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There’s been an increasing number of papers concerned with culture and its relationship to economic growth. I happened to just see this working paper by Di Tella and MacCulloch (2014), but the idea of culture being an important determinant of economic development levels has been hanging out there in the literature for a long time. Weber’s theory of the Protestant work ethic is probably the starting point for any discussion of this topic. More recent work tends to try and be more empirical than Weber, often using World Values Surveys as a means of measuring cultural elements. This is what Di Tella and MacCulloch do in their working paper. [If you’d like a good introduction to the culture literature, check out James Fenske’s course materials, in particular his “Foundations of Development” course].

I think this is pretty interesting reading, but I’m starting to get a little antsy about the use of the cross-country empirical work. Not in a standard “Identification!!” way, although that’s an issue, but in a slightly deeper way. In particular, why bother regressing GDP per capita (or growth, or any measure of economic activity) on cultural variables at all?

Culture affects economic activity through the choices that people make about how to allocate scarce resources. In other terms, while culture may be a fundamental determinant of economic activity, it acts through proximate factors like (but not exclusive to) the accumulation of capital, the adoption of technology, or labor market participation decisions. So if we are going to describe how culture influences economic activity, we need to describe how culture influences those proximate factors.

The decisions regarding saving, technology adoption, and labor market participation are similar in that they involve some sort of constrained optimization problem. That is, there is some budget constraint and some utility function, and people do the best they can to maximize utility while keeping within that budget. I have some income, for example, and I need to decide how much of it to consume and how much to save. I have some profits as a firm, and I need to decide whether to invest in a new technology, or distribute the profits to my stockholders. I have a finite amount of time, and I need to decide whether to stay home and raise my kids or put them in day care and go back to work. All constrained optimization problems.

So if culture is going to influence economic activity, it has to influence those constrained optimization problems. And there are really only two options then. Either culture influences budget constraints, or it influences utility functions. I haven’t seen any argument that culture actually changes the budget constraints of people, firms, or governments. Finite resources are finite no matter what you believe. So culture probably acts through utility functions, changing people’s preferences towards the future, or towards education, or towards material success, or towards the environment, or whatever.

Maximizing utility does not mean that people are individualistic money-grubbers. You can write down a utility function where someone cares about other people’s welfare, or a function where someone really enjoys free time with their kids, or highly values the environment, or values the success of their group. Culture, if it has economic effects, would presumably act by changing exactly what is valued in the utility functions of people or households.

Take as an example the common cultural distinction that Americans are more individualistic than Europeans. This would manifest itself in a utility function in the U.S. that is heavily weighted towards individual income, say, versus any measure of community income. In Europe, the opposite would apparently hold. Then, given the same budget, Americans would make choices aimed towards better personal outcomes (e.g. low tax rates and social safety nets) while Europeans wouuld makes choices aimed towards better group outcomes (e.g. high tax rates and social safety nets).

So here’s the issue that I mentioned at the top. If culture leads to different utility functions, which in turn lead to different measurable economic outcomes, then why should we bother with measuring economic outcomes? Let me take this from the opposite angle. If everyone has identical utility functions, then measurable economic outcomes (GDP, average wages) have some information about relative welfare across countries. But if everyone has a different utility function, then measurable economic outcomes don’t necessarily provide any information about relative welfare. If one culture derives utility from having massive families with lots of kids, and doesn’t really care about consumption goods, then what does their low GDP per capita tell me? Nothing. It doesn’t tell me they have lower welfare than a high GDP per capita culture.

If you tell me that culture is important for economic outcomes, then you’re telling me that utility functions vary across cultures. But if utility functions vary across cultures, then cross-culture comparisons of economic outcomes don’t imply anything about welfare. So aren’t the regressions with culture as an explanatory variable self-defeating, even if they are econometrically sound?

I could well be over-thinking this, and I’d be happy to hear a good argument for what the culture/growth or culture/income regressions are supposed to be telling me.