The Rules, Part XVI

Governments are smaller than markets; markets are smaller than cultures.

This rule has always had a special place in my heart.  It is an attempt to explain what drives human action in our world.  Though I think economic reasons for action are important, they are not the dominant reason for human action.  Human actions are dominated by the religious and philosophical views of each culture.  That is what men will sacrifice for.  Economics is how they fund those ideals.

Homo Oeconomicus does not exist.  Few live to merely maximize their personal enjoyment of life, narrowly described.  Yes, if one broadens the paradigm to say that enjoyment of life means achieving the unique goals that one might have for influencing society, that might make the two similar, but there is no way for that to be true for all men at the same time, because views differ there.

Cultures are not Neutral with Respect to Economics

Let’s take a step back.  The embedded beliefs of cultures affect what can be done by its inhabitants economically.  Does the culture permit/encourage:

  • Borrowing and lending with interest? (In non-stilted ways)
  • Taking risks?  Having a bankruptcy code that is not too punitive?
  • Avoiding big risks, that might harm parties two or three links removed?
  • Education of children, such that they are motivated to learn.  (Note: only parents can do this effectively.  Teachers will try, but school cultures depend on parenting cultures.  Lazy parents –> lazy kids.  This applies to children in public, private and home schools.)
  • Education, so long as we don’t get too many people in any area where there is not enough demand.  (I am thinking of the science and math deficit here.)
  • Labor flexibility; will a significant subset of people retrain when their area of the economy is no longer in so much demand?
  • Basic honesty in business dealings?  Business is based on trust.
  • A strong view of the value of time?  Time is money, and cultures that say “tomorrow” will not prosper as much.
  • Allowing freedom to business within the basic boundaries of ethics?
  • Government officials don’t commonly take bribes, or political action committee contributions?
  • People to have an interest in building something through their lives, and free to pass on the benefits as they wish?
  • Charity, not welfare, to those who have had a rough go of it.
  • Fair courts that will adjudicate rights and claims impartially.
  • Legislatures that will be restrained?
  • Executive officers and bureaucrats that will balance the varying needs of society in accordance with the laws, and not become pseudo-dictators?
  • Honest money, where a stable unit of account is maintained, rather than trying to trick people into doing more or less through monetary policy.
  • And more, I hope you get the idea.

Cultures set the backdrop for what men will value and do.  More than laws and regulations, cultures have the soft power such that it is difficult for a man to imagine other ways to do things rather than the accepted norms of the culture.

Cultures are not contiguous with nations; it is more of a tribal thing.  Some cultures exist inside a single nation, some exist across nations.  I think it boils down to a similar view of life that gets propagated through families sharing a similar world view.

Each nation has a meta-culture that is a weighted average of the influences of the cultures inside it.  The weightings depend on size, and willingness to exert effort.

Over the long haul, I think that culture has a bigger impact on the growth of GDP/person than natural resources of an area.  Hong Kong and Singapore are small examples of successful meta-cultures.  Russia and Venzuela would be examples of a resource-rich places that did not capitalize on its opportunities because of the lack of honesty in government.

Governments Have Limits Relative to their Economies

The present time helps show the limits of governments.  Yes, governments have taken bold actions to prevent a banking crisis.  And, it may have worked, but who can tell two years out?  But the governments took on a lot of debt to do so.  Debt-based systems are inherently less flexible than equity-based systems.  As such, the governments of our world are less capable of meeting a significant crisis than they were ten years ago.

Governments that try to do too much run the risk of growing beyond their meta-culture’s willingness to fund them.  It makes sense for governments to focus on the few things that they should do well: internal security, defense, public health, justice, etc.  Beyond that, the effectiveness of governments breaks down.  Governments that try to favor/disfavor a wide variety of actions through tax and stimulus policies don’t typically achieve what they wish for.  Instead, they get populaces that get a minority of clever people who milk the legal code to their advantage, and pay lobbyists to continue the practice, while the average person is frozen out through barriers to entry.

There is something similar to the Laffer Curve that applies to governments, though the shape is unknown to me.  At some point, increasing tax rates stops leading to an increase in revenues, and at some point beyond that increasing tax rates leads to a decrease in revenues.  Those break points will vary, but the clever rich forever reduce their taxes through loopholes.  For the second break point to be hit, taxes have to rise such that the middle class starts to seek shelter from taxes.

Conclusion

Governments can’t dominate economies or meta-cultures.  If they do, they will enforce relative poverty on their countries.  They have to reflect the basic ethics of their meta-cultures, or they won’t survive for long.  Economies will only grow to the degree that their meta-cultures allow them to do so.  Willingness to take and fund risk are culture-driven.

When you consider international investing, examine the culture that you are investing in and ask whether it will be fair to foreign shareholders.  Ask whether they will have standards of governance as good or better than in your home country.  Ask whether they will be motivated to do their best for themselves and their owners.

Don’t underestimate cultural effects in economies.  Men are not the same everywhere; their cultures lead them to think differently.