Is Economic Growth a Question of Culture?
Skip to content
Economics Finance & Accounting Sep 2, 2014

Is Eco­nom­ic Growth a Ques­tion of Culture?

A decade of research shows how cul­ture seeps into eco­nom­ic decisions.

Cultural biases in economic exchange stem from weak bilateral trust.

Yevgenia Nayberg

Based on the research of

Paola Sapienza

As some coun­tries’ economies churn steadi­ly — even briskly — over time, oth­ers’ remain stag­nant. While stan­dard eco­nom­ic vari­ables, such as pro­duc­tiv­i­ty and avail­abil­i­ty of cap­i­tal, explain inter­na­tion­al dif­fer­ences, some of these dif­fer­ences remain unex­plained. Gaps in eco­nom­ic devel­op­ment often seem to fall along cul­tur­al lines. Cul­ture and eco­nom­ics, they move togeth­er,” says Pao­la Sapien­za, a pro­fes­sor of finance at the Kel­logg School. But does cul­ture fol­low eco­nom­ic devel­op­ment or is eco­nom­ic devel­op­ment direct­ed by culture?

Add Insight
to your inbox.

We’ll send you one email a week with content you actually want to read, curated by the Insight team.

The debate goes all the way back to Karl Marx, who held the view that every­thing is dri­ven by eco­nom­ics. Marx deemed reli­gion, for instance, the opi­um of the peo­ple — imposed by, and to the ben­e­fit of, the eco­nom­ic estab­lish­ment. But anoth­er view, held by Max Weber, gave cul­ture more cre­dence. Parts of Europe devel­oped ear­li­er and stronger than oth­ers, he posit­ed, due to the influ­ence of Protes­tant work ethics.

Who is right? Econ­o­mists have tra­di­tion­al­ly tak­en the Marx­i­an view, says Sapien­za — at least until recently.

A Trip to Europe

Until just a few gen­er­a­tions ago, liv­ing arrange­ments were very sim­i­lar in North­ern and South­ern Europe. But more recent­ly, the dif­fer­ences have become stark­er. In South­ern Europe, chil­dren tend to live at home much longer than in North­ern Europe. This has enor­mous con­se­quences,” explains Sapien­za. If they live at home until they’re forty, they have few­er chil­dren. We know that demo­graph­ic growth is very, very impor­tant for eco­nom­ic growth, and so the ques­tion is: Why is there this big difference?”

The eco­nom­ic expla­na­tion, of course, is that, with unem­ploy­ment high and real estate expen­sive in South­ern Europe, kids sim­ply can­not afford to move out. This is a per­fect­ly rea­son­able” expla­na­tion, says Sapien­za, and proves that the eco­nom­ics explains” cul­tur­al norms.

Trust is quin­tes­sen­tial­ly one of the most impor­tant ingre­di­ents in eco­nom­ic transactions.”

But there’s anoth­er pos­si­bil­i­ty. The sex­u­al rev­o­lu­tion, which crashed through the West­ern world begin­ning in the 1960s, has changed the mores around chil­dren liv­ing at home. Before, the desire to enter into a seri­ous rela­tion­ship may have prod­ded more peo­ple out of the house at an ear­ly age. Now, it is no longer nec­es­sary to expe­ri­ence inde­pen­dence out­side your par­ents’ home. Today, with no such pres­sure — as well as a free place to stay, com­plete with home-cooked meals and laun­dry ser­vice, at least in the nur­tur­ing fam­i­ly envi­ron­ment of South­ern Europe — one won­ders whether adult chil­dren even have a rea­son to leave the house. Cul­ture may well be dri­ving eco­nom­ic growth.

Tak­ing Cul­ture with You

Suc­cess­ful­ly dis­en­tan­gling the rela­tion­ship between cul­ture and eco­nom­ics has rest­ed on one key truth: vis­i­tors to a new coun­try inevitably bring some of their old cul­tur­al tra­di­tions with them. In 1997, for instance, a man and a woman left their 14-month-old child unat­tend­ed out­side of a New York City bar­beque joint while they ate. Passers­by not­ed the tod­dler cry­ing in her stroller and called the police, who charged the par­ents with endan­ger­ing the wel­fare of a child. The arrest raised a ruckus in the par­ents’ native Den­mark, where it is com­mon­place to leave babies out­side of restau­rants and shops while par­ents go about their business.

Oth­er habits — includ­ing more eco­nom­i­cal­ly rel­e­vant ones, like a will­ing­ness to con­form to rules — also trav­el across bor­ders. In 2006, econ­o­mist Ray Fis­man tal­lied up the park­ing tick­ets giv­en to Unit­ed Nations diplo­mats. Because diplo­mats have diplo­mat­ic immu­ni­ty and need nev­er pay up, the only rea­son they would not park ille­gal­ly is if they have inter­nal­ized a cul­tur­al norm that tells them not to break the rules. Indeed, Fis­man found that diplo­mats from high­ly cor­rupt coun­tries tend­ed to rack up more tick­ets than those from nations with low lev­els of corruption.

Econ­o­mists have been able to exploit our ten­den­cy to take our cul­ture with us by study­ing the eco­nom­ic habits of immi­grants and their fam­i­lies. In a way, with immi­grants, you almost have a nat­ur­al exper­i­ment,” says Sapien­za. It’s not per­fect because, of course, immi­grants self-select. But you have these peo­ple who are away from their environment.”

And just how they behave in a new coun­try offers strong evi­dence that cul­ture is often inde­pen­dent from eco­nom­ic con­text and may, in turn, play a causal role in shap­ing eco­nom­ics. Immi­grants seem to keep the sav­ings habits they’ve acquired in their old coun­tries, for instance. And even their chil­dren tend to make labor and fer­til­i­ty choic­es that mir­ror those of chil­dren born in the coun­try of ori­gin. Indeed, in the study of liv­ing arrange­ments, UCLA econ­o­mist Pao­la Giu­liano showed that the sons and daugh­ters of first-gen­er­a­tion immi­grants to the Unit­ed States behave accord­ing to the geo­graph­i­cal divide in Europe: south­ern Euro­pean immi­grants more fre­quent­ly live at home with their par­ents, while those from north­ern Europe tend to live inde­pen­dent­ly ear­ly on. This is remark­able because these immi­grants are placed in the same eco­nom­ic con­text, yet their cul­ture affects their decisions. 

Trust and Economics

Acknowl­edg­ing that cul­tur­al atti­tudes can influ­ence eco­nom­ic deci­sions rais­es a ques­tion: Which atti­tudes? Over the years, the bulk of Sapienza’s own research has focused on trust. My view has always been that trust is one vari­able that is high­ly cul­tur­al, often trans­mit­ted from par­ents to kids,” she says. Think about the rec­om­men­da­tion in some cul­tures not to trust any­body.” Grow­ing up in an envi­ron­ment where you are told not to talk to strangers or rely on gov­ern­ment offi­cials sets you up to expect the worst from every encounter with a per­son or the state — and behave accordingly.

The eco­nom­ic impli­ca­tions of low trust can be vast. Trust is quin­tes­sen­tial­ly one of the most impor­tant ingre­di­ents in eco­nom­ic trans­ac­tions,” says Sapien­za. Sure, we can — and should — write con­tracts. But no con­tract will cov­er every con­tin­gency. You have to trust the per­son you’re nego­ti­at­ing with that even­tu­al­ly we’re going to work togeth­er to work things out,” says Sapien­za. While trust is fun­da­men­tal to all trade and invest­ment, it is par­tic­u­lar­ly impor­tant in finan­cial mar­kets, where peo­ple part with their mon­ey in exchange for promises.”

Trust lev­els dif­fer wild­ly from one coun­try to anoth­er. In Brazil, it is very low; in North­ern Euro­pean coun­tries, it is much high­er. And trust is strik­ing­ly per­sis­tent. This is part­ly just a com­mon sense reac­tion to real­i­ty: if you live in a low-trust soci­ety, it’s opti­mal for you to teach your kids not to trust,” says Sapien­za, because if you’re the only one trust­ing, you’re very like­ly going to be sur­prised by some­body tak­ing advan­tage of you. In a cul­ture where every­one is trust­ing, and there is there­fore more coop­er­a­tive behav­ior, the opti­mal thing to teach your kids is indeed to trust oth­ers. This trans­mis­sion of cul­tur­al atti­tudes may have big eco­nom­ic consequences.”

Liv­ing with­out Trust

Sapien­za has found that peo­ple tend to write few­er finan­cial con­tracts in areas where the lev­el of trust is low­er. This unsur­pris­ing­ly has a neg­a­tive impact on eco­nom­ic devel­op­ment. You have worse finan­cial allo­ca­tion,” says Sapien­za, because the quin­tes­sen­tial mech­a­nism of a free mar­ket econ­o­my is that peo­ple who have the cap­i­tal are not nec­es­sar­i­ly the peo­ple who have the ideas. In order to put cap­i­tal to use, you real­ly have to make it circulate.”

Anoth­er of Sapienza’s stud­ies finds that just how much cit­i­zens of one Euro­pean coun­try trust those of anoth­er impacts their will­ing­ness to engage in mutu­al­ly ben­e­fi­cial finan­cial trans­ac­tions. Coun­tries that do not share a nation­al reli­gion, have a his­to­ry of war with each oth­er, have few­er genet­ic sim­i­lar­i­ties, or even sim­ply pos­sess neg­a­tive stereo­types about each oth­er are less like­ly to trade and invest in each other.

But trust does not just dif­fer from nation to nation. In yet anoth­er study, Sapien­za and her col­leagues find that even with­in a state, indi­vid­u­als who are more trust­ing have riski­er stock mar­ket port­fo­lios: Peo­ple who believe that oth­ers can be trust­ed in gen­er­al … end up putting their mon­ey to work,” says Sapien­za, invest­ing in the stock mar­ket more, invest­ing in riski­er assets, and even­tu­al­ly hav­ing a high­er return.”

Per­sis­tence of Growth

Sapien­za believes that rel­a­tive­ly high lev­els of trust in North­ern Italy — and else­where in the world — stem from his­tor­i­cal prece­dent. Back in the Mid­dle Ages, many cities in North­ern Italy, unlike many sim­i­lar ones in the South, rebelled against the Emper­or and became free city states,” she explains. The under­tak­ing required enor­mous coop­er­a­tion among var­i­ous par­ties and result­ed in a much more open, trans­par­ent style of gov­ern­ment. What we claim in [a recent] paper is that this expe­ri­ence has led peo­ple to trust that they can change things,” says Sapien­za. Today, Ital­ian cities that became free city states over 800 years ago have more non­prof­it orga­ni­za­tions, engage in more blood and organ dona­tion, and raise chil­dren less like­ly to cheat on their nation­al exams than those that did not. That his­to­ry begets cul­ture is not an entire­ly new idea. Nathan Nunn, a pro­fes­sor at Har­vard Uni­ver­si­ty, finds that even today low lev­els of trust in some regions of Africa align close­ly with regions where slave trade caused the most damage.

But per­haps his­to­ry need not be des­tiny. Sapien­za and oth­er econ­o­mists would like to find ways to increase trust lev­els in regions where they have his­tor­i­cal­ly been low — par­tic­u­lar­ly in places where bar­ri­ers to eco­nom­ic devel­op­ment, such as legal­ized dis­crim­i­na­tion, have since been removed. But change will not come eas­i­ly. Where do we start?” Sapien­za asks. If you don’t trust any­body, you will not engage in trans­ac­tions and, of course, the sys­tem will not reward you, even when insti­tu­tion­al changes have removed dis­crim­i­na­tion. More impor­tant­ly, if you don’t trust, you’re going to teach your kids not to trust, which cre­ates a cycle that is dif­fi­cult to escape.”

Featured Faculty

Paola Sapienza

Donald C. Clark/HSBC Chair in Consumer Finance, Professor of Finance, and Zell Center Faculty Fellow

About the Writer

Jessica Love is the staff science writer and editor at Kellogg Insight.

Suggested For You

Most Popular


How Are Black – White Bira­cial Peo­ple Per­ceived in Terms of Race?

Under­stand­ing the answer — and why black and white Amer­i­cans’ respons­es may dif­fer — is increas­ing­ly impor­tant in a mul­tira­cial society.


Why Warmth Is the Under­ap­pre­ci­at­ed Skill Lead­ers Need

The case for demon­strat­ing more than just competence.

Most Popular Podcasts


Pod­cast: Our Most Pop­u­lar Advice on Improv­ing Rela­tion­ships with Colleagues

Cowork­ers can make us crazy. Here’s how to han­dle tough situations.

Social Impact

Pod­cast: How You and Your Com­pa­ny Can Lend Exper­tise to a Non­prof­it in Need

Plus: Four ques­tions to con­sid­er before becom­ing a social-impact entrepreneur.


Pod­cast: Attract Rock­star Employ­ees — or Devel­op Your Own

Find­ing and nur­tur­ing high per­form­ers isn’t easy, but it pays off.


Pod­cast: How Music Can Change Our Mood

A Broad­way song­writer and a mar­ket­ing pro­fes­sor dis­cuss the con­nec­tion between our favorite tunes and how they make us feel.