Does Culture Affect Economic Outcomes?

A common question presented to American history students: is the United States a melting pot or a mosaic? The question asks whether emigrants retain the culture of their native land (mosaic) or whether the American culture is a melting pot of all the old cultures together. In Does Culture Affect Economic Outcomes? The authors find that people act as mosaics for at least a generation. People tend to preserve the culture of their parents, and this inheritance affects how they act socially, politically, and economically. The authors specifically study how culture affects opinions towards the choice to become an entrepreneur and income redistribution.

One major difficulty in measuring culture is defining it. Culture evokes many connotations, and its ambiguity makes economists reluctant to formally study it. The authors, therefore, use the introduction to develop what they see as the meaning of culture. They decide that culture is “those customary beliefs and values that ethnic, religious, and social groups transmit fairly unchanged from generation to generation.” Therefore, culture can be treated as an exogenous variable that is essentially unchanged over a lifetime. They surmise that that culture influences change so slowly because

1. parents teach their children what they learned from their parents
2. organizations that promote a certain culture (like churches) have a vested interest in the continuation of beliefs that support them
3. some cultural norms hurt economic outcome but increase birthrate and therefore become more prevalent despite their inefficiency.

The debate of whether culture impacts the economy can be traced back as far as Adam Smith, but up until now, the greater contributions come from philosophers and political scientists. There is much disagreement amongst contributors. John Stuart Mill believed that cultural constraints effected individuals more than personal interest. This means that culture dictated by the group would have a greater effect on how someone acted economically than the individual themselves. Karl Marx believed the opposite and saw technology as the major impetus in effecting change in economic systems. Economists have taken an analytic approach recently. The authors believed that the addition of an analytical framework coupled with the empirical tools of economists will be provide key research.

The major theory of cultural economics echoed by standard economics is the assumption that each individual has one identity and the individual maximizes the utility of his identity (i.e. acts in self-interest). However, the authors theorize that culture impacts the parameters of utility. Essentially, what is best for one individual is not necessarily best for another because everyone does not agree on what is best. Culture affects a person’s value system and what a person finds optimal. People make life decisions without having previous experience: which college to attend, which profession to pursue, who to marry (at least the first time). Researchers hypothesize that these decisions are largely influenced by the culture in which an individual was raised.

The authors use data from several surveys, most prominently the General Social Survey, to show ways in which culture affects economic outcomes. The two most common aspects used by the authors are country of origin and religion. These two aspects fit the authors’ definition of culture because they do not change over a person’s lifetime. A person may emigrate to a new country, adopt a new religion, or renounce religion completely, but their birthplace and system of values received growing up continue to influence individuals as economic actors. An Irish Catholic may become a Muslim in the United States, but research supports the idea that the Irish and Catholic upbringing will continue to exert influence.

The authors’ two major original focuses is on how culture affects the choice to become an entrepreneur and preferences towards income redistribution. The article uses trustfulness in order to measure the likelihood to become an entrepreneur. An entrepreneur works in a less structured environment than an ordinary worker. Many contracts are incomplete or simple handshakes. Based on this logic, the authors believe that more trusting individuals are more likely to become entrepreneurs. Because whether an individual expresses trust is highly correlated with whether that individual is trustworthy (Glaeser et. al., 2000), the authors use their measure of trust as a measure of trustworthiness and study its impact on the probability of becoming an entrepreneur. They find that trusting others increased the probability of being self-employed by 1.3%.

Of course, the problem with this finding is determining the direction of causality. Success may foster trust, and therefore a successful entrepreneur may be more trusting instead of the other way around. To address causality, the authors use religion and ethnic origin as variables. In the first stage they treat trust as a dependent variable and use dummy variables for Protestant, Catholic, Jewish and other religions (as well as dummies for the ancestors’ country of origin later) as the independent variables. In the second stage, they plugged in the predicted values of trust for each individual as their regression with entrepreneurship as the dependent variable. The goal of this approach is to capture only the component of trust caused by differences in ethnic and religious backgrounds.

As a whole, religious people are more trusting. Everything else held constant, the authors find that being raised religiously raises the level of trust by 2% and people who currently regularly attend religious services of the Catholic or Protestant faiths are 20% more trusting than non-practicing people. Muslims, Buddhists, and Hindus, however, do not share this increased level of trust. The implication is that religion fosters trust and this trust is transferred to the workforce.

Culture also affects outcomes through the political preferences of individuals about government involvement: for example, how much the government should interfere in markets, redistribute income, run a social security program, or nationalize certain industries. The authors find that Catholic, Protestant, and Jewish respondents have a more negative attitude towards income distribution than those without religious affiliation. The country of origin also affects opinion towards distribution. Even after controlling for income, education, gender, age, and health status, the authors find that Americans with Canadian or Hispanic roots favor redistribution the most. British and German Americans do not favor redistribution. The authors hypothesize that since the British and Germans immigrants came the earliest that they absorbed most the American ideal that success is determined by individual action. This ideal makes government intervention undesirable.

The conclusion ends with research by Salamon (1992), which I find quite interesting. He finds that in southern Illinois, in spite of the similarity of environmental conditions, towns inhabited by German-Catholic descendants who settled in the 1840s and towns with descendents of Yankee settlers from other parts of the United States (mainly Indiana, Kentucky, and Ohio) differed greatly in the structure of land ownership, farming practices, crop choice, and reproduction rates. German-Catholics almost never sold their land and produced more children generally. To put to use these extra children, they tended to grow crops that were more labor-intensive. Yankees saw farming as a business, and therefore, they bought and sold land more often and grew less labor-intensive crops like corn. Interestingly, although theYankees were generally more profitable, the German-Catholic model maintained the same prevalence after more than a century. This is a powerful example of culture having an effect that was persistent despite lower profitability.