How can we quantify culture?
This sounds ridiculous. It sounds like a quixotic intellectual conceit. But I think the idea is important to economics because of the way we are now using the concept of institutions to explain social and economic phenomena.
The fact that institutions matter has been known for yonks. The use of this knowledge has been limited however. It has proven too difficult to pin down just what we meant by the term. It was also hard to formalise when the larger part of the discipline was prizing formalism, so the use of the concept has been curtailed.
Institutions are culture. They don’t need to be any of the things we usually think of as culture. Whereas most of us think of food and philosophies and worldviews when we think of culture, things absorbed and made into identity, institutions are also culture. They are culture as they are not innate from a genetic level. They are the rules of the game in the societies we live and move between.
But can we pin these down, even quantify them? If we could it would be a great way to get more use out of something that has traditionally been mainly Applied Phebotinium.
Recently we’ve had Paul Romer promoting his Charter Cities concept for spreading good institutions, but with very little insight into what they are, save that places like Canada and Australia must have them. So my interest has been repiqued. I think the concept can be saved and I did my honours work dipping my toe into the area. I’m lucky enough to have this opportunity to shout out for feedback on a few questions (after all, who reads Honours theses). Does my critique of current approaches make sense? Is the concept of quantifying insitutions worth pursuing and what people think of my own tentative steps towards this aim.
This is a series of three posts. This one will talk about some recent work in empirical institutional literature and why I think it has serious flaws in the way it attempts the task. In the second I want to look at the alternatives that have been tried, the problems I have with them. In the last, I want to talk about my own modest efforts using language and hope to get some feedback.
In the last ten years there has been a surge in publishing on institutions in mainstream economic journals. Part of this was handwaving, excusing the failures of the Washington Consensus’ prescriptions. But much of it was a genuine attempt to give explanatory power.
There was a flowering of literature; Robert Hall and Charles Jones’ work on productivity in 1999; The prodigious output of the triumvirate Acemoglu, and Robinson kept things humming along and, by 2004, Dani Rodrik, Arvind Subramanian and France Trebbi declaring that Institutions rule. They were a solution to all our problems! Still, what are the damn things?
This literature was different from what had preceded it. It tried to be empirical. They were not just talking about the effect different institutions could have in different countries, they were using data to try and pin down this effect. Finally, something hard on an elusive concept.
Unfortunately their institutional measures were rubbish. Complete and utter rubbish.
Their favourite measure of institutions was the index. Constructed by an NGO or watchdog group, with names such as the Corruption Perception Index, the Protection from Expropriation Index, the Economic Freedom Index, these were good institutions. These were all apparently based on the thoughts of experts or surveys or some such judgement by a people. The problems involved with these are legion, but here are just a few I had:
Firstly, the methodology was vague and sometimes varied from year to year. I said “apparently” above for a reason. The Corruption Perception Index was illustratively shoddy. Survey question phrasing could change, or they might use a collection of various surveys amalgamated in a hopefully coherent mess. And what if there are different conceptions about what constitutes corruption/freedom/whatever across different economies? The findings could even be endogenous if a participant merely chose to agree with previous index findings rather than admit ignorance.
But there are deeper issues.
They are based on an unspoken assumption of convergence towards a single best model set of institutions. Good institutions are those that have drawn closest to this universal ideal. Perhaps this comes from an ingrained bias from unique equilibrium theories or maybe it’s a deeper enlightenment thing. In any case, it is a big assumption that there is a universal point to which institutional sets will converge as they improve, and it needs to be justified first. After all, we’ve seen many attempts at universalist historical laws before. They have us awaiting neo Roman decline and fall or the dawn, the Dictatorship of the Proletariat and a number of other inevitabilities.
There was a certain circularity as well. The people constructing the indices already had a good idea of what these ideal institutions looked like. You could see them in wealthy countries. That’s why they were wealthy, right? When applied to the indices you ended up with a scale of 1 to Switzerland. Eurocentric chauvinism to be sure, but it also meant you got a measure that told you that wealthy countries had institutions that looked like the institutions of wealthy countries, and that poor countries had institutions that looked like the institutions of poor countries. We can then prove by regression that A is A and B is B if A is A and B is B. A fairly meaningless correlation. Survey based indexes tended to reinforce this by way of the Halo Effect.
Finally (for now), the indices were far too focused on government and formal institutions. There seemed little or no effort to account for person to person trust in transactions, or expectations of return to effort, or any of the basic, diffused and universal institutions that actually matter to most of the economy and, indeed, were important to most of the early Institutionalists. It effectively treated government as exogenous and subject to human design rather than something built on deeper and less observable institutions. I think this was the most concerted effort to patch up the Washington Consensus. Rule of law was just another thing to be prescribed.
Even when they were testing hypotheses on the source of these institutions, the work relied on these indices. Acemoglu, Robinson and Johnson for instance posited an interesting hypothesis about the effects of disease on colonial settlers. Where there was less disease to which Europeans were susceptible, they were more willing to stick around and build better institutions. In the empirics however, they correlated the disease to indices, and then the indices to economic growth.
Even after all these flaws, I think the whole idea of quantifying this institutions caper has its merits. Is this a way we can stop the concept being only the Applied Phlebotinium, something used to mainly justify preconceptions and give us instead a little more explanatory power? After all, the virtue of Behavioural Economics isn’t that they discovered that humans aren’t rational, it is that they found ways to properly identify the relevant irrationalities and get a stronger sense of their implications. Perhaps we can do some similar things with institutions.