Abstract
To unravel the roots of the relationship between the individualism–collectivism dimension of culture (IC) and market-supporting institutions, we develop a model where the two interact and coevolve. IC and institutions are related indirectly via social organization: agents settle either in the Town, a loose organization where they work independently, or in the Clan, a cohesive organization where they engage in collective work. The town’s relative economic potential positively affects the town’s size and institutional quality. A larger town then renders society more individualistic, which attracts even more agents to the town and improves its institutional quality. The resulting positive feedback loop drives societies toward different steady states. If the town’s relative economic potential is sufficiently high, the society converges to a steady state with a completely individualistic culture, high institutional quality, and a large town. Otherwise, the society converges to a steady state with a completely collectivistic culture, weak institutions, and a large clan. We conclude that contemporary IC and institutions exhibit path dependence and are thus related to the historical exogenous conditions in each region. Using current and historical data, we provide empirical evidence supporting our model. In addition, we apply the model to discuss the historical divergence between China and Europe.
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Notes
Culture is defined as “information capable of affecting individuals’ behavior that they acquire from other members of their species through teaching, imitation, and other forms of social transmission” (Richerson & Boyd, 2005) Institutions, broadly defined, are mechanisms through which social choices are determined and implemented (see Acemoglu et al., 2006). For studies that emphasized the role of culture, see, for instance, Alesina et al. (2013), Figlio et al. (2019), and Galor and Özak (2016). For studies highlighting the role of institutions, see Acemoglu et al. (2001, 2002), Acemoglu and Robinson (2012), Dell (2010), North (1990), and Rodrik et al. (2004).
The data on institutions is taken from The IPD data set (Bertho, 2013) and the data on individualism is taken from Hofstede et al. (2010). The regressions account for regional fixed effects, geographical characteristics (absolute latitude, mean ruggedness, agricultural suitability, total length of coasts, and the minimal distance from either the coast or a major river), and historical characteristics (ancestry-adjusted years since the Neolithic revolution, state antiquity, and colonial history).
We use the terms town and clan to denote two types of social organizations rather than distinguish between urban and rural settlements. Historically, many loose, interest-based organizations, which we refer to as towns, existed in the countryside (see, e.g., Brenner, 1976; De Moor, 2008), while urban clans were also not uncommon (Watson, 1982).
In the online appendix, we further show a negative correlation between market-supporting institutions and irrigation suitability, which is another possible proxy for the clan’s relative economic potential (the inverse of the town’s relative economic potential).
Rather than IC, Acemoglu and Robinson (2021) define a new dichotomy between “hardwired” and “fluid” cultures, where the former are the ones that mitigate institutional change. They further note that despite this disadvantage, hardwired cultures have an advantage in coordination among individuals who share the same culture. However, to us, it makes more sense to associate this advantage with collectivism (as in, e.g., Greif, 1994) rather than with hardwiredness: if, for example, the values held by the hardwired culture are purely individualistic (“do what is good for you”), then this hardwiredness will most likely inhibit rather than promote coordination.
As we show in our historical survey (see Sect. 4.2), Chinese clans were the loci of collective economic activities, whereas, in Europe, the towns’ residents usually engaged in independent work.
At this stage, the agent’s decision does not depend on what others do, so he simply settles in the location where he is expected to get higher utility.
This approach is prevalent in the literature. See, for instance, Persson and Tabellini (2021).
Medieval institutions in Europe, such as merchant guilds, indeed often charged entry fees. See the discussion in Sect. 4.3.
As was the case with exogenous institutions, all agents who settle in the town receive the same utility. Thus, any standard social choice rule would elicit the same fee.
Note that within a continuum of agents, the actions of any given agent do not affect others, so he is not strategic.
Note that \(1*(1-|{\mathcal {C}}_t|)+0*|{\mathcal {C}}_t| = 1-|{\mathcal {C}}_t|\) is the average action in period t and is also the Town’s size.
To keep the analysis tractable, we assume that the agent’s individualistic inclination does not depend on his place of birth. This assumption, alongside the exogeneity of \(\psi \), implies that a parent does not affect the offspring’s individualistic inclination and, thus, the offspring’s utility. Thus, the agent’s optimal choice, characterized in Sect. 3.2, remains unchanged.
Note that \({\underline{\lambda }}_t\) and \({\bar{\lambda }}_t\) depend on \({\bar{\theta }}_t\) and \({\underline{\theta }}_t\), respectively. Hence, dynamic changes in the two bounds of the cultural-trait distribution, \({\bar{\theta }}_t\), and \({\underline{\theta }}_t\), would lead to changes in \({\underline{\lambda }}_t\) and \({\bar{\lambda }}_t\) as well. In addition, \({\underline{\lambda }}_t\) and \({\bar{\lambda }}_t\) depend on the parameters \(\lambda \), \(\alpha \), and \(\psi \). Let us consider each in turn. First, \(\lambda \) affects the clan’s size, \(|{\mathcal {C}}_{t-1}|\), which itself determines the bounds of the cultural-trait distribution, \({\bar{\theta }}_t\) and \({\underline{\theta }}_t\) (see Eq. 15). These two bounds then affect \({\underline{\lambda }}_t\) and \({\bar{\lambda }}_t\), respectively. Second, \(\alpha \) affects \({\underline{\lambda }}_t\) and \({\bar{\lambda }}_t\) both directly and indirectly, through its effect on \(|{\mathcal {C}}_{t-1}|\). Finally, \(\psi \) affects \({\underline{\lambda }}_t\) and \({\bar{\lambda }}_t\) through its effect on \({\bar{\theta }}_t\) and \({\underline{\theta }}_t\) (see Eq. 15).
As noted in footnote 14, \(\lambda \) affects the two bounds, \({\underline{\lambda }}_t\) and \({\bar{\lambda }}_t\), through its effect on \({\bar{\theta }}_t\) and \({\underline{\theta }}_t\), respectively. Hence, \({\bar{\lambda }}_T\) is a function of \(\lambda \) as well.
See Online Appendix A. Since the relationship between \(\psi \) and \({\tilde{\lambda }}(\alpha , \psi )\) is complex and bears little importance in our analysis, we do not discuss it here.
While in this section, we focus on the coevolution of culture and institutions, the relationship between the exogenous conditions, namely \(\lambda \), and both culture and institutions is empirically analyzed in Sect. 5.
Attitudes toward ancestors are closely related to IC, and societies that attach great importance to ancestors tend to be more collectivistic. Ancestor worship, which emphasizes the group’s common origins, both reflects and reinforces group consciousness and social cohesion (see Keightley (1990)).
This Confucian formulation of the “Golden Rule” goes beyond the liberal Harm Principle. The latter is essentially prohibitive, restricting harmful types of behavior. The former, on the other hand, also has a positive content, encouraging individuals to love actively, care for and empathize with others (see, e.g., Sta. Maria, 2017).
By the late medieval period, Christianity had become highly ritualized, characterized by a complex system of ceremonies and practices. However, personal faith remained an important religious tenet (see, e.g., Morris, 1987).
See Watson (1982) and Ebrey et al. (1986) for a discussion of the different types of kinship-based organizations. In this study, we contrast two types of social organizations: those based on kinship and the ones based on individual interests, and, thus, abstract from possible variations within each type. Hence, throughout the study, we use two generic terms, clan and town, to denote these two types.
A common term for interest-based social organizations is corporation (see, e.g., Greif, 2006a). However, in this study, we focus on a specific kind of corporation: permanent settlements that were the loci of different economic activities. Since this leaves out other types of corporations, such as monasteries and universities, the term town seems adequate.
See Pirenne (2014) for a detailed account of the economic structure of medieval towns in Europe.
The socio-psychological utility agents derive from settling in the clan, \(1-\theta ^i\), captures this sense of affiliation and commitment.
The idea that codification is a prerequisite for legal development is based on two reasons. First, codification facilitates the accumulation of legal knowledge, which can later be applied to improve the system. Second, written laws make adjudication more logical and less arbitrary, rendering the verdict more predictable. See Berman (1983) for a detailed analysis of legal development in Europe.
The fee, \(\tau \), we introduce in Sect. 3.2 of our model aims to reflect this historical fact.
Two notes are in place here. First, we assumed that the cultural-trait distribution was initially identical in all societies. However, our model suggests that differences in \(\lambda \) generated cultural dissimilarities across societies in the early stages of development. Our data on the historical levels of individualism attempts to capture these dissimilarities. For simplicity, we set the time indicator of historical individualism at these early stages to be \(t=0\). Second, the data do not capture the historical cultural variation within each society. Hence, in the following empirical analysis, the cultural-trait distribution is represented by a single value, which may be the society’s average individualistic inclination. We denote the historical average inclination of society i by \(\theta _{0,i}\).
See Bertho (2013) for more details on this database.
For some of the indicators, we had to reverse the order so that higher scores would consistently reflect higher institutional quality.
Indeed, building on this notion, The Rice Theory (Talhelm et al., 2014) argues that societies that cultivated rice became more collectivistic than the ones that cultivated other cereals.
Boserup (1965), for instance, estimated that the hours required for rice cultivation are thrice as much as those required for wheat cultivation.
The list of each region’s crops, presented in Table B.3, are based on Galor and Özak (2015).
For each crop, the Global Agro-Ecological Zones (GAEZ) provides estimates for crop yield based on three alternative levels of inputs—high, medium, and low—and two possible water supply sources—rain-fed and irrigation. Moreover, for each input-water source category, it provides two separate estimates for crop yield based on agro-climatic conditions, which are arguably unaffected by human intervention, and agro-ecological constraints, which could potentially reflect human intervention. The FAO dataset provides the potential yield for each crop for each cell in the agro-climatic grid. These estimates account for the effect of temperature and moisture on the crop’s growth, the impact of pests, diseases, and weeds on the yield, as well as climatic-related “workability constraints.” In addition, each cell includes estimates of the growth cycle for each crop, capturing the days elapsed from planting to harvesting.
The caloric content of each crop is based on estimates of the United States Department of Agriculture Nutrient Database for Standard Reference.
Importantly, since rice was introduced to the New World only after the Columbian Exchange, for the New World countries, we calculate the cereals’ maximal caloric yield without deducting the maximal caloric yield of rice.
We do so because, as Putterman and Weil (2010) note, people retain their cultural values as they migrate.
In Online Appendix C, we explain how we constructed the index and provide a few additional examples of individualistic and collectivistic motifs.
A potential concern is that the country’s total number of motifs may distort our measure. To address this concern, we follow Michalopoulos and Xue (2021) and include the total number of motifs as a control in our regressions. For robustness, we construct an additional measure, dividing the difference between the number of individualistic and collectivistic motifs by the number of total motifs in each country. The results remain qualitatively unchanged.
Specifically, we calculate the great circle distance of each country to the coast or a major river (taking the minimum of the two). Data on rivers are from Natural Earth (2012), which categorizes rivers by their size from 1 to 11. Major rivers are defined as the ones with sizes between 1 and 7.
All these controls are measured as ancestry-adjusted, based on the Ethnographic Atlas.
Omitting this control slightly increases the coefficient of historical individualism, and it remains significant at the 1%.
Controlling for legal origins fixed effect does not change the results qualitatively. Table B.4 replicates Table 1, displaying all the coefficients for the controls used.
Table B.1 presents the descriptive statistics of these two groups of institutions.
These include Ease of Market Functioning, and Security of Transactions and Contracts.
The significant one belongs to the Civil Union indicator.
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We wish to thank the editor, Oded Galor, three anonymous referees, Anne Hanley, Joel Mokyr, Ömer Özak, Fabrizio Panebianco, David Weil, Ran Weksler, and seminar and conference participants at Brown University, Northwestern University, Università Cattolica del Sacro Cuore, the annual conference of the Israel Economics Association, CEF, PEDD, ASREC, PET, CES, and EPCS for helpful suggestions and comments. Yosef Mentzer and Omer Shiran provided excellent research assistance. This work was supported by the Handelsbankens Research Foundation (Grant Number P18-0142).
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Eruchimovitch, I., Michaeli, M. & Sarid, A. On the coevolution of individualism and institutions. J Econ Growth (2023). https://doi.org/10.1007/s10887-023-09238-4
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DOI: https://doi.org/10.1007/s10887-023-09238-4