• EconAfterHours

The Role of Culture and Ethics in the Economic Bases, Structure and Development of Societies

Written by: Deep Mehta

(Winner, College Category, Essay Writing Competition 2020)


Human behaviour is the root of economic activity. This essay shows that culture and ethics, by virtue of the behavioural patterns they generate in individuals, determine the nature of consumption, production and exchange in an economy. An important question is of the role they play in defining social structures and whether they hamper or augment development. In this essay, it is argued that the answer lies in the way cultural norms impact transmission and symmetry of information in society and that development, in terms of human capability, may be hampered by norms if they distort information transmission channels.


Introduction

Being key constituents of human behaviour and social frameworks, cultures and ethical systems have a cognizable presence in economic and developmental perspectives of societies. By definition, cultures are “patterns of behaviour and interactions” learned from socialisation processes which arise in social groups by a “consistent pattern of thought and action” (Rathje, 2009) and range from theological religions to workplace norms.

While ethical norms may be idiosyncratic, for the purpose of this essay it is taken that systems of ethics in social groups are a subset of social norms in a culture. This is reasonable as ethical systems are patterns formed by common ideas of morality in cultures. If an individual is a member of a culture without norms in some regard, the norms he or she does follow categorises them in another culture as well. For example, one culture may involve but conscientiousness and another but honesty. An individual may belong to both.

Origins of cultures are connected to economic systems; consistency in thoughts and actions is formed, discovered and maintained in the course of transactions. Karl Marx reasoned how humans enter into necessary “definite relations” and correspond to “a definite state of development in their material productive forces.” (Marx, 1859)

These relations serve to fulfil human desires and repeated interaction in these relations develop ideas of optimal patterns and common understandings of morality. The network for economic exchanges can then crystallise ideas of right and wrong depending on what they find to consistently maximise welfare. Marx argues that economic relations are at the core of all relations;

“The mode of production of material life conditions the social, political and intellectual life process in general.”2

This argument is fair considering that geographically linked social structures are formed to meet basic demands of survival which then grow various complexities. However, consistent cultures have new generations born into them for whom the aforementioned conditioning is already done. They but perpetuate the socioeconomic and political relations established in the culture.

This is true of a wide range of systems; theological religions have cultures established over centuries followed by those who, willingly or not, ascribe to them. In organisations or socialising institutions, economic interactions for achieving common goals set norms and traditions that follow a culture; e.g.; culture in a workplace or a university. In such situations, economic activity, rather than generating cultural norms, is guided by them. Cultural or social norms differ from rationality in that they are not “outcome-oriented” (Elster, 1989) and hence, culture makes a case for the unviability of homo economicus.

It is noteworthy that these common behavioural patterns result from communication and perception of information which then form norms for optimality. For optimality to persist in changing circumstances, information availability and symmetry are crucial. In their absence, cultures cannot be altered. In this essay, I argue how culture is definitely relevant in the economic fundamentals, structure and progress of societies and highlight the importance of information transmission in the same.


The Impact on Consumption and Production in an Economy

Markets are formed by demand for commodities which generates supply. The demand depends on the utility functions of the consumer which in turn, depend on their personal and social value maximisation. Beliefs and consumption norms in a culture, therefore, determine the volume and nature of goods and services produced and consumed. For instance, Indian communities with different cultures have different levels of consumption demand. (Lindridge, 2005)

While it is true that resources, technology, climate and other factors determine demand, and even determine cultures, there is variance in how different cultural groups in the same society consume goods and services. For example, Hindu, Muslim and Christian cultures in Kolkata, India, demand different food items, recreational services, attire, etc. in the same city. These are consequences of norm perpetuation post locomotion and over time.

Demand and utility functions of individual consumers also depend on cultures. Members of a group that values decorative vases as prosperity signals may have increasing marginal utility from successive units of purchase. Exceptions to the law of demand such as conspicuous consumption and the bandwagon effect happen when agents signal to members of their culture.

It follows that culture influences the consumption behaviour of households in the Keynesian model of aggregate demand and supply. Firstly, the marginal propensity to consume in the economy depends on the prevalent cultures’ take on consumerism. The savings rate in Asian countries is higher than that in western countries owing to cultural differences. (Yew- Kwangh et al, 2019)

On the supply side, the marginal productivity of labour depends on the work ethics and workplace cultures that are predominant in the society; if excess value is given to corporate success, demand for skill development and subsequently, supply of skilled labour tends to be higher. Also, the number of hours worked also varies with cultural norms. (Kodj. et al., 1998) These cultural impacts can be negative as well.

Since economies are of nations that comprise multiple societies and multiple cultures, the influence of such cultures on the different sectors is varied. Greater the multiplicity and disparity of cultures, greater are the complexities of the economic systems.


Credulity and Social Co-ordination

An important aspect of ethical norms, which are mostly a subset of cultural characteristics, is credulity. The degree of trust one has in others relates directly to whether trustworthiness is common in their cultural group. Moreover, the trustworthiness of an individual depends on their moral codes of conduct.


Akerlof (1970) presents a famous theory of how an informationally asymmetric market for used cars can be completely wiped out when the expectations of “lemons” being sold as good cars is sufficiently high. The ethical norms of the perfectly informed seller and the credulity of the buyer are factors influencing market outcomes.

If profit maximisation is accorded greater importance than honesty in general among the agents, the trend shall be to cheat customers and the market shall be wiped out. It is also unprofitable to cheat if dishonesty leads to negative social outcomes such as ostracism.

If we consider a theoretical model to express this, with the seller 𝑆𝑖′𝑠 payoff 𝑃(𝑆𝑖) = 𝑃[𝑝, 𝑝 + 𝛿] where p is the profit made from selling a bad commodity and 𝛿 is the premium over p in selling a good commodity or a bad commodity as a good one, the seller can choose between two actions; honesty and dishonesty with probability π of his being honest such as 𝐸(𝑆𝑖) = 𝜋(𝐻) + 1 − 𝜋(𝐷).

Here, 𝜋 = 𝑓{𝜃𝑖, 𝛿, 𝐿𝐽} where 𝐿𝐽 is the degree of law enforcement against dishonesty in market J and 𝜃𝑖 = 𝑓{𝑣(𝐻), 𝑣(𝑀), 𝜀} is the set of social norms seller I ascribes to, with v(H) and v(M) denoting the value of honesty and monetary gain in the culture respectively, along with other factors 𝜀.

Legal institutions and contracts (𝐿𝐽) are not independently capable of maintaining market fairness. Firstly, it is given that no contract can cover every contingency, especially over time. Hence, subversions to information disclosure can be found. Secondly, agents in legal institutions; bureaucrats, police, etc. have their own ethical and cultural norms. The predominant cultures determine their integrity, work ethics and therefore, outcome efficiency.

Alternatively, in the absence of institutions and laws, a society may have harmonious market interactions when the predominant culture believes in honesty and credibility over profits.

It is given that economic set-ups themselves see the formation of cultures. If certain practices and customs gain value in an economic entity, they form a culture which impacts the performance of those regions. Very strong evidence for this is provided in financial sectors across the globe;

The culture in banks in the 19th century were concerned with primary savings and loan services in cultural communities where trust was valuable and scope for profits were low. Here, V(H)>V(M). (Dowd & Hutchinson, 2010)

Post the 1940s market boom and financial engineering developments, banks focused on aggressive profit-making. Workplace culture socially rewarded profits and honesty held little value among traders and other employees. V(M)>V(H) here. Hence, transactions are affected by agents’ norms.7

Credulity, on the other hand, determines volume of transactions too. Trust is necessary for transacting when there is uncertainty. In transactions between people within the same or from different cultures, outcomes depend on their how trusting their cultural values makes them. Empirical research has proven the dependency of trust on cultural background. (Luigi et al., 2006)

Here, agent payoff 𝑃(𝐶𝑖) = 𝜋(𝐷)(−𝛿 + 𝐾) + (1 − 𝜋(𝐷))(𝐾) where K is the pleasure derived from buying a good commodity and −𝛿 + 𝐾 is the payoff on being duped. Here, credulity 𝐸(𝐷) = 𝑓(𝜃𝐶𝑖 , 𝐸(𝜃𝑖), 𝐿𝐽) where 𝜃𝐶𝑖 represents the social norms of uninformed agent 𝐶𝑖.

If trust between agents is low, expected costs are higher, exchanges are lesser and deadweight losses are greater. In such societies, allocation of capital is lesser and economic growth is constrained. In societies with high trust, exchanges are smoother and growth is easier.


Market Structuring and Problems of Information Flow

People may exchange particular commodities only with particular groups as per cultural norms, which may or may not depend on E(D) of the group. Thaler (1985) introduces transaction utility to social welfare in transactions which help explain the value of cultural norms; if the behaviour of opposite parties conforms to them, there may be transaction utility and in the opposite case, disutility, altering consumer and producer surpluses.

Moreover, market structuring is based on distribution norms in a society. Within a single culture, economic and social role allocations are given to people which, when perpetuated, give the shape of a structure between different groups within the society. Codes of conducts between different groups are formed for optimality in social exchange.

It can be that certain groups or ethnicities in the culture are allotted only specific kinds of capital and are allowed to indulge in only specific occupations, if any. Individuals then refuse to buy or sell if the opposite party is contradicting norms. For example, conservative people may refuse to buy women entrepreneurs or employ women in traditionally male roles. Even if actions are in their economic interests, people refuse them if they violate social norms. Akerlof (1976) Hence, market activity is greatly affected by cultures and ethics. This brings to light culture’s impact on social structuring.

Social disparities occur when norms restrict free flows of information. Improper information transmission fosters the dependence of deprived groups on educated ones for knowledge and economic activity. This dependency causes inequality between the groups over time as the latter dominate the former. For example, patrilocal structures restrict mobility and education of women, re-asserting economic and intellectual dependency on men. Over time, their dependency exacerbates into subservience.

Moreover, such set-ups lead to concentration of power among groups that have access to information and economic freedom. Over time, the payoffs to future generations in these groups are greater if they exploit others by restricting information and making trade unfairer than if they prioritise social welfare. Religious exploitation by Brahmins in India and the Church in England in the middle ages (Sagan, 1995) are examples. The trust on the uninformed agent’s side is maintained by social norms while the informed agent manipulates transactions with extortionary compensations and rules.

Culture and norms pose problems because humans have anchoring biases in their decision making and reasoning; they prefer maintenance of status quo and resist change in environments even when they are rational. (Samuelson & Zeckhauser, 1988) This impact is increased by lack of interaction with alternates ideas and norms. However, in the face of changing technology and interaction with different cultures, the economic, social and geographical viability of the nuances may be challenged, often making their adherence irrational.


Concluding Remarks: Cultures and Progress

Development is most aptly defined by the Capability approach; the lack of “unfreedoms” that people have to make and live as per their choices. (Sen, 1999) Individuals rely on their immediate social groups for economic and psychological well-being. Hence, as mentioned earlier, they typically adhere to the norms in these groups when there is no better alternative. The lack of choice clearly represents low capability.

Ideally, cultures make occupations and social functioning smoother and enable human capability. However, information asymmetries and structural rigidities make it costly or unfeasible for individuals to undertake activities of their choice. A student may be unable to take up acting in a culture where performing arts are shunned as trivial. Similarly, sexually repressive societies may prevent the active choices of LGBTQ community members.


These stifle welfare and disallow any progress; unconventional thought and action are necessary for technological progress and individuals strongly influenced by culture may be prevented from thinking beyond them.

However, rigidity in cultures is not inherent; if individuals have sufficient intellectual and economic capabilities and understand the principles behind norms, they are capable of evaluating and adapting to changing environments and interact with other cultures. Spiritual communities that connect scientific research to religious texts are an example. There exist harmonious communities with diverse cultures in geographical proximity. (Banban, 2018). Cognitive biases occur for simplifying information processing. Restricted and static information, therefore, causes greater biases and greater conflicts when they are challenged. Cultures and ethical systems which hamper information processing hamper human behaviour and prevent progress.

Changes in cultures and ethics have arisen when striking developments such as communications with new societies or technological progress have struck societies with insights into new possibilities of livelihood. If there is scope for shifting to norms or societies that promise higher welfare, people will be more willing to shift, especially if current welfare is negative.


Hence, cultural, and therefore, ethical, norm guided human behaviour certainly influences economic bases of societies as well as their structuring and progress, given how they impact information transmission.


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