Acton Institute Powerblog

Why culture matters for the economy

This article first appeared on February 24, 2020, in Law & Liberty, a project of Liberty Fund, Inc., and was republished with permission.  

In many peoples’ minds, economics and economists remain locked in a world of homo economicus—the ultimate pleasure-calculator who seeks only to maximize personal satisfaction from the consumption of goods and services and whose occasional displays of seemingly altruistic behavior really only function as a means of self-satisfaction.

This conception of economics is far removed from how modern economics has functioned for a long time. The limits of the homo economicus thought experiment have always been well-understood. In recent decades, more attention has been directed to the deeper and broader motivations which drive human choice and action in economic life. To that end, many economists have begun to focus their attention on culture over the past 30 years.

In many cases, historians were ahead of economists in directing attention to culture’s significance for economic life. Almost 40 years ago, Eric L. Jones’ “The European Miracle: Environments, Economies and Geopolitics in the History of Europe and Asia” showed how particular mindsets and patterns of behavior, formal and informal, helped medieval Europe make important economic breakthroughs which didn’t occur elsewhere. Since that time, other historians such as Niall Ferguson as well as Nobel Prize-winning economists like Douglass North and Edmund Phelps have written extensively on this and related subjects. This cultural emphasis represented a welcome break from the mathematical formalism that still dominates much of academic economics and, I would argue, limits and undermines its utility as an analytical technique.

Missing from these assessments of the interplay between economics and society, however, is an examination of the ways in which culture mediates—for better or worse—the workings of human rationality. In “Why Culture Matters Most,” David C. Rose seeks to develop a theory of how this occurs and why it turns out to be beneficial in some situations and not in others. In doing so, Rose takes this discussion to a new level, especially through his focus on the element of trust.

What is Culture?

“Culture” is one of those phrases that can mean everything or nothing, depending on how it is defined. The first half of Rose’s book engages in close discussion of the nature of culture and its different moral and institutional manifestations. Particular moral beliefs, he maintains, give shape to the application of human rationality. This makes all the difference between, for example, deploying our reason to realize nefarious ends and using our rationality to pursue various forms of individual or community flourishing.

At the same time, culture has an instrumental function insofar as it enables commitment to (or disdain for) specific moral values to be transmitted across generations, thereby establishing expectations which most people can rely upon being in place. In a culture in which social trust is widespread and part of everyone’s working assumptions about life, certain economic ways of acting (such as entrepreneurship and free exchange) become more plausible and sustainable. This trust helps incentivize individual action that promotes collective well-being.

By contrast, the workings of individual rationality in cultures in which trust is low or non-existent can, Rose observes, “undermine the common good.” Dishonesty, he says, “often pays off handsomely” in these conditions as “harm is often spread over so many people that no other individual can even notice.” Understanding the role played by culture in facilitating these types of problems helps us further understand how culture “can get around this problem better than anything else.”

Having established these foundations, Rose proceeds to unpack different dimensions of culture. The first of these he describes as “the cultural commons.” This is “any part of culture that facilitates large-group trust” and which is “an asset to all members of society, a common cultural asset.” Cooperation features heavily here insofar as it is key to facilitating the division of labor, a point underscored by F.A. Hayek when he described capitalism as “an extended order of large-group cooperation.” For Rose, however, Hayek and others underestimated the importance of “large group trust” in sustaining markets. Trust can, according to Rose, extend further than we often realize—beyond just families and small groups.

That said, Rose underscores that the challenge faced by the cultural commons is that it is “prone to being degraded by the very people who benefit from it.” Rationality unbound to particular moral beliefs can cause people to abuse the commons. It follows that strong moral beliefs—and not just any moral beliefs—need to inform people’s choices and actions so that rationality doesn’t collapse into rationalizations of abuses of trust. Rose sees moral norms that emphasize restraint as especially important insofar as sustaining trustworthiness over the long term “requires that individuals be unwilling to undertake negative moral actions.” It’s not that Rose thinks that “moral beliefs that emphasize moral advocacy” (such as calls to be altruistic) are unimportant. They can and do, he states, help to promote overall welfare. Yet they can’t substitute for the trust-magnifying effects of ethical beliefs that stress moral restraint. These are uniquely able to promote widespread and lasting cooperation.

The Fragility of Markets and Democracy

What implications does this vision of culture have for societies that embrace markets in the economic realm and democracy in the political sphere? Following Tocqueville, Rose notes that democracy has a way of breaking down constitutional restraints on the use of state power, either through populist impulses or special interests’ pursuit of self-interested goals (or at least goals that seem to them to be in their self-interest). The breakdown of restraints corrodes the workings of markets, diminishes the rule of law, and facilitates a view of politics as focused on the ruthless pursuit of power rather than the common good. In short, it contributes to the destruction of trust itself. Once this happens, we start down the path of economic inequality (with the politically-connected coming out on top), modern versions of tribalism, and the breakdown of civil society.

Bolstering the type of moral beliefs capable of sustaining trust in the context of market economies and political democracies thus becomes a priority. Where and how can these virtues and knowledge of moral goods be formed and transmitted in ways which can resist the pressures that flow from markets and democratic practices?

Here Rose examines the role played by the family, religion, and government in developing the type of habits and culture which effectively equip people for life in market economies and democratic polities. Interestingly, he suggests that the shift away from agriculturally-based economies towards more technologically-focused societies may have exacted a price in terms of families’ abilities to form their children in the ways of trust. Technology has, Rose comments, mechanized many activities once undertaken by people from a young age, which helped them quickly acquire any number of the virtues typically found in often labor-intensive types of work.

Conversely, the move from the pagan world to the Christian one had positive implications for the development of trust-sustaining habits. For one thing, Christianity provided a single, universal model (Jesus of Nazareth) for living the good life, as opposed to an incoherent gaggle of gods and goddesses. Alongside this model, Christianity also proclaimed a universal moral code that the pagan religions could never have generated by themselves. These factors, along with the persistent and generally consistent transmission of this moral code across generations via the church, made the development of trust-affirming norms and institutions much easier.

As for government, Rose holds that it does contribute to the common good when it addresses genuine market failures that require a type of binding collective action. But, he cautions, if the general welfare is confused with the well-being of specific individuals and particular groups, government action risks damaging trust in democratic societies. To the extent that the general welfare is reduced to the interests of one or more groups, trust between communities and individuals is gradually pulverized. It follows that any pursuit of the general welfare must be guided by general rules of conduct.

Of course, all this is much easier said than done. Tocqueville isn’t the only person to have exhibited some pessimism about the ways in which democracy could wreak havoc upon free societies by facilitating particular types of beliefs and expectations. Rose, however, is somewhat more optimistic, provided that we live in cultures that protect “freedom as a state of mind.” But those cultures also need to be characterized by “the inculcation of duty-based moral restraint.” Only then can we develop the type of culture which can sustain free markets and democracy over the long-term.

Culture does not explain everything. Economic successes and failures are attributable to more than values and institutions. But Rose has given us a book which underscores the need for more extensive work in this still relatively new field of inquiry if we want to understand more of the unseen forces shaping our economic lives as individuals and societies.

Samuel Gregg

is director of research at the Acton Institute. He has written and spoken extensively on questions of political economy, economic history, ethics in finance, and natural law theory. He has an MA in political philosophy from the University of Melbourne, and a Doctor of Philosophy degree in moral philosophy and political economy from the University of Oxford.