The world-renowned historian Andrew Roberts recently wrote that “Brexit will be good for the British national character, as it will reintroduce risk-taking, self reliance and a sense of being in control of our national destiny”. This beautifully concise statement captures the fundamental essence of the ultimate driver of economic performance, culture.
By culture I mean the beliefs, inner values and attitudes that act as a fundamental driver of wealth creation. These beliefs and preferences then shape behaviour and institutions. Institutions, in this context, means the rules of the game, from property rights to the size of the state.
Over the past year I’ve spent a lot of time thinking about the issue of culture and economic performance, constructing an upstream and downstream conceptual model, the River of Prosperity. Like most economists I’d spent most of my working life ignoring culture, with my focus much further downstream on the role of institutions and competitiveness.
Don’t get me wrong, the role of institutions and competitiveness is fundamental to economic performance. But we need to understand what shapes these forces and I believe the answer is culture. The Nobel Laureate Douglass North said that, “if we learn anything from the history of economic development, it is that culture makes all the difference”. Of course, if we’re really thinking about ultimate causes, the obvious question is what drives culture, but that’s a rather big theological and philosophical issue beyond the scope of this article.
The River of Prosperity model is fascinating because one of the direct implications is that what drives prosperity at the nation state level may be very similar to that for an individual. In other words the macro model has micro foundations.
But here’s the irony. Throughout the referendum debate there’s been no discussion whatsoever about how Brexit might change our culture and economic performance as a result. It’s as if such a debate were more appropriate to a different era, when we discussed things like the Protestant work ethic, but now we’re scientific and use tools such as gravity models and computable general equilibrium (CGE) modelling to tell us whether the EU is good or bad economically.
The problem, of course, is that these approaches aren’t scientific at all. There are fundamental flaws in modelling our EU relationship. Gravity models can’t capture the past accurately. CGE models can’t simulate the future accurately. There is no perfect model and so we’re left with imperfect substitutes, which could be seriously misleading.
For those wanting to know just how misleading, and still unsure how to vote, I recommend my paper “What do we really know about the economics of EU membership?”, which can be accessed on my website.
There is a dawning realisation that cultural attitudes and beliefs really do speak to contrasting economic performance. And if I’m right about culture, the entire UK-EU economic debate isn’t about what will happen out there, it’s about what will change inside us. No Treasury model is ever going to capture that effect, but it could be tremendously powerful, consigning Project Fear to irrelevance. One historian has made more sense than most of the economists throughout the referendum campaign.