A growing body of empirical work measuring different types of cultural traits has shown that culture matters for a variety of economic outcomes. This paper focuses on one specific aspect of the relevance of culture: its relationship to institutions. We review work with a theoretical, empirical, and historical bent to assess the presence of a two-way causal effect between culture and institutions.Human systems are complex, dynamic, chaotic and subject to strong exogenous influences such as constraints, contexts and circumstances. There is a long history of trying to compare two countries in a mechanical fashion and focusing on one or two elements of difference to explain contrasting outcomes, ignoring that the outcomes were the result of a wide range of multi-causal events and interactions. Just take a look at the long literature seeking to explain the differences between Britain and France in the past five hundred years. Two nations with many ties and quite distinctively different outcomes and traditions. What causes those differences? Genes? Geography? Economy? Institutions? Forms of Government? Technology? Culture?
Yes, yes, yes, and yes some more to an even longer list of causal variables.
Alesina and Giuliano, in different words, seem to get at the same point.
What roles do culture and institutions play in determining the wealth of nations? We have argued here that it would be wrong to claim the causal superiority of either. Culture and institutions interact and evolve in a complementary way, with mutual feedback effects. Thus, the same institutions may function differently in different cultures, but culture may evolve in differing ways depending on the type of institutions. We discussed many examples of this interaction, for different types of institutions (such as political and legal institutions, regulation, and the welfare state) and different cultural traits (including trust, family ties, individualism, and generalized morality). We also discussed in detail definitional issues, which are important both for clarity of models and for measurement.
Though the studies we’ve reviewed have done much to emphasize the presence of a feedback effect, two major tasks lay ahead.
First, we need to better understand the mechanisms driving the interaction. Most of the studies still tend to examine an event in isolation from other events, except possibly to account for other covariates. However, the joint dynamics of culture and institutions can be much more complex and highly nonlinear. Therefore, linear regression methods tend to be less appropriate than more structural analyses of the data.
Second, we need to better understand channels of causality. Most of the papers we’ve reviewed try to isolate one direction of causality, by using instrumental variables or by looking at historical exogenous shocks. The existence of complementarities between culture and institutions hinders identification. While much progress has been made in isolating the importance of culture and institutions, we need to do more to fully understand their complementarities and how they jointly affect development. To find empirical answers to these questions, researchers will need to assemble a chronology of both cultural change and institutional change and then examine the interrelationships between them.