B300B Policy Chapter 4 By: WASSIM ALWAN

culture, social norms and economics: some implication for policy

This chapter focuses mainly on The author presents two assumptions that most economic theorist based on: First: materialism and self-interest is embedded in much of economic theory Second: trust and social norms are important for the functioning the market

Policymakers should recognize that there are two main forms of capitalism: Low-trust capitalism: Exist in competitive market, It characterized with selfishness, materialists, impersonal and competitive form of social relation because both buyers and sellers concern is maximizing their interests while ignoring the welfare of others.

high-trust relation: trust and social norms are important for the functioning the market, therefore policy makers should create a system that maintain trust and act as coordinating mechanism instead of market, such mechanisms are: government, firms and business leadership, religion, family, cultural institution, media and political institutions.

Two assumptions that most economic theorist based on: 1) Selfishness and materialism of rational action in Low-trust capitalism: Most economists use the rational action model to explain the human behavior within the market, this model asserts that individual rank all alternatives, collect information, assess the feasibility of these alternatives and then select the best that suit their private interest. The previous complex information processing is managed by the principle of equilibrium mechanism, this principle assert that the expectation that individual form before they act is consistent with the action of other people, the equilibrium price is agreed by all individuals.

At the stage of transaction between consumer and producer no external authority such as government is organizing the transaction process. Neo-classical theory: market is the only mechanism that organizes the behavior of economic agents, their behaviour characterized by impersonal and competitive form of social relation; selfish individuals' only concern is maximizing their interests. Adam Smith introduced the economic concept of ‘Invisible hand’ to illustrate that market is an institution that acts as mechanism to coordinate people interaction rationally

High-trust culture and social norms in market interactions (in less competitive market): - Market failure resulted from lack of trust, selfishness and materialism of agents' interactions, i.e. when people play against each other to secure their interest at the expense of others. For example, with lack of trust, suppliers may break their contracts. - Therefore political leaders need to promote high trust culture; this culture would help sustaining cooperation betweens market agents. - Policy makers should encourage creating social mechanisms that generate trust and cooperation and help overcoming market failures, such social mechanisms are: business leadership, religion, family, cultural institution, media and political institutions.

The social basis of the market process 1) Law as coordinating mechanism: Cultural values like trust can be enforced by legal system; Law allowing people who can't trust each other to trust the law instead. Cheating can be eliminated when it covered by law system Law as a mechanism face obstacles: Law is a social institution and itself needs trust to sustain the system, and it can't work effectively when police and courts is corrupt. High operational cost to implement law mechanism; which is resulted from use of information and collecting evidence.

2) Society as a coordinating mechanism: Society mechanism in the form of peer regard and intermediation, it work best in small group, where there is stable membership and regular communication, Disadvantage: slow in responding to new circumstances that arise because any decision needs to consider different interests in one society.

3) Leadership as a coordinating mechanism: Leadership mechanism is more flexible because leader has the authority to exercise direction in dealing with unprecedented situation; his vision is personal and can be changed and reformulated to react quickly on environment threat and opportunity. Disadvantage: is that it may give over power upon others and reduce consultancy which lead to less information gathered from different sources

4) Firms as a social mechanism: Market is not the only coordinating mechanism also firms are alternative mechanisms, managers within firms make social interaction through sharing information in formal and informal meetings which enable them to make complex decisions. firms in the same industry not only compete but also cooperate at the same time, that is when lobbing for 'infant industry' protection or pressing for reducing restrictions that prevent growth of demand. Many commodity markets originate on collective innovation where group of people meet and agree to trade under certain rules.

5) Religion as social mechanism: Organized religion play an important role in directing emotion to support established beliefs such as when unify belief help to achieve economy of scale in the organization of charitable work. Religious belief give economic value on communities, these communities would attract people from outside who believe in this religion. communities with religion decay need to replace it with other expensive mechanisms such as strengthen their laws and promoting welfare policies in order to overcome economic crimes such as theft of property and cheating, but these are costly mechanisms

6) Entrepreneurship as social mechanism: entrepreneurship which is highly competitive and individualistic, but it can also be co-operative and familistic, that is when single entrepreneur face difficulties to what can he achieve, therefore he had to share vision and plan with other entrepreneurs in related line business to expand his business. Trust and cooperation between entrepreneurs could be increased when there is common schooling, religious or family links.

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