Economic growth and economic development 173

Introduction to Modern Economic Growth
they are social choices. While laws and regulations are not directly chosen by individuals and some institutional arrangements may be historically persistent, in the
end the laws, policies and regulations under which a society lives are the choices of
the members of that society. If the members of the society collectively decide to
change them, they can change them. If institutions are a major fundamental cause
of economic growth and cross-country differences in economic performance, they can
be potentially reformed so as to achieve better outcomes. Such reforms may not be
easy, they may encounter a lot of opposition, and often we may not exactly know
which reforms will work. But they are still within the realm of the possible, and
further research might help us understand how such reforms with affect economic
incentives and how they can be implemented.
By culture, we refer to beliefs, values and preferences that influence individual
economic behavior. Differences in religious beliefs across societies are among the
clearest examples of cultural differences that may affect economic behavior. Differences in preferences, for example, regarding how important wealth is relative to
other status-generating activities and how patient individuals should be, might be
as important as or even more important than luck, geography and institutions in
affecting economic performance. Broadly speaking, culture can affect economic outcomes through two major channels. First, it can affect the willingness of individuals
to trade-off different activities or consumption today versus consumption tomorrow.
Via this channel, culture will influence societies’ occupational choices, market structure, saving rates and their willingness to accumulate physical and human capital.
Second, culture may also affect the degree of cooperation among individuals, and as
we will see later in the book, cooperation and trust can sometimes play an important
role in underpinning productive activities and thus affect the growth performance
of societies.
There is a clear parallel between institutions and culture. Both affect individual
behavior and both are important determinants of incentives. Nevertheless, a crucial
difference between the theories put into these two categories justifies their separation: while institutions are directly under the control of the members of the society,
in the sense that by changing the distribution of resources, constitutions, laws and
policies, individuals can influence the institutions under which they live, culture is a
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