On his recent foreign tour Mitt Romney learned a basic lesson in diplomacy: There are many things that may be true, but it is not always tactful to state them openly.
But what is a virtue in international relations can be a vice within academia. Scholarly disciplines fail society when they avoid dealing with troublesome issues because examining them will offend someone.
Over the years that has been true within economics on the question that tripped Romney up in Israel: What is the role of culture in determining why people are much more productive — and hence much richer — in some economies than in others? Romney, following the arguments of economic historian David Landes, offended many Palestinians by arguing that differences in culture were the primary reason Israelis are so much richer than their Arab neighbors, including the Palestinians. The media treated this as a gaffe.
Perhaps it was, but the question of what factors determine economic growth has been at the core of economics since the publication of Adam Smith’s “Inquiry into the Nature and Causes of the Wealth of Nations” in 1776. And careful reading of Smith shows he clearly recognized differences in culture and in institutions as important pieces in the puzzle.
However, as economics became more rigorous in its theorizing in the 1800s, the discipline’s leading lights paid greater attention to how individual satisfaction-maximizing decisions in the marketplace aggregated to affect the economy as a whole.
It took a German sociologist, Max Weber, to re-open the question of culture in 1905 with a little book, “The Protestant Ethic and the Spirit of Capitalism.” (Unfortunately, it was not translated into English for another 25 years.) Weber argued that the Reformation, and in particular Calvinism, changed cultural attitudes toward work and savings and thus made possible the emergence of modern capitalist market economies.
Weber’s work was controversial from the start, in part because it offended Marxists who saw his emphasis on culture as a denial of the primacy of economic factors over everything else in history. And it offended Catholics and other non-Protestants by implying that their culture was somehow inferior because it allegedly did not lead to the same levels of economic output as Protestantism.
The argument was fruitful, but never amounted to much within economics as a whole. And then the disaster of the Great Depression focused attention for an entire generation on why economies can fail at the national and international level. John Maynard Keynes’ work oriented the discipline to focus on why and whether government could act, using powers of taxing, spending and controlling the money supply, to stabilize national economies and avoid disasters like the Depression. Little attention was paid to the basic question of why economies vary so much in their underlying levels of output and rates of growth.
With post-World War II decolonization and with myriad independent poor countries in Africa and Asia joining those in Latin America to constitute the “Third World,” a specialty known as “development economics” grew up. But much of this focused on how foreign capital, modern technology and government planning could produce rapid industrialization. It paid little attention to culture and institutions.
Ironically, the rational expectations refutation of Keynesian theory in the late 1970s returned the discipline to the underlying question of Smith’s book. What are the causes of the wealth of nations? Is it merely that some interfere less in private markets than others? And why is it that some economies are much more willing to leave resource allocation up to markets while others instinctively resort to government control?
Examine this question and one inevitably concludes that there are differences in history, in tradition, in social norms, in political and economic culture and in institutions, both private and public. But such factors are hard to include in the abstract mathematical modeling that had come to dominate economic scholarship.
Technological change also plays a factor, and this was easier to include in formal economic models. So much effort has gone into “endogenous growth theory” that incorporates an explanation, within theoretical models, of why technology advances and how that contributes to growth.
Culture and institutions remained on the margin. It took an economic historian at Harvard, David Landes, to address these in a 1998 book “The Wealth and Poverty of Nations.” Landes rejected mono-causal explanations for growth, arguing that geographic and biological factors, as well as historical, cultural and institutional ones, all played a role.
Over the last decade, more economists have piled into the argument, including Daron Acemoglu, one of the brightest young economists today, who together with James Robinson published the book “Why Nations Fail” earlier this year. Drawing a distinction that I think false, they argue that culture is not a factor but that institutions are of overwhelming importance. They also reject the geographical and biological arguments made by Jared Diamond in his book “Guns, Germs and Steel” and accompanying TV documentaries.
Culture, institutions and history remain nearly impossible to deal with in formal mathematics, and so these factors frustrate mainstream economists. But at least, like Mitt Romney, there are some economists who are now willing to discuss the issue in public. That is an important advance.