This article, provided by the Kellogg School of Management at Northwestern University, was originally published on the Morningstar US website and Morningstar Australia website.
As some countries' economies churn steadily -- even briskly -- over time, others' remain stagnant. While standard economic variables, such as productivity and availability of capital, explain international differences, some of these differences remain unexplained.
Gaps in economic development often seem to fall along cultural lines. "Culture and economics, they move together," says Paola Sapienza, a professor of finance at the Kellogg School. But does culture follow economic development or is economic development directed by culture?
The debate goes all the way back to Karl Marx, who held the view that everything is driven by economics. Marx deemed religion, for instance, the opium of the people -- imposed by, and to the benefit of, the economic establishment.
But another view, held by Max Weber, gave culture more credence. Parts of Europe developed earlier and stronger than others, he posited, due to the influence of Protestant work ethics.
Who is right? Economists have traditionally taken the Marxian view, says Sapienza -- at least until recently.
Staying with parents or moving out?
Until just a few generations ago, living arrangements were very similar in Northern and Southern Europe. But more recently, the differences have become starker. In Southern Europe, children tend to live at home much longer than in Northern Europe.
"This has enormous consequences," explains Sapienza. "If they live at home until they're 40, they have fewer children. We know that demographic growth is very, very important for economic growth, and so the question is: Why is there this big difference?"
The economic explanation, of course, is that, with unemployment high and real estate expensive in Southern Europe, kids simply cannot afford to move out. This is a "perfectly reasonable" explanation, says Sapienza, and proves that the economics "explains" cultural norms.
But there's another possibility. The sexual revolution, which crashed through the Western world beginning in the 1960s, has changed the mores around children living at home. Before, the desire to enter into a serious relationship may have prodded more people out of the house at an early age. Now, it is no longer necessary to experience independence outside your parents' home.
Today, with no such pressure -- as well as a free place to stay, complete with home-cooked meals and laundry service, at least in the nurturing family environment of Southern Europe -- one wonders whether adult children even have a reason to leave the house. Culture may well be driving economic growth.
Immigrant, tourists and diplomats: Taking culture with you
Successfully disentangling the relationship between culture and economics has rested on one key truth: visitors to a new country inevitably bring some of their old cultural traditions with them. In 1997, for instance, a man and a woman left their 14-month-old child unattended outside of a New York City barbeque joint while they ate.
Passers by noted the toddler crying in her stroller and called the police, who charged the parents with endangering the welfare of a child. The arrest raised a ruckus in the parents' native Denmark, where it is commonplace to leave babies outside of restaurants and shops while parents go about their business.
Other habits -- including more economically relevant ones, like a willingness to conform to rules -- also travel across borders.
In 2006, economist Ray Fisman tallied up the parking tickets given to United Nations diplomats. Because diplomats have diplomatic immunity and need never pay up, the only reason they would not park illegally is if they have internalised a cultural norm that tells them not to break the rules.
Indeed, Fisman found that diplomats from highly corrupt countries tended to rack up more tickets than those from nations with low levels of corruption.
Economists have been able to exploit our tendency to take our culture with us by studying the economic habits of immigrants and their families.
"In a way, with immigrants, you almost have a natural experiment," says Sapienza. "It's not perfect because, of course, immigrants self-select. But you have these people who are away from their environment."
And just how they behave in a new country offers strong evidence that culture is often independent from economic context and may, in turn, play a causal role in shaping economics.
Immigrants seem to keep the savings habits they've acquired in their old countries, for instance. And even their children tend to make labour and fertility choices that mirror those of children born in the country of origin.
Indeed, in the study of living arrangements, UCLA economist Paola Giuliano showed that the sons and daughters of first-generation immigrants to the United States behave according to the geographical divide in Europe: southern European immigrants more frequently live at home with their parents, while those from northern Europe tend to live independently early on.
This is remarkable because these immigrants are placed in the same economic context, yet their culture affects their decisions.
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