Culture, Growth and Economic Policy

The purpose of this chapter is to show how cultural background is firmly interconnected with the way in which societies attempt to satisfy their basic human needs. A brief outline of the relationship governing human needs, cultural background and a society’s economic development is presented. The concept of human needs is presented in the chapter while it discusses the relationship between needs and economic growth. In addition the chapter shows the relationship among needs, economic growth (development) and cultural background. Finally, the chapter raises the issue of the relationship between the individual and society.

This chapter describes how cultural background is shaped. It is necessary to outline early in this book how cultural background is organized so that we can clearly study its interactions with development and growth. Thus, in this chapter we establish how the characteristics and strength of cultural background are shaped over time. In more detail, we present the relationship between cultural background and cognitive ability. The chapter makes reference to the procedures under which cultural background influences personal cognitive ability. Furthermore the chapter clarifies the elements of its organization, and presents endogenous perceptions of the mechanisms and functioning of cultural background. External influences of cultural background and comments on the existence of multicultural equilibria are presented in the chapter.

Although the interconnection between “culture” (“cultural background”) and economic science is widely acknowledged among researchers, this relationship may seem odd to non-experts. In this chapter we first examine culture as part of economic theory. We then investigate developments that have led to the differentiation of culture and economy and to their interconnection again. At first, the chapter investigates cultural background as part of economic theory and describes the divergence of the two concepts. In addition we focus on the re-emergence of cultural background in growth economics and economic thinking. Culture in the neoclassical model and the relationship between cultural background and the post-Keynesian/institutional model is presented in the chapter. Finally, chapter focuses on the theory of rational expectations.

The relationship between cultural background and economic system is presented in detail in this chapter. At first chapter provides the macro reflections of cultural background in order to identify the relationships governing economic system and the cultural traits of societies. Next, the chapter presents political institutions as a first-round effect while we introduce a second-round effect, economic institutions, which can be divided into structures and incentives. Structures as the first dimension of economic institutions are presented in last section of the present chapter.

The previous chapter presented the structures of the first element of cultural background’s second-round effects. The present chapter deals with the second element, incentives. Furthermore the chapter concerns third-round effects with a focus on the relationship between cultural background and growth, followed by section on income and wealth distribution. Finally, the interactions are presented in reverse, i.e., from growth and distribution to cultural background in last section of the chapter.

The present chapter attempts to verify the relationship between cultural particularities and individual economic behavior. In other words, the relevant control is exercised at a micro level. As a rational being and within the context of rational choice, an individual functions under a network of basic assumptions regarding the sum of the individual’s beliefs and preferences, which are generally selfish and materialistic. Nevertheless, the theory of rational expectations does not reveal the nature of the individual on the basis of which such assumptions are made. Consequently, it ignores the way human beliefs and preferences are formed and in which cultural background lies. The present chapter attempts to reveal the relationship between cultural background and rational choice by analyzing the conclusions of certain laboratory experiments that examine whether different cultural dimensions influence rational behavior.

Measuring cultural dimensions is in itself an extremely complex task because they are based on complex behavioral description indices; hence, their quantification is extremely difficult. Despite this, their use is necessary to show the subject matter of the survey. The issue of the measurement of cultural dimensions is presented in the chapter, while it is examined the way in which the dimensions of cultural background are presented at a global level. The chapter analyzes the elements of culture and the dimensions of a society’s social effectiveness using the surveys of Hofstede (Culture’s consequences: international differences in work-related values. Sage, Beverly Hills, CA, 1980; Cultures and organisations. Harper Collins Business, London, 1991; Culture’s consequences—comparing values, behaviors, institutions and organisations across nations. Sage, London, 2001) and GLOBE (House et al., leadership and organisations—the GLOBE study of 62 societies. Sage, Thousand Oaks, CA, 2004). The chapter also portrays cultural traits according to the World Values Survey (WVS). Finally, a comparative analysis of the cultural dimensions from a geographical perspective is conducted in the last section of the chapter.

The present chapter analyzes a cultural dimension of particular importance, which concerns the extent that individualism and collectivism characterize every society. Collectivism can primarily be defined as a social stereotype comprising strong cohesive ties among individuals that consider themselves members of one or more groups (e.g., family, race and nation). Individuals act on the basis of the group’s norms and give priority to group goals over their own. Individualism, on the other hand, can be defined as a social stereotype in which individuals consider themselves as independent entities. These particular individuals act primarily on the basis of their own preferences, needs and goals, and the only incentive to enter into social relationships is for their own personal benefit.

Power distance and uncertainty avoidance are two key cultural dimensions strongly interrelated with economic growth. The role of time has attracted interest because thinking about future actions constitutes a basic feature of human thought. From an individual’s perspective, future orientation requires the development of a series of abilities. These include cognitive and mental processes (such as planning, prediction of circumstances and ways of behavior), as well as emotions and attitudes (such as optimism, pessimism and hope). Similarly, incentives, which are expressed as interests, values and goals, play a primary role in the individual’s future actions. Time orientation is closely connected with individual progress. By predicting the future, people feel as though they are predicting their own development, resulting in the fact that we set the directions we wish to follow.

The present chapter deals with a fundamental question concerning possible changes in values and cultural background over time. Examining the dynamic nature of cultural background may help to explain possible economic failures due to economic systems’ inability to adapt to social conditions. The proper analysis of the prevailing conditions in each society is essential to setting appropriate economic growth policies. If values remain steady over time, then economic policy should adapt to the prevailing values. When social development is in line with changes in economic conditions, the result is an improvement in living standards and increased prosperity.

The present chapter aims to contribute to the interpretation of the annual growth rates of GDP with specific reference to fundamental growth factors (i.e., capital, labor and human capital) and cultural background. The focus here is on cultural background as an influential element of growth. Whether directly or indirectly, culture influences the outcome of the economic process. The importance of culture, its quantification and formal analysis can prove challenging. Acemoglu (Introduction to modern economic growth. Massachusetts Institute of Technology, Department of Economics, London, 2009) looked to the work of Montesquieu (The spirit of the laws. Cambridge University Press, New York, 1989), Machiavelli (Discourses on Livy. Oxford University Press, New York, 1987) and Marshall (Principles of Economics. Prometheus Books, New York, 1997) for references regarding the general features of the environment that may impact on attitudes and human conventions. The role of religion has been underlined by Weber (The protestant ethic and the spirit of capitalism. Scribner, New York, 1958) and more recently by Harrison and Huntington (2000), and Putnam (Am Prospect 4:11–18, 1993) broadened the meaning of cultural factors and trust as they relate to the concept of social capital.

The main purpose of this chapter is to identify the extent to which cultural background affects transaction costs and economic institutions. The role of cultural background has preoccupied researchers in their efforts to explain the differences among the economic performances of various countries. The relationship between the results of those studies and developmental growth indices demonstrates that culture can be particularly valuable. In addition, the institutions of a society form the “rules of the game” (North, Institutions, institutional change and economic performance. Cambridge University Press, Cambridge, 1990) and affect the efficiency of the market. The reduction of transaction costs frees up resources. Existing literature supports the notion that cultural background can affect economic output via institutions; i.e., culture is directly linked to the formation of institutions. The establishment of distinguishable frameworks of action for economic actors can reduce transaction costs by offering incentives for undertaking entrepreneurial activities.

The concept of opportunity entrepreneurship has been of interest to researchers for many years. The aim of this chapter is to analyze opportunity entrepreneurship by considering some factors that influence entrepreneurial capital, originating from three fields: cultural background, transaction characteristics and economic institutions. These factors are not separate or isolated in their structural effects on opportunity entrepreneurship. Therefore, this chapter identifies the opportunity entrepreneurship determination framework, allowing for endogenous phenomena. This chapter also identifies ways of creating a different world, more oriented toward opportunity entrepreneurship, by postulating changed human behaviors and then analyzing the effects observed.

The purpose of this chapter is to identify and quantify the effects of knowledge and culture on the entrepreneurship of societies. The concept of entrepreneurship is approached through two different variables: (a) self-employment rates and (b) entry of new firms to the economy. This introduction shifted the focus of policy to knowledge, which became particularly potent in terms of its impact on growth when compared with the traditional factors of physical capital and labor, where no knowledge spillovers or free access by third-party firms was possible (Audretsch, The Entrepreneurial Society, Oxford University Press, New York, NY, 2007).

The stages of economic growth cover the transition from being a low-income country to becoming a middle-income one and, finally, a high-income one (advanced economy). This transition is not easy and, in most cases, comes up against obstacles and lack of appropriate resources. High growth rates were followed by periods of stagnation, or even recession, and then by growth again, meaning that such countries have been unable to exit from this vicious cycle and reach a permanent level of higher income. We describe this phenomenon as the “Cultural Growth Trap”, and by doing so, we attempt to explain the failure of middle-income countries to present and sustain economic development and avoid years of stagnation or economic recession. We consider that, except where low productivity is the main factor behind the middle-income trap, cultural background can explain the deeper sources of low income growth rates in middle-income countries. Later on, we discuss whether there is an ideal cultural background to increasing growth. This chapter closes with reference to issues of economic policy and, more particularly, austerity policy and the neo-Keynesian approach to stabilization policies, using South Europe as a case study.