The Imperative of Understanding the Role of Institutions, Culture, and History in Economics

I recently read an article by Dr. Avner Greif of Stanford University titled, “Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and individualist Societies.” While it is a somewhat dated article being published in 1994 (see citation below), Dr. Greif’s conclusion struck me as being very important and still applicable to understanding economic development and economics in general today. I think his concluding remarks are also important to take into consideration when one is attempting to apply economics in the making of public policy or just trying to understand a certain issue or event.

Here are the highlights I took from Dr. Greif’s conclusion.

…This paper points to factors that make trajectories of societal organization – and hence economic growth – path dependent. Given the technologically determined rules of the game, institutions – the nontechnological constraints on human interactions – are composed of two interrelated elements: cultural beliefs (how individuals expect others to act in various contingencies) and organizations (the endogenous human constructs that alter the rules of the game…). Thus the capacity of societal organizations to change is a function of its history, since institutions are combined of organizations and cultural beliefs, cultural beliefs are uncoordinated expectations, organizations reinforce the cultural beliefs that led to their adoption, and past organizations and cultural beliefs influence historically subsequent games, organizations, and equilibria.

Understanding the sources of institutional path dependence indicates the factors that forestall successful intersociety adoption of institutions for which there are many historical and contemporary examples…The view of institutions developed in this paper indicates why it is misleading to expect that a beneficial organization of one society will yield the same results in another. The effect of organizations is a function of their impact on the rules of the game and the cultural beliefs of the society within which this game is embedded. Analyzing economic and political institutions and the impact of organizational modifications requires the examination of the historical development and implications of the related cultural beliefs.

Past, present, and future economic growth is not a mere function of endowment, technology, and preferences. It is a complex process in which the organization of society plays a significant role. The organization of society itself, however, reflects historical, cultural, social, political, and economic processes. Comparative historical analysis is likely to enhance our comprehension of the evolution of diverse societal organization, since this process is historical in nature. Furthermore, such an analysis provides the historical perspective and diversity required to examine institutional evolution and the interrelations between culture, the organization of society, and economic growth (Greif 1994, 943-944).

What this means to me is that if we are truly going to understand economics, the process of economic development, and the functioning of economies, we have to also understand the related historical, political, social, cultural, and institutional elements. We can’t only rely on mainstream economic theory. The culture and institutions that are embedded within an economic system are vitally important to fully understanding how that economy functions at a macro level, as well as gaining a full understanding of the economic behavior at the micro level.

Furthermore, since history (along with culture) plays a key role in determining the path dependence of the economy’s institutions, it is imperative to understand the historical context of an economy in order to be able to appropriately apply economic theory to the development and implementation of effective policy. Institutions, culture, and history matter, but yet, we ignore them, for the most part, in mainstream economics…much to the detriment of society.

Reference

Greif, A. (1994). Cultural beliefs and the organization of society: A historical and theoretical reflection on collectivist and individualist societies. Journal of Political Economy, 102, 5, 912-950.

 

Steve

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Creative Industry Registers $4.0 Billion Impact on San Antonio Economy in 2016

I recently finished the update to the economic impact of the creative industry in San Antonio and was honored to present it at the creative industry luncheon this past Wednesday.

The presentation can be found here.

In 2016, employment in the industry totaled 20,363 with incomes reaching over $914 million. Output was over $3.3 billion with a bit over $1 billion of that being exported from the region. Once multiplier effects are taken into consideration, the total impacts on employment amounted to 24,885 full-time equivalent positions earning incomes of $1.1 billion and registering a total economic impact of about $4.0 billion.

Steve

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The Importance of Arts Education to Economic Development

Many people, including myself, have argued that it is important to include an enhanced focus (or even a focus at all) on the arts within a curriculum that is focused on science, technology, engineering, and math (STEM). In other words, the focus on STEM should be expanded to be STEAM. Even with these arguments being made, there has been a relatively recent movement to minimize the importance of a liberal arts education across some states. For example, the governors of both Kentucky and North Carolina have made such proposals.

I think this is a grave mistake. To be upfront, I received my bachelor’s degree from a small liberal arts college, and I am currently an associate professor of economics at a liberal arts university. Thus, I admittedly may be biased. But based on my experience, I know that my liberal arts education allowed me to achieve a deeper understanding and view problems from different perspectives. And in my work with artists on various projects and through my teaching of arts students, I know that they see the world from a different perspective that allows them to approach problems from varied angles.

I think J. Bradford Hipps discusses this very eloquently in his New York Times article, “To Write Software, Read Novels,” published in the May 22 paper edition (published May 21 online under the title “To Write Better Code, Read Virginia Woolf“). In the article, he provides examples where liberal arts graduates working within technology companies applied their abilities to “see” things differently to solve problems that the “techies” were finding to be intractable.

This is not arts for arts sake. This is arts for the economy’s sake.

I am confident that if we continue down this path of gutting liberal arts education from Pre-kindergarten through university, our economy is going to suffer because we will severely diminish the productive abilities of our labor force.

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Creative Industries, Creative Class, and the Effects on Urban Economic Growth

I recently read an article by Erik Stam, Jeroen P.J. de Jong, and Gerard Marlet called “Creative Industries in the Netherlands: Structure, Development, Innovativeness and Effects of Urban Growth.” Part of their research documented in this article looks at the effects of the creative industries and the creative class on innovation and urban economic growth. The difference between the two is that the creative industries is defined by industry sectors (e.g., NAICS codes), and the creative class is defined by occupations. I think the conclusions they draw from their research is quite interesting and very useful for economic development policy.

The analyses show that, with the exception of the metropolitan city of Amsterdam, there is no relation of the presence of creative industries with employment growth. In general, it seems that a concentration of creative industries is a less important determinant for employment growth in cities than a concentration of creative people/creative class. Creative industries do not seem to act as a catalyst for the effect of knowledge (spillovers) on urban economic growth in general. This seems to occur only in the metropolitan city of Amsterdam. This role is ore likely to be taken by the creative class, which was shown to have a much stronger relation with employment growth than the creative industries. If the objective of local economic policy is employment growth, improving living conditions for the creative class…could be more effective than creating conditions for stimulating the creative industries, which is currently widespread policy in the Netherlands…If the objective is not specifically employment growth, but is more focused on the innovativeness of the business population, creating conditions to stimulate the creative industries seems a reasonable policy, as we have shown that firms in the creative industries are more innovative than firms in other industries. However, our study shows that the creative industries are very heterogeneous; businesses in the distinctive domains face different constraints. One policy to stimulate all the creative industries will be less effective than more specific policies tailored to the nature of the specific domains.

Our findings call for a focus on living conditions and labour markets…attracting and retaining individuals in the creative class, instead of business conditions for attracting firms belonging to the creative industries if growth in cities is the objective. Only in very specific urban environments, such as the metropolitan city of Amsterdam, does a policy to attract and stimulate business activities in the creative industries seem to be justified. Perhaps metropolitan environments distinguish themselves from other lower order cities by their intensive social and cultural activity (including creative industries) that provides a source of inspiration for other economic activities…, the local ‘buzz’ of unpredictable, innovative interactions…(pp. 128-129).

I agree with their conclusion that economic development is more about attracting people than attracting companies, but there has to be a place for the creative class to work, so it is also important that the appropriate conditions exist within a metropolitan economy to stimulate the creation, growth, and attraction of creative industry businesses as well. In other words, it is important, as it always has been, that innovation be catalyzed for an urban economy to develop, which brings us back to their point about the importance of creative industries in fostering innovation.

(The article cited in this post was published in the journal Geografiska Annaler: Series B, Human Geography in 2008.)

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2015 San Antonio Creative Industry Growth and Prosperity Report

I recently presented the updated economic impact of the creative industry in San Antonio at the Tobin Center. The measured impacts are for 2014. The presentation can be found here, but in brief the industry has shown steady increases across all measures from 2012 through 2014. As of 2014, the industry, employs 21,736 people who earn over $1 billion in wages. The total estimated output of the industry in 2014 was $4.3 billion. These numbers do not include any multiplier effects. This industry, maybe more than any other industry, registers an impact far beyond its standard economic impacts as previously mentioned because of  its “artistic dividend.” This is a concept coined by Ann Markusen and David King to capture the productivity enhancements and economic growth that would not occur were it not for the presence of artists and other creative workers in the area. So, besides the rather large impact the industry directly has on employment, income, and output, it is a very important industry to the development of San Antonio’s economy because of the productivity improvements it provides to every other industry. Tobin Center for the Performing Arts \