CH1 Introduction
Since the early 1990s culture has entered economic analysis again, whereas it was totally absent
from mainstream economics during most of the second half of the twentieth century. At that time
the dominant view in economics was based on rational behaviour, and did not take the context of
the decision-making process into account.
Within economics the urgency of considering culture as an explanatory factor was first felt in two
fields where researchers were confronted with cultural differences namely development economics
and international business.
Definitions of culture have in common that they refer to the entire social system; the 'complex
whole' and the 'totality'. In other, more narrow defined definitions symbols are explicitly mentioned.
There are other common features:
Values are essential
They refer to a group
They refer to a trend or pattern
The cultural elements are humanly devised aspects that are transmitted from generation to
generation.
Values refer to a broad tendency to prefer certain states of affairs over others'. Culture refers to a
collectivity, and thus to collectively held values. Rituals are collective actions that are technically
unnecessary for achieving the desired ends. Heroes are persons who possess characteristics that are
highly prized in a culture and thus serve as models for behaviour. Symbols are word gestures,
pictures and objects that carry often complex meanings recognized only by those who share the
culture.
In many studies nations are taken as the group to be analyzed. This practice has been heavily
criticized as neglecting different subcultures within a nation.
Members of a group can have different opinions. Culture focuses on the trend, the mean or average
opinion.
Culture is not equal to identity. Identity refers to people's feelings about belonging to a particular
group. The group identity consists of cultural practices and not of sharing common values. Particular
persons can have different identities depending on the situation they are in, and thus in another
group they can feel distinguished from other groups, even the one they were in previously.
DiMaggio distinguishes two forms of culture. The first form of culture is constitutive (categories,
scripts, etc.) and enables transactions by providing understanding and meaning. The other form of
,culture is regulatory. Individuals know the behaviour they can expect from others. Since norms limit
selfish behaviour mutual trust can be built, and thus reduce transaction costs.
Two views on economics can be distinguished. The first one focuses on the subject studied by
economics. 'By the economy, I refer to institutions and relations of production, exchange and
consumption'. The other definition refers to the method supposed to be used in economic analysis.
Then economics is the social science which assumes optimization by economic agents. Economics
applied in the latter tradition assumes general rules to be valid all over the world.
CH2 A History of thought about culture and economy
Ever since the late nineteenth century, there have always been (at least) two economic sciences. One
is the formal economics, focused on marginal analysis of individual choices. The other is the
substantive tradition in economic science, focusing on the study of economy: those segments of
society that ensure production consumption and distribution of goods and services.
The birth of cultural economics
Max Weber wrote about the relation between protestantism and capitalism. Conclusion was that
countries with protestantism did better than others. Therefore, colonialization started.
Ancestors of cultural economics
In 1759 Smith argued that the force of mutual sympathy was what held society together. Smith's
famous 'invisible hand' was an organizing mechanism that sprang from the limitedly selfinterested
behaviour of individuals. It ensured that, if individuals were left to pursue their own interests, wealth
was created for society as a whole. The discipline it founded was called political economy - but, from
the present perspective, it could also be called moral economy or even cultural economy.
According to Marx, the way in which the capitalist system is structures creates a conflict between
labourers and capitalists, because labourests have to give up part of the value they produce (taxes).
To Marx, the object of economic analysis is the entire system of relations that make up this basic
structure of exploitation of labour by capital. Hence, ideas, beliefs, and socio-political institutions also
play a role. This role, however, is secondary. Since structure determines superstructure, the
evolution of the mode of material production is mirrored by changes in beliefs, values and
institutions. This pattern is called the principle of historical materialism. It is the idea that the Weber
thesis has been positioned against.
Gramsci stated that intellectuals were an instrumental part of the system of capitalist exploitation.
The entire system of domination, economic, political and intellectual, is what Gramsci called
hegemony.
Sibling rivalry
The birth of formal economics
The marginalist revolution sought to make economics into a formal science, with the maximization of
subjective value as its central object. The debate between Menger and the proponents of the
German Historical School, most notable Gustav von Schmoller, is called the methodenstreit. In this
debate, German historicists held that economists ought to study historical documents and statistics
in order to derive insights about economic mechanisms from them. German historicists, were not
inclined to believe in universal principles in economics. Insights were time and society-specific.
Against this, Menger held that it was possible to develop economics as a formal science. The
fundamental principles that Menger proposed were self-interest, utility maximization, and complete
,knowledge. To Menger, the individual was to be the starting point for any analysis of social structures
and relations. Menger and the marginalists in Britain agreed upon the development of economics as
a formal science focusing on individual choice and subjective utility.
American institutionalism
Marxism continued to have its own share of followers. At the time, the most serious challenge to
neoclassical economics came from the US. It was in the US where Commons and Veblen formed a
distinct school that came to be known as institutionalism. Veblen sought a theory of historical change
as an evolutionary process, grounded in universal biological categories and their interaction.
American Institutionalism never adhered to the strict demarcation of economics that the marginalists
had developed. It explicitly argued that drawing from psychology, biology and theories of culture was
necessary for an understanding of the economy. Institutionalism began gradually to lose influence,
until after World War II, the idea of economics in the formal sense had all but taken over the debate.
The supremacy of formal economics
Economics from the 1950s onward became a decidedly homogeneous affair. Mathematical methods
begun to dominate the field. After the war ended, the idea of production and distribution as
something that could be caught in models had become accepted. Mathematics were successfully
used during the war, also the Jews from various European countries came to America and liked to
use the universal language of mathematics as a means of communication.
Politics was probably another factor in the ascendancy of formal, mathematical economics.
Experiences with authoritarian regimes has bred a generation of intellectuals with a deep distrust of
state intervention in social and economic life. The Cold War stimulated this. The ideological
commitment to individual freedom and subjective decision making caused economists to stay away
from factors like culture and moral values. Those were things for individuals to sort out for
themselves, and they were non of the economists' concern.
Closing the ranks
Economics had come to be about economizing, rather than that economizing was but a perspective
from which one could do economics. The substantive tradition disappeared from economics and
found new shelter in the sub-disciplines of economic sociology and history.
A last haven for culture: development economics
There was one area of economics in which culture continued to play an important role. This was the
new research field of development economics. The idea of something called development economics
itself only came about after de-colonization processes set in all over the world. Part of the interest in
the development of this region sprung from a political concern to maintain these areas in one's
sphere of interest during a time of global conflict. It was also morally inspired though: the rise of
social-democracy, an increasing guilt about colonization, and feeling of international solidarity
formed important motivations to be concerned with development.
Whereas the economic model of rational man was sufficient to study behaviour in Western,
developed societies, it did not apply in the rest of the world. Here, culture and traditions ruled the
day.
The dominant paradigm in development economics in the 1950s and 1960s, modernization theory,
dealt with much more than economic development. Modernization included a move towards
bureaucratization, democracy, and a modern mindset geared towards market behaviour. It implied a
move away from traditionalism.
, Lal (1983) argued that there was no need for a separate development economics. Neoclassical theory
would suffice. This attack, which was known as the neoclassical counterrevolution, heralded two
decades of neoclassically inspired policies and thinking about development, culminating in the
(in)famous Washington Consensus.
CH3 The re-emergence of culture in economics
The end of the Cold War had two important influences: it ended the rivalry between the market and
centrally planned economies, and it opened the discussion on the way to establish a market
economy. New schools within economics came into being: institutional economics, evolutionary
economics, behavioural economics, etc. None of these sub-disciplines exclusively focuses on the role
of culture. All, however, allow for culture to play a role in addition to other factors for explaining
economic phenomena. One can speak of an economics and culture view: culture is added as an
explanatory factor to an existing economic theory.
Some trends in post-war economics
Inspired by the ad hoc character of some macro-economic functions, especially in the 1970s and at
the beginning of the 1980s, many were of the view that macro relations were in need of a
microeconomic foundation. The models used were characterized as representative agent models:
only one or a few type(s) of economic agents were thought to represent the economy. A
fundamental problem with these types of models concerned the difficulties with the aggregation of
individual relations.
The unsatisfactory results of the general equilibrium theory stimulated researchers to take another
route. Rational choice game theory was one of these alternatives. Due to unrealistic knowledge
assumptions and results researchers moved towards evolutionary game theory. Hereby the game has
fixed rules.
A similar development can be observed with respect to the Rational Expectations Revolution which
took off in the beginning of the 1970s. In rational expectation models, expectations of endogenous
variables are obtained by minimizing the variable's forecast error. An unstable equilibrium is a typical
feature of these models. When a shock hits the model, a new equilibrium has to be determined. Only
one of the equilibriums and paths are stable, the path is called the saddle path. In order to select the
saddle path, the rational agent is assumed to foresee developments into the far future and
understand that all other paths will not lead to the new stable equilibrium.
An advantage of rational expectations model is that these expectations are forward looking: they
depend on expected events (exogenous variables) to come, whereas previous forms of expectations
were backward looking. However, the price paid for these improvements was high. Learning, which is
an important element of expectations formation, is totally absent. Similar to the common knowledge
assumptions in rational-choice game theory, rational expectations models assume that economic
agents possess an unrealistically high level of knowledge about the working of the economy.
Bounded rationality is an element of behavioural economics, which tries to incorporate elements
from psychology into economics. It started in the 1950s. It focused on discovering the empirical laws
that describe behaviour correctly and as accurately as possible. The new behavioural economics,
which started in the beginning of the 1970s, takes the rationality assumption as a benchmark and
analyzes departures from this standard instead of presenting an alternative approach. They
developed the prospect theory, which is a descriptive theory and not an optimizing one such as
neoclassical thoery.
