Values and Economic Outcomes

Macroeconomic textbooks discuss economic growth in terms of the Solow Model (factors of production and technology). Some textbooks do a better job and indicate that incentives and institutions affect the productive capacity of a country. The graph below goes one step farther and includes values which along with institutions affect behavior. Although incentives are missing in the graph, the inclusion of values is an step ahead. Behavioral factors (individual or collective) affect economic outcomes. 

The graph is from this paper by Janice Boucher Breuer & John McDermott. A draft is here. 

The authors explain

This paper continues recent work on the search for deep determinants of economic development. We show that two core values - respect for others and responsibility - are almost always highly significant and of sizeable magnitude in explaining productivity, capital, human capital, output per worker, and institutions. We suggest that these core values are fundamental and exogenous, and work on behavior - both directly and indirectly through institutions. Our empirical results are strong and consistently support our contention. . . 

We also examined whether institutions embed core values. We considered four institutions: social infrastructure (as measured by Hall and Jones, 1999), the index of economic freedom, property rights, and civil liberties. In all cases, both core values respect for others and responsibility were positively and strongly correlated with better institutions and explained 34% or more of the variation in institutions. P. 21. 

Probably the next challenge of development economics is to study values deeper, how they change, and what makes them change. I see Breuer and McDermott's paper as a step in the right direction. 

It might well be that there is feedback from increases in income (y) and values via education and technology, and more indirectly via religion and ideology. Of course very important work has been done on these topics, by Douglass North and many others. Several questions remain however, which is exciting. Next time you see an explanation of economic growth and development ask: "What role do values play in your model?" and "What type of values does your model assume?"