Saturday, December 4, 2010

Culture, Rational Choice, and Economic Development.

Okay, here are my thoughts with a little more elaboration. Once I know what the heck I mean when thinking of culture, I think I'll write a paper on it. If you have any disagreements, please let me know! Debate can only clarify my thoughts.


What is culture? Culture is the sum of knowledge that is irrational – that is neither logically consistent nor empirically verifiable. Why do people have knowledge that is irrational? Because there exists uncertainty – uncertainty in the way that Frank Knight meant it, as the fundamental ignorance of the future that a probability distribution cannot be applied to it, in other words, something that cannot be insured against, to differentiate it from risk. If there is certainty, or if there is an objective probability distribution of something, then all action collapses into rational action, as there is an objective constraint that can be maximized.
So when do we run into uncertainty? As Douglass North notes, much of human history has been the story of bringing our understanding of the physical world out of uncertainty into certainty, and thus changing our knowledge of it from irrational, ie religion, witchcraft, etc., into the rational, or functional relationships between things. By doing so, we have made human interaction more complex, so that uncertainty has increased – while primitive hunter gatherers had to construct an irrational system in order to understand the world, their interpersonal relations were relatively rational: those within the family were to be protected and had enumerated roles; women bore children and gathered resources, men hunted, and outsiders were threats. Given this worldview, the ends that individuals pursued could be rationally planned; the means which people pursued those ends were fraught with true uncertainty – would dancing a certain way bring rain? Would eating the brains of your enemies give you their power? Primitive culture, then, is primarily found in the means that people use to pursue common ends.

In the modern world, the physical world is much more predictable. We still do not know exactly what the weather will look like tomorrow, but we know that we cannot affect it by dancing, and we have a fairly good idea what causes the weather that does occur. True uncertainty these days lies in two places – in ourselves, and in other people. Our culture has developed in order to help us deal with this aspect of human life. Our lives are non-ergodic, to use the term that North uses. An ergodic system is one which returns to a previous state; our selves never regress to a previous state – at every moment of time we are a different person that we were previously, and we can never know who we will be in the future. The ends we pursue are irrational – determined by our culture. There is also uncertainty in other people, how they will react to things, their motivations, etc. How we perceive other people and their motivations has enormous implications for the functioning of the economy: if we believe people are primarily well intentioned, then cooperation and coordination are going to be easier, and the economy will do better than if we never trust the motivations of others. If we see someone innovating in some way, and we believe that this innovation will lead people to do things we don’t approve of, then we will try and quash the innovation.

Again, the only reason for culture is this fundamental uncertainty about the world. If the ends we pursue we all well defined, and the means of pursuing them were all simple functional relationships, then there would be no question what society should look like, and there would be no differences across societies. But given uncertainty things must be interpreted – and the way people interpret things is irrational.
Now, uncertain does not mean completely random, and irrational does not mean completely arbitrary. Psychological studies show that personality is relatively fixed for most people after the age of 30, which makes planning for oneself much easier. The fact that people engage in projects that are long term implies that we expect our future selves to want to pursue similar ends as our present self. And people’s culture is based on reasonable interpretations of past events. This is why we as economists can talk about it – while culture is inherently individual, it is based on shared events and a mental framework which has parts to it which are shared with similar people.

So what does this have to do with how economists usually talk about culture?

1) Culture as preferences – This shows us that culture and preferences are not the same thing. Culture is certainly important in determining the ends which an individual pursues, but it is not the same thing. The preferences of the primitive tribe – the desire to eat, sleep away from exposure, reproduce, etc, are all instinctual, given by genes. As these lower level needs are met, then culture can shape the ends that people pursue

2) Culture as capital – Insofar as the irrational beliefs of people lead to production being better coordinated, culture can be thought of as capital. It is really the same thing as sociologists and mainstream economists talk about social capital, though.

3) Comparative Cultural Advantage (a la Lavoie and Chamlee-Wright) – It is useful to talk about comparative advantage when we talk about the production of goods or services which are consumed. Culture certainly shapes the productive capacity of a country or group of people, but countries do not compete on margins of culture. So saying that a country has a comparative cultural advantage in work ethic is ultimately meaningless, but saying that the attitude towards work affects a country’s comparative advantage in automobile production is valid.

4)Culture as a constitution – this metaphor, made by Storr and John, is useful in the sense that both arise out of the desire to limit uncertainty. If the actions of public officials were known with certainty, then a constitution would be unnecessary, just as culture would be unnecessary without uncertainty.

Should we even talk about culture?

As rational choice theorists, we take ends as given and analyze only the means used to attain those ends. If culture is, today, primarily about the selection of ends, then economists should ignore it and stick to the means used to attain those ends.
The problem arises when the question of economic development comes up. Economic development is never the intended goal of individual actors, but the unintended consequence of those actors in building an economy which makes coordination and cooperation easier. The economist can talk about economic development in three ways.

1) As students of society, we can look at the ends which people pursue which tend to lead to increased economic cooperation, and those ends which people pursue which do not. There need not be any comment about the desirability of the ends, or even the desirability of improved economic cooperation. The rational choice theorist must stay silent on such matters. What he can speak up on is the compatibility of means with stated ends – as Mises and Hayek were in the calculation debate, arguing that socialism and economic performance superior to capitalism were inherently incompatible.

2) As people who believe that improved economic coordination is inherently better for humanity, we can be preachers advocating for ends which lead to economic development, and we can help reframe the actions of others, in particular merchants and innovators, in a positive light. This is the economist as preacher, and is the goal of economists like Deirdre McCloskey, who wants to recast the Bourgeoisie as heroes. The economist here is ultimately usurping the stated ends of individuals with her own, but doing so through persuasion rather than coercion.

3) The economist, finally, can be the planner. There is one case in which the choice of an individual has to do with economic development – that of the policymaker. The policymaker has a vested interest in the economic performance of the society he has influence over, so the economist in advising him can legitimately advise usurping the ends of individuals in society through coercion. The morality of so advising is questionable.


  1. Ryan,

    After attempting to read these two posts on culture, I basically have no idea what you are talking about. Are you explaining culture, or ideology?

    I don't really know what you mean by "irrational" or "rational" here. Irrational like "not directed at ends"?

    But yeah, I'm confused.

  2. So, I make the distinction between three types of knowing: Certain, risky, and uncertain. If we have well-defined ends and well-understood means (ie, certainty), then rational choice is simply the process of solving an engineering problem. Riskiness is where there are objective probabilities ex ante that describe the situation, so choosing is simply a matter of risk aversion.

    Uncertainty is where there is no known/inferred ex-ante probability distribution something will happen. The knowledge about these situations will be culture, of which ideology is a subset (at least as I view it...). To people who believe the rain is connected with their actions, the rain will be uncertain (rather then risky, which it is to us) so the way people interpret the connection between their actions and rain will be cultural. Above, when I say 'rational' I mean 'the choices of a determined problem' and irrational as 'the knowledge of a poorly determined problem'. In the praxeological sense it's all rational.

    Basically, if I'm not making sense it's because I'm still confused.