Does Individualism Drive Economic Development?

It’s the age-old question: do individualist cultures see more economic success than collectivist cultures (e.g. capitalism vs. socialism)?

We’ve mentioned how individualism vs. collectivism is one of the most important (if not the most important) of Hofstede’s cultural dimensions. The degree to which a culture lies along this scale can determine much of the culture’s values and norms.

The West (the US and European countries, in particular) believes that economic development is fueled by individualism.

Is that the case?

The “Spirit of Capitalism”

Adam Smith, the author of The Wealth of Nations (considered “the Bible of capitalism”), wrote that the economic model of the West is rooted in the individual’s aspirations and initiative to earn money, build his career, and elevate his social standing.

He writes:

“The real tragedy of the poor is the poverty of their aspirations. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. Man is an animal that makes bargains: no other animal does this – no dog exchanges bones with another.”

And he wasn’t the only economist to believe so. Economist Max Weber coined the phrase the “spirit of capitalism,” which embodied the entrepreneurial spirit of the West, the desire to climb the social ladder and build a career, all of which was once believed by some to be the sole method of driving economic success.

However, as we discussed in a previous post, Japan disproved this theory by demonstrating that a collectivist culture, with its own values and norms, can boom economically as well.

Apart from the “Japanese Miracle,” business models like Kaizen’s steps to improvement and the quality circle provide positive outcomes and follow collectivist values.

The Lexus

An example of collectivist culture contributing to economic success:

I was invited to a presentation of the Lexus, a luxury Japanese car brand. The production process involved a unique manufacturing method put in place to guarantee top quality.

The car bodies were mounted in a large hall and transported along an assembly line of steps, in which each worker had his/her own task, like welding or screwing parts to the vehicle. A string hung from the ceiling at each step, allowing workers to stop the entire assembly line production if necessary.

Of course, pulling that string costs the company a fortune. But not doing so, if there is a quality issue, could cost them even more…and might even ding their reputation if left unchecked.

So, despite the costliness of pulling that string, when an assembly worker makes that decision, he’s greeted with cheers.

Why?

Because he took a bullet for the team, stepped up and disrupted the workflow, hopefully with reason. Nevertheless, the worker isn’t punished for putting quality over cost, which is why Lexus has a reputation for reliability.

In this way and many more, Japan has demonstrated that an individualist culture is not required for economic development. Both collectivist and individualist cultures have their strengths.

Next week, we’ll talk about the driving factor behind economic success in either type of culture.

10 Cultural Universals: Economy

When the economist, Adam Smith, wrote in his 1776 book, Wealth of the Nations, that each of us contributes to a self-regulating system by pursuing our own personal interests, his idea of “personal interests” was not exclusively financial or material.

He understood that cultural values were involved in economics.  

German social scientist, Max Weber, defined this more clearly during the early 20th century. He examined how certain cultural values influenced economic output.

One example he gave was the Protestant culture.

Reformation teachings in the religion called for congregants to gain wealth, and in doing so, the Protestant work ethic and teachings produced a stronger economy than did, for instance, the Catholic counterpart.

At that point in time, Ireland, Italy, Portugal, and Spain – all Catholic countries – had weaker economies than Great Britain and Germany – countries with a larger Protestant population.

Culture Impacts Economy

The plain fact is some economies fail while others succeed. And the success or failure of an economy is largely dependent on culture.

For any given culture to prosper, economists look at a checklist of necessities for economic development. These include:

  • Good governance
  • Stable political system
  • Straightforward laws, enforced honorably
  • Efficient and uncorrupt government officials
  • Available land for businesses
  • Less bureaucracy when it comes to applying for business permits
  • Foreign investment

For an economy to develop fruitfully, these requirements must be fulfilled.

Values, Tastes & Desires

As Francis X. Hezel, SJ, writes in his article, “The Role of Culture in Economic Development”:

“Modern technology alone will never be able to turn around an economy and to boost the standard of living among a population. The development of a mindset, with accompanying values and habits, is a big part of the equation.”

The study of cultural economics examines all this.

Cultural economics differs from traditional economics in the examination of how and why individuals make decisions.

Traditional economics sees decision-making as producing explicit and implicit consequences.

Cultural economics sees decision-making as something arrived at through trajectories involving regularities accrued over the years that direct the individual in decision-making.

Our tastes, our desires are informed by our culture. This begins during primary socialization and continues to be enhanced by the environment we grow in. We internalize these tastes and desires and they inform our future wants.

Individuals and societies have culture-driven wants, needs, desires, and values, all of which drive the economy and the culture, thereby producing economic evolution – or stagnation.

Learn more about the 10 Cultural Universals.