Monday, April 28, 2014

Are culture and economic freedom substitutes or complements in facilitating economic development?

A couple of articles by Claudia Williamson and Rachel Mathers provide a good place to start to think about this question.

The authors construct an economic culture index by identifying four categories of culture likely to encourage economic interaction and hence promote economic development. The categories are: trust (percentage who say most people can be trusted); respect (percentage who choose tolerance and respect for other people as one of the most desirable qualities for children to learn at home); individual self-determination (average rating on a scale of 1 to 10 where the highest rating is given where respondents claims a great deal of control over the way their lives turn out and the lowest rating where they claim no control); and individualism (percentage who choose obedience as one of the most desirable qualities for children to learn is viewed as a negative factor). The data comes from World Values Surveys and culture index scores for each country are obtained using principal component analysis.

The economic freedom data used in the studies comes from the Fraser Institute. This economic freedom index combines economic and institutional variables relating to size of government, monetary policy and price stability, legal structure and security of private ownership, freedom to trade with foreigners, and regulation of credit, labour and business.

The studies use regression analysis in an attempt to disentangle the impact of economic culture and economic freedom on growth in per capita incomes. There are some differences in the conclusions of the two articles.
The first article, ‘Economic Freedom, Culture and Growth’, for which Claudia Williamson is lead author, was published in Public Choice (2011). The authors found that economic freedom is “relatively more important for growth than culture” and suggested that “culture and economic freedom may best be described as substitutes”. They suggested that trust and respect may become less important from an economic growth perspective as economic institutions are established to enforce property rights and contracts. The authors also acknowledged that culture may have important indirect effects on economic growth by promoting establishment of economic freedom.

The second article, ‘Cultural Context: Explaining the Productivity of Capitalism’ for which Rachel Mathers is lead author, was published in Kyklos (2011). This article extends the line of analysis by including an interaction term (the product of the culture and freedom indexes). The authors find that “such interaction does demonstrate a significant and positive effect on economic growth”. They conclude that if economic culture is deficient, “economic freedom alone may not possess the necessary binding constraints to be as effective as theory predicts”.

After reading these articles again I wanted to get a better feel for the data which the authors use. The first chart has been constructed using the summary data provided in Appendix 2 of the Public Choice article. (The culture index has been rebased from a 0-10 scale to 1-10 scale to assist subsequent analysis) The size of the balls in the chart (it would not be appropriate to refer to them as bubbles) represents the per capita income level for each country in 2000 (That year is chosen for consistency with other data used in the studies. The relevant variable is rgdpl Penn World Tables version 6.2).

What the chart shows is, of course, consistent with some substitution between culture and economic freedom – for example, both Singapore and Sweden manage to have relatively high per capita income levels. It suggests, however, that substitution possibilities are limited. The countries that rate highly in terms of culture also tend to rate highly in economic freedom, and vice versa.

The finding in the Kyklos article concerning the importance of interaction between culture and freedom suggested to me that it might make sense to use a Cobb Douglas production function in further regression analysis. The isoquants in Chart 2 have been constructed using the coefficients of such an analysis. The isoquants show the differing combinations of culture and freedom that are estimated to produce a given level of average income. The per capita income level of the US in 2000 was about 4.25 times that of Mexico, which in turn was a bit more than 4.25 times that of Ghana.

 (For those with an interest in such esoteric matters, the estimated coefficients of the regression are as follows:
Intercept         2.44 (0.64)
Ln Culture       0.66 (0.21)
Ln Freedom     3.20 (0.47)
Adj R2= 0.68

If the isoquants are interpreted as reflecting a production function, the Chart suggests that in the absence of a supportive culture, high levels of economic freedom cannot produce high average income levels. However, it might be more appropriate for the isoquants to be interpreted as being determined simultaneously by interaction between culture, economic freedom and development levels. Under that interpretation, a high level of economic freedom is unlikely to be sustainable in the absence of some cultural support because law and order problems would constitute a major threat to lives and property.

It seems to me that in trying to put together a plausible story of economic development, it makes sense to speculate that interactions between culture and economic freedom facilitate market exchanges, which in turn provide incentives for participants to gain reputations as being worthy of trust. As people become more trustworthy and trusting, and more respectful of the rights other people, they could be expected to support greater economic freedom. We may thus observe a virtuous cycle where economic freedom promotes economic development and economic development promotes a culture supporting greater economic freedom.

However, I have yet to provide a satisfactory answer the question raised in my last past of whether emancipative values (as defined by Christian Welzel) support economic freedom.

Wednesday, April 23, 2014

Do emancipative values support economic freedom?

What do I mean and why should you care?

Emancipative values, defined by Christian Welzel in his book Freedom Rising (discussed here) cover values relating to autonomy, choice, equality and voice (democracy). There are two reasons why you should care whether emancipative values support economic freedom:
  • First, people tend to have happier lives in societies with strong emancipative values. As more countries have experienced economic development and accompanying improvements in material living standards, a rise in emancipative values has resulted in more widespread opportunities for individuals to flourish.
  •  Second, societies have a better chance of being able to sustain improvements in material living standards if their values support economic freedom. As discussed in my last post, there is evidence that the industrial revolution, which began the process of economic development, was influenced by a change in values toward support of economic freedom.

The question of whether emancipative values support economic freedom is too big to answer in this post, but I can make a start. My search for literature relating to links between values and economic freedom led me to Gizem Arikan’s article: ‘Economic Individualism and Government Spending’ (WVR: 4(3),2011). Using data from the World Values Survey, the author tested whether countries in which values of citizens are more individualistic have smaller government (as measured by government spending as a percentage of GDP). She found that individualistic societies do indeed tend to have smaller government. She also found that the effect of individualism on size of government is more pronounced in societies with majoritarian elections and presidential systems (which I find very interesting, even though it is not particularly relevant to the present discussion).

The study uses central government spending as its measure of government spending, but allows for the possibility of lower central government spending in federal systems by including federalism as a control variable. Other control variables include per capita GDP, the percentage of the population over 65, democracy, and institutional variables to account for majoritarian and presidential systems. The results are inconclusive on the question of whether high income countries tend to have big governments. The results are consistent with the view that an aging population tends to result in larger government, but suggest that democracy, majoritarianism and presidentialism all tend to reduce the size of government.  

The individualism variable used in the study incorporates values relating to: whether respect for parents should be conditional on their behaviour; ideal qualities for children to learn at home e.g. independence, imagination and feelings of responsibility; and qualities important in a job e.g. responsibility and opportunity to use initiative.
There is not much direct overlap between Arikan’s individualism index and Welzel’s emancipative values index. The only components they have in common relate to desirable child qualities. While Arikan’s index focuses on values that relate fairly directly to individual autonomy, Welzel’s index has a broader focus, incorporating values relating to sexual morality (divorce, abortion and homosexuality), gender equality and voice (freedom of speech and democracy).

However, the chart below suggests that there is high correlation between Arikan’s individualism index and Welzel’s emancipative values index.

The surprising observation in the chart is that the Nordic countries – normally thought of as prime examples of countries with big government - rank much more highly than the United States on both the individualism and emancipative values indexes. Does this mean I should reconsider my view of the US as the land of the free? Perhaps we can shed some light on the matter by considering the relationship between emancipative values and attitudes toward big government and competition.

Monday, April 14, 2014

Can the industrial revolution be explained by the "cool-water condition"?

In my last post I discussed how Christian Welzel’s book, Freedom Rising has reinforced me in the view that the story of human flourishing is all about emancipation. As people obtain more action resources (wealth, intellectual skills and opportunities to connect with others) they tend to adopt emancipative values and to engage in collective action to attain more civic entitlements. Life provides greater opportunities for most people as this process occurs.

Before proceeding further it may be worth noting that there is evidence that poor people in low-income countries place value on economic freedom and the right to express their opinions e.g. the survey evidence by Deepa Narayan, Lant Pritchett and Soumya Kapoor discussed by William Easterly in The Tyranny of Experts, p 150 (which was reviewed on this blog a few weeks ago). It is hardly surprising that poor people do not like governments stealing their property or impeding their endeavours to earn more income and then telling them to shut up when they complain. Humans don’t have to become wealthy before they perceive that they have natural rights that should be respected.

In this post I consider whether or not Freedom Rising provides a satisfactory explanation of the conditions that got the ball rolling toward improved civic entitlements by enabling people to achieve higher material living standards, first in western Europe and then in many other parts of the world. It is important to have an understanding of the factors that led to the industrial revolution in order to consider whether a reversal of those factors could cause the processes of emancipation and human flourishing to be interrupted.

Professor Welzel identifies an environmental condition, the cool-water (CW) condition, as the source of the expansion in action resources associated with the industrial revolution. The CW condition is a combination of moderately cold climates, rainfall in all seasons, and permanently navigable waterways. These conditions are important because cool temperatures diminish infectious diseases, decelerate soil depletion and diminish physical exhaustion from work; continuity of rainfall improves land productivity and keeps water sources healthier; and permanently navigable waterways are a lubricant for economic exchange. Under the CW condition, soil is arable without irrigation, small farming households can work relatively large sections of land on their own, there is no need for extended families with many children to provide labour, and families do not have much need for community support. The CW condition enables people to have water autonomy – it prevents a central power from monopolising access to water as a means of controlling people.

 The development of urban markets occurred late in the CW societies, but once urban markets emerged in the CW societies of western Europe, the CW conditions made those societies more vibrant by generating “derivative autonomies, such as autonomy in marketing one’s skills, ideas and produce – the engine of technological advancement”.

It seems plausible to me that the CW conditions improved the odds that the industrial revolution would occur in western Europe rather than in some other part of the world at a comparable stage of technological development, e.g. China. My problem is that narrowing the source to western Europe provides, at best, a partial explanation. Why did the industrial revolution begin in north-western Europe rather than, for example, in south-western Europe?

If we want to answer that question then it seems to me that it is useful to look at economic history and, in particular, the works of people like Joel Mokyr and Deidre McCloskey. I suppose it is predictable that I might take that view since that is the approach taken in Chapter 7 of my book, Free to Flourish, and in posts on this blog (for example here and here).

Joel Mokyr has suggested that the industrial revolution should be referred to as the industrial enlightenment. He argued in The Enlightened Economy that a sustained period of industrial innovation was made possible because the “legitimisation of systematic experiments carried over to the realm of technology”.

Deidre McCloskey presented her views about the importance of value change as follows:
In particular, three centuries ago in places like Holland and England the talk and thought about the middle class began to alter. Ordinary conversation about innovation and markets became more approving. The high theorists were emboldened to rethink their prejudice against the bourgeoisie, a prejudice by then millennia old. … In northwestern Europe around 1700 the general opinion shifted in favour of the bourgeoisie and especially in favour of its marketing and innovating. … People stopped sneering at market innovativeness and other bourgeois virtues …”.

In Free to Flourish I concluded my discussion of drivers of opportunity in the following terms:
“This account of the historical drivers of opportunity underlines the importance of economic freedom in determining the advance of technology and innovation. Yet, the ongoing expansion of opportunities depends on much more than just formal rules and economic incentives. It also depends importantly on beliefs, ideologies and social norms.
One implication is that inter-personal trust and supportive public attitudes toward commerce need to be recognised as important factors influencing the growth of opportunities. Another implication is that the economic freedom necessary for ongoing growth of opportunities cannot be sustained unless prevailing beliefs, ideologies and norms are supportive.

The relationship between prevailing values and economic freedom seems to me to be a topic worth exploring further. It would be interesting to see to what extent emancipative values are correlated with values that support economic freedom. Are emancipative values protective of economic freedom, or is there reason to be concerned that such values are leading to increased pressure for “entitlements” that threaten economic freedom and hence the further growth of action resources?

Monday, April 7, 2014

Is the story of human flourishing all about emancipation

Yes, the story of human flourishing is all about emancipation. There is no other word that better describes what human flourishing is about.

At least that is the way it seems to me - and that view has been reinforced by reading Christian Welzel’s book, Freedom Rising, which is subtitled: Human Empowerment and the Quest for Emancipation.

The central idea in the book is that a desire for emancipation from external constraints is deeply rooted in human nature. It stems from the ability of humans to make conscious choices and to imagine a less constrained existence.

Emancipative values remain relatively dormant when people are poor, illiterate and isolated in local groups - they tend to place lower value on freedom of choice and more equal opportunity than on meeting their most basic needs.  Emancipative values emerge strongly as people acquire more action resources (wealth, intellectual skills and opportunities to connect with others). As people recognize the value of civic entitlements, such as the right to vote, they are inspired to take collective action to achieve them.

A society ascends a utility ladder of freedoms as its people obtain more action resources, adopt emancipative values and attain more civic entitlements. Life provides greater opportunities for most people as societies ascend this ladder. That is fundamentally what human flourishing is about in my view.

For individuals, ascending Welzel’s utility ladder of freedoms is much the same as ascending Maslow’s hierarchy of needs. However, Welzel’s emancipation theory has the advantage of being able to explain movement up the ladder in terms of forces of social evolution as well as desires that are deeply rooted in human nature.

Some implications of Welzel’s emancipation theory are capable of being tested empirically. The index of emancipative values used in the empirical work incorporates twelve items from the World Values Survey covering values relating to autonomy, choice, equality and voice (e.g. protecting freedom of speech and giving people more say in government and workplace decisions). Action resources are measured using various indexes of technology, education and national income. Civic entitlements are measured using Freedom House indicators and various other sources such as Vanhanen’s index of democratization.

The results of four tests of implications of Welzel’s emancipation theory are briefly reported below.

First, the empirical work confirms that emancipative values tend to become more widespread as action resources become more widespread. The results indicate that action resources (particularly intellectual resources) strengthen emancipative values at both the individual and societal level, but operate most strongly at the societal level. An individual’s intellectual resources strengthen her emancipative values more when she lives in a society in which intellectual resources are more widespread.

Second, the empirical results reported are consistent with the view that the sequence of change runs from emancipative values to civic entitlements rather than vice versa. Increases in emancipative values are explained by action resources rather than civic entitlements.

Third, evidence is presented that as emancipative values become more widely shared, the dominant life strategies in a population shift from an extrinsic focus on material circumstances to an intrinsic focus on emotional qualities. As emancipative values become more widely shared, people become less preoccupied with their financial situation and their satisfaction with life becomes more closely related to their emotional state (happiness).

Fourth, evidence is presented that a strong sense of general well-being becomes more common as intrinsic life strategies become prevalent. In other words, levels of life satisfaction tend to be higher when life satisfaction becomes more closely related to emotional state rather than material circumstances.
To sum up, Welzel’s emancipation theory seems to me to fit the facts pretty well in terms of what we know about the ways in which values have changed and civic entitlements have expanded as living standards have risen.

I will consider in my next post whether or not Freedom Rising provides a satisfactory explanation of the conditions that got the ball rolling by enabling people to achieve higher material living standards, first in Western Europe and then in many other parts of the world. That is not just an important historical question. It is also relevant in considering what factors could cause the processes of emancipation and human flourishing to be interrupted in future.