Effects of Individualism on Economic Performance

Since the times of Max Weber who was a classical economist, culture has been recognized as a pivotal pillar towards economic growth. The classical economist acknowledged that the protestant ethic of Calvinism fueled the growth of capitalism in its early stages. Therefore, it is clearly evident that individualism is related to the classical political model of liberal democracy, where individuals with better knowledge form their own political opinion on their daily issues, rationally and independent of others. Although,this has brought about inequality in wealth distribution and exploitation by power interest in many countries that support individualistic culture such as America. Lands and mokyr, both economists, have recently recognized the role played culture in the economic development and growth, especially its crucial role in industrial revolution (Gorodnichenko & Roland, pg 1, 2).

People see culture as a set of beliefs and values that an individual must possess in order to understand how the world functions. Basing on this definition, culture has crucial role not only social customs but also in economic performance. The economic performance includes the incentives for investments, invention and innovations, supply labor, work, among others. Many researchers have come-up with explanations on how individualism cultural has lead to great effects on innovation and the economic growth in the long run. Hence, this is one of the reasons why people value individualism as their culture (Gorodnichenko & Roland, pg 4).

The definition for individualism emphasizes on two major terms; personal achievements and freedom. Therefore, individualist culture is known to honor social status to personal achievements such as innovations, important discoveries among other activities that make one to stand out. Another significance of individualism is evident in the model of perfect market by Adam smith. In this kind of market, ceteri paribus, there are many sellers and buyers, hence no single seller can have much influence over prices. Therefore, prices of various goods and services are determined through interacting forces of demand and supply. Adam Smith argued that when individuals are left free to pursue their own selfish-interests, they will behave responsibly as if they are being guided by an “invisible hand.” The selfish-interests provide incentives for individuals to innovate intensively so long as they are not committing a crime. Adam smith saw self-interest as a driving strength towards an ideal society with better production level. Hence, capitalism is viewed as the embodiment of individualism by many economists. However, individualism is prone to inefficiencies especially in collective actions (Gorodnichenko & Roland, pg 5, 6).

To prove that individualism encourages innovation, we use an endogenous growth model, in which there are two sectors; final goods sector and intermediate inputs. The intermediate goods sector is occupied with producers who produce differentiated, improperly and substitutable for production of final goods. Entrepreneurs get satisfaction both from consumption and social reputation linked with producing of higher quality of products. Therefore, this social honor is acts as an economic incentive and it is more pronounced in individualistic culture to encourage productivity. The quality of intermediate inputs will depends on the effort put in researches, and the effort is the monetary and social honor offered as rewards towards innovation. In this theoretical setting we find that individualism to attract more innovations because of both monetary and social honors as rewards. This makes individuals to direct more labor in innovative activities which in turn leads in to advanced levels of productivity and output in long run. Therefore, it accelerates dynamic efficiency leading to increase in economic growth in the long run(Gorodnichenko & Roland, pg 6)

In empirical analysis, we try to analyze how the individualism score works. Individualism score tries to examine to which extend an individual is believed to take care of himself. The analysts found out that individuals in such culture valued personal freedom and class. Basing on Hofstede’s measure of collectivism-individualism culture we notice that in collectivist culture individuals have collective interest while in individualistic culture, people have personal interest. Hence, we notice a higher GDP per worker on individualism. In the report by Roland and Gorodnichenko, it is approximated that one deviation in individualism result in to a greater percentage in income levels. It is also true that as countries or persons get more wealthier, their culture tend to be more individualistic (Gorodnichenko & Roland, pg 4).

The significance of individualism in innovation can also be linked to the psychological fundamentals. The desire to stand out and the social honor rewards associated with individual accomplishments derived from the independent self and the desire for self-enhancement. Individuals view this achievements as the prove of their exceptional personality traits and talents. This is the reason to why they are motivated to discover these traits through their achievements. As a result, individualism has stimulated the need for rule of law as a way of settling conflicts, protection of property rights in order to limit individuals with more powers from manipulating others. Individualism has facilitated more cases of geographical mobility, loose family ties, more openness towards immigration, and existence of market- based social relations (Gorodnichenko & Roland, pg 18, 20, 22, 24 ).

Individualist culture value freedom more suitable environment for achieving self-goals. Not to forget the equality before the law, this is also an important value since lack of equality will violet the freedom of that particular group.

In this discussion we have tried to show how culture determines the economic development and economic growth of a given population. The empirical and theoretical researches have tried to explain how individualism affects long-term growth and innovation. In addition, we have also realized that individualism also affects other significant institutional and economic variable such as political institution, specialization and comparative advantages in trade.

Yuriy Gorodnichenko & Gerard Roland. Understanding the Individualism-Collectivism Cleavage and its Effects: Lessons from Cultural Psychology. Retrieved from http://emlab.berkeley.edu/~groland/pubs/IEA%20papervf.pdf (2011)