Collective Conscious

Mod­eled Behav­ior sug­gests that col­lec­tive behav­ior plays a large role:

The idea is that while the [Ital­ian] south was dis­cour­ag­ing net­works from form­ing, as they pre­sented chal­lenges to the hier­ar­chy (and espe­cially the church), the north embraced the for­ma­tion of social net­works, which allowed it to form valu­able human (and social) capital.

and cites time pref­er­ence as another cru­cial factor:

Cul­tures that live for today (or, con­versely, are mired in the past) have prob­lems across the board, rang­ing from low work ethic, to inabil­ity to engage in com­plex coor­di­na­tion and low lev­els of invest­ment in inno­va­tion. Why work hard, and invest in coop­er­a­tion and inno­va­tion if tomor­row doesn’t mat­ter? In con­trast, cul­tures that have an ethic of invest­ing for tomor­row tend to value work, have high inter­gen­er­a­tion sav­ings rates, demon­strate a will­ing­ness to sac­ri­fice short-​​term plea­sures for long-​​term gain, and enjoy high lev­els of cooperation.

My ques­tion here is, isn’t the social time pref­er­ence just the inter­est rate? Peo­ple don’t invest out of altru­ism, they invest for profit. And only if the inter­est rate on invest­ment is pos­i­tive does this hap­pen. Not only that, but peo­ple have to expect that they’ll live to see the rewards of their invest­ment. Mod­eled Behav­ior cites Africa as one exam­ple of failed growth, and I’ll help to explain that a bit more.

Say the real inter­est rate is r over some period, that is, if you invest a dol­lar today, you get (1 + r) dol­lars after one period. Now say that there’s an AIDS epi­demic and your prob­a­bil­ity of sur­vival to the end of the period is only p. So what’s that return on invest­ment really worth to you? Just p(1 + r), which is less than it would have been oth­er­wise. So invest­ment should be lower. Now we can’t say that peo­ple in Africa are some­how stu­pid or irra­tional or greedy because they’re not invest­ing — in fact, given their sit­u­a­tion, they’re prob­a­bly mak­ing very good (non)investment decisions.

How­ever, this expla­na­tion implies a feed­back effect. How are con­di­tions going to get any bet­ter if nobody invests? So  we might find a role for human­i­tar­ian aid, but the model also points us in a good direc­tion for it. That is, peo­ple are already over­in­vest­ing in con­sump­tion, so pro­vid­ing more food prob­a­bly won’t be too help­ful if we want to spur long-​​run growth. But grad­ual infra­struc­ture invest­ments won’t do much either, because they won’t  raise the sur­vival rate or the inter­est rate far enough that nor­mal Africans start invest­ing their own money. No; what is needed is a mas­sive one-​​time shock that breaks the cycle and encour­ages invest­ment after invest­ment. It will prob­a­bly even be cheaper in the long run — as the say­ing goes, “teach a man to fish…”