even measures of physiological or neurological responses. The problem, of course, is that there is little we can do to remove as much subjective valuation from such assessments as needed to deliver stable and rational (in mathematical terms) system of classification or rankings.

Thus, the perennial question in art valuations (cultural, not economic) is 'who the experts are?' In economic valuations of art, the answer is rather simple: an auction process or a direct sale sets the value. In cultural terms, a Rauschenberg is a masterpiece to some and a collection of refuse to others. Another simple question that undermines the idea that cultural value is perfectly measurable is the validity of surveys of users and, in even more specialist context, the validity of physiological responses being measured. These fail on the basis of the 'eye of the beholder' or 'the innocent eye' tests.

(Mark Tansey "An Innocent Eye Test")

One last measurement system - the system reliant on aggregation of individual valuations, or put more colloquially the 'repetition test' fails because it is open ended. No time horizon or sample size can be defined for such a metric and no value can be assigned on its basis. This applies to all collective bases for valuations, including cultural and social norms. In methodological terms, many of these issues have been known to economists for some time, as highlighted, for example, in a survey by Charles Manski, titled "Economic Analysis of Social Interactions" written over 15 years ago.

But some recent examples show just how far the field of economic modelling has evolved in developing capabilities to capture cultural and social phenomena in the econometric setting, allowing at least for applied evaluation and analysis.

A paper by Luigi Guiso, Paola Sapienza and Luigi Zingales, titled "People's Opium? Religion and Economic Attitudes" takes a debate about the effect of religious institutions on economic behaviour and attitudes - a debate that raged since the times of Max Weber - and applies modern econometric techniques to it. The result is analysis of dynamic evolutionary trends in the link between religion and economics. The conclusions are far from banal or anodyne. Using the World Values Surveys "to identify the relationship between intensity of religious beliefs and economic attitudes, controlling for country fixed effects", the authors "study several economic attitudes toward cooperation, the government, working women, legal rules, thriftiness, and the market economy". The study found that "on average, religious beliefs are associated with ‘good’ economic attitudes, where ‘good’ is defined as conducive to higher per capita income and growth. Yet religious people tend to be more racist and less favorable with respect to working women. These effects differ across religious denominations. Overall, we find that Christian religions are more positively associated with attitudes conducive to economic growth."

It is worth noting that such far-reaching systemic conclusions cannot be reached by a reference to tools traditionally employed by historians and cultural anthropologists, but must instead rely on econometrics and prior economic modelling.

This is hardly an example of economics research that 'ignores culture' or 'has difficulty modelling cultural inputs'. But it is also the type of research which shows that one cannot establish a hierarchical system defining the superiority of one system of valuations (economic or cultural) over the other (cultural or economic) – a pivotal issue that we will return to below.

Culture does present economists with interesting dilemmas that push out the boundaries of our way of thinking.

Take for example collective as opposed to individual valuation of a cultural object. In economics, traditionally, utility functions - the basis for defining value and transactions basis - are agent-specific and reflect the position of a representative agent (a sort of mathematical average). In this, the value of the object usually arises from individual valuation without regard for others and for their valuations. By virtue of all agents being ‘representative’ these valuations then apply to the entire group of people that form the economy.

In culture, of course, a work of art has both an individual value to the viewer and a collective value to the society or a group of people that individual references, plus to the broader groups that may not be referenced by the person who’s utility is being modeled. One source of value is intimately linked to the other, however. Even the most remote cultural connections between an individual and a group still exert impact, even if indirectly (via conditioning or framing, for example).

Alas, economics have recognised the limitation of the fully separable or individually objective utility function for some time now. Much of modern economics rests on the basis of preferences that incorporate references in valuation of an object to their valuation by others (for example 'keeping up with the Joneses' or benevolence motives), expectation about the value of the object to future generations (inter-generational bequests), transmission of value through time (referencing to past generations valuations, addiction, habit formation or path-dependency), and other forms of linkages between one's own satisfaction from consumption of a good or a service and satisfaction of or impact on the others.  More tenuous connections across the society, including cultural ones, are captured (if not always directly) via institutional and political systems.

Referencing to others' preferences can be commonly seen as an important component of exchange-linked interactions. And here, cultural factors can enter directly into economic models. For example, Luigi Guiso, Paola Sapienza and Luigi Zingales study, titled "Cultural Biases in Economic Exchange?" looked at how cultural biases affect economic exchanges. Using data on bilateral trust between European countries, the authors show that "trust is affected … by cultural aspects of the match between trusting country and trusted country, such as their history of conflicts and their religious, genetic, and somatic similarities.” Lower bilateral trust leads to less trade, less portfolio investment, and less direct investment between countries. Another study, by Paul Zak and Stephen Knack also found that trust has a direct causal link to economic growth via facilitating investment and trade.

Trust, as a cultural factor, enters determination of the effectiveness of large organisations operating in society, according to Rafael La Porta, Florencio Lopez-de-Silane, Andrei Shleifer and Robert W. Vishny. This applies to "government performance, participation in civic and professional societies, importance of large firms, and the performance of social institutions".

Luigi Guiso,  Paola Sapienza, and Luigi Zingales, cited previously, also looked at the issues of trust and culture in relation to households willingness to participate in stock markets. Their paper on this topic showed that cultural attitudes to trust are significant determinants of households’ choices to participate or not in the stock markets in a number of countries.

Similarly, time-linked referencing, among other matters, has been tackled already in economics, including in the context of modelling cultural systems inputs into economic systems and institutions. For example in his 1994 paper, Avner Greif models effects of cultural beliefs on the organisation of society across historical and ideological lines. The paper used game-theoretical and sociological frameworks to conduct a comparative historical analysis of the relations between culture and institutions, explicitly incorporating possible path-dependencies (historical referencing) in how culture impacts institutional evolution.

Much of the thinking about culture and its contribution to economic and financial interactions between people, firms, countries and regions enters economics from analysis of the impact of arts and public or shared goods and services on economic behaviour. In other words, culture enriches economics.

But economic models, techniques and concepts also contribute to our understanding of culture.

One example is the rapidly evolving field of analysis relating to cultural capital. In general, capital is an asset - a form of foregone or saved consumption - that stores value. Cultural capital, therefore, is a form of storage, and transmission over time, of cultural values. In so far as such value is embedded into physical objects, experiences, actions and knowledge, these objects or subjects of culture (e.g. paintings or sculpture or a garden), actions, experiences and knowledge are embodiments of cultural capital. They can be passed on to the future generations, or destroyed, enhanced by adding to their stock and quality, undermined or devalued by reducing their stocks or quality and so on.

In economics, all capital either directly serves as an input into production and/or can be used to transform other inputs (for example, via labour-capital complementarity). And so is with cultural capital. Current generations of artists rely on past stock of artistic and cultural capital to create their works. Today's music draws on folklore of the past, today’s architecture references past landscapes and cityscapes, tomorrow’s poetry will reflect today’s ethos or events shaped by it, and so forth.

Again, the idea of cultural capital – an economic concept to begin with – also poses an interesting challenge for economics. Physical capital, such as buildings, machinery, equipment, exists separably from us, households and workers, who use it. As a result, modelling production process using ‘labour’ and physical capital is conveniently easy from mathematics perspective, although such separation is by no means accurate or even accepted any longer in modern economics. But cultural capital exists simultaneously within us and outside of us. In mathematical terms - it contains parts that are simultaneously separable and parts that are inseparable from human beings, or 'labour'.

This problem, however daunting technically, is not unique to cultural capital. Other forms of capital, such as human capital, social capital and some forms of technological capital, are also non-separable (at least not perfectly) from 'labour'. More interestingly, in contemporary economics, we are starting to recognise that even physical capital can no longer be perfectly detached from us. Aesthetic and ethical aspects of our physical environment (aesthetic and, increasingly also ethical, aspects and attributes of buildings, settings, equipment we use) also interact with our human capital and are directly influenced by cultural capital.

These forces shape the modern workplace, an issue touched upon, for example, in Andrea Ichino and Giovanni Maggi paper on work environment and individual employees’ background.  Another good example of these processes is the recognition we accord today to the role of ergonomics and design in general in our workplace. There is a truly massive body of academic literature linking quality of design of the working environment to productivity, innovativeness and creativity of the workers. As far back as in 1999,  Adrian Leaman and Bill Bordass in their paper “Productivity in Buildings: the ‘killer’ variables” argued that “losses or gains of up to 15% of turnover in a typical office organization might be attributable to the design, management and use of the indoor environment. There is growing evidence to show that associations between perceived productivity and clusters of factors such as comfort, health and satisfaction of staff.” In other words, things like energy efficiency may act via cultural triggers to improve workers’ outlook and satisfaction, thus increasing productivity.

Importantly, social, human and cultural forms of capital are increasingly entering economic analysis both at microeconomic level (decisions of households and individual firms) and at macroeconomic (economic systems, national economies, global economy) levels. For example, economists are fully aware (even though we still have great difficulty valuing or measuring it and more pertinently, we have a great difficulty finding suitable econometric instruments to capture many types of cultural and ethical values) of the effects that cultural values and systems have on political and economic institutions, their shapes, evolutionary dynamics and key traits.

In one paper, Edward L. Glaeser, David Laibson  and Bruce Sacerdote, developed a complete economic model of social capital that can also be extended to capturing some traits of cultural capital.

These effects can be transmitted via demographics (cultural aspects relating to family formation, beliefs structures and collective ethics), political systems (nature and extent of democratic institutions, efficiency of specific forms of political and economic governance), judiciary and military (role of independent judiciary or power of military in a society), and so on.

Alessandra Fogli and Raquel Fernandez paper "Culture: An Empirical Investigation of Beliefs, Work, and Fertility" found that cultural attributes, based on woman's country of ancestry have strong explanatory power in determining family decisions relating to the work and fertility behavior of second-generation American women, even after we control for other, economic and social, drivers. And in another study, the same authors, together with Claudia Olivetti, argued that cultural drivers are also important to work and fertility behaviour of the American women in general.

These are just some examples of the ways in which economics and culture interact, productively and constructively. Of course, none of these imply existence of the dominance relationship between the two domains. Instead, the domains ‘collaborate’, causally, in both directions.

Rachel McCleary and Robert Barro, in their "Religion and Political Economy in an International Panel" argued that "Economic and political developments affect religiosity, and the extent of religious participation and beliefs influence economic performance and political institutions." The study found that "Church attendance and religious beliefs are positively related to education (thereby conflicting with theories in which religion reflects non-scientific thinking) and negatively related to urbanization. …On the other side, we find that economic growth responds positively to the extent of some religious beliefs [notably those in hell and heaven] but negatively to church attendance.” In other words, belief, not belonging to church, drives growth. These results, according to authors “accord with a perspective in which religious beliefs influence individual traits that enhance economic performance. The beliefs are, in turn, the principal output of the religion sector, and church attendance measures the inputs to this sector. Hence, for given beliefs, more church attendance signifies more resources used up by the religion sector."

Likewise, institutional arrangements in specific sectors of economy, e.g. finance, can be traced at least in part to cultural drivers or factors. Rene Stulz, and Roha Williamson looked at cultural differences (in particular religious values variations) as a driver for determination of shareholder and creditor rights. To the chagrin of the ‘culture-first, economics-last’ proponents, they found that "the origin of a country's legal system is more important than its religion and language in explaining shareholder rights." To the chagrin of economics-first supporters, a country's principal religion still proves useful in predicting the cross-sectional variation in creditor rights… [and that] …religion and language are also important predictors of how countries enforce rights."

Amir Licht, Chanan Goldschmidt and Shalom Schwartz show that culture underpins the foundations of the rule of law and other basic/fundamental norms of governance, thus directly influencing evolution of social and institutional capital.

Guido Tabellini's important study, "Culture and Institutions: Economic Development in the Regions of Europe" looked at whether culture has a causal effect on economic development. Tabellini concluded that it does: "Culture is measured by indicators of individual values and beliefs, such as trust and respect for others, and confidence in individual self-determination… The exogenous component of culture due to history is strongly correlated with current regional economic development, after controlling for contemporaneous education, urbanization rates around 1850 and national effects."

On the opposing side of research spectrum, economic models and techniques can be used to study changes in underlying social and cultural traits.

Alberto Bisin and Thierry Verdier paper "Beyond The Melting Pot: Cultural Transmission, Marriage, And The Evolution Of Ethnic And Religious Traits" developed an economic analysis of "the intergenerational transmission of ethnic and religious traits through family socialization and marital segregation decisions". Econometric methods and techniques have been deployed by Paola Giuliano to explain a largely cultural phenomenon of varied family living arrangements found across European countries.

An applied World Bank policy research paper by Karla Hoff and Priyanka Pandey used experimental economics to explain the relationship between cultures and caste discrimination in India.

In their "Belief in a Just World and Redistributive Politics", Roland Benabou and Jean Tirole cross-link culture, political institutions, social ethnographies, ideological beliefs and use economics to explain variations in ethical systems across a number of countries.

And in their 2004 paper Fabian Bornhorst, and co-authors use experimental economics to capture significant differences in culturally-based trust between southern and northern Europeans.

The above are just a handful of examples where culture and economics are productively cross-linked in social and ethnographic, economic and demographic, as well as anthropological research.

Only a naive mind can suggest some hierarchical structure that would rank one over the other – culture over economics or vice-versa – either as a tool for any social inquiry, or as a source of value in the social setting. In the real world, each requires the other to sustain itself. And in the real world, illusory theoretical perfections of economics can be challenged by the messiness of arts and cultural factors, while the intangibles of ethic values can be partially systemised and made part of the broader analysis of our society by economics. Economics is not detached from culture and culture is not divorced from economics.

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