Canan KORKMAZ Mustafa SERBEST Mert AKTAŞ Cultural Beliefs and Organization of the Society: A theoretical Reflection on Collectivist and Individualist Societies Avner Grief Canan KORKMAZ Mustafa SERBEST Mert AKTAŞ

What effects a society’s economic performance and growth? Cultural Beliefs Societal Organization Organization of the society: Legal, economic, political, social and moral enforcement institutions Social constructs, information transformation and coordination mechanisms

Why do societies fail to adopt the organization of more economically successful ones?

Collectivist vs. Individualist GROWTH LEVEL DEVELOPING DEVELOPED SOCIAL STRUCTURE SEGREGATED INTEGRATED INFORMATION TRANSMISSION INTERACTION BETWEEN PEOPLE IN SAME GROUP INTERACTION AMONG PEOPLE FROM DIFFERENT GROUPS CONTRACT ENFORCEMENT ‘INFORMAL’ INSTITUTIONS SPECIALIZED ORGANIZATIONS RESEMBLES 11TH Century- MAGHRIBI TRADERS MUSLIM WORLD 12TH CENTURY GENOESE TRADERS LATIN WORLD

Cultural Beliefs The ideas and thoughts common to several individuals that govern interaction- between these people, their gods and other groups. Integral part of institutions and the evolution and persistence of diverse social organizations

CULTURAL BELIEFS INFLUENCE: Expectations of ability to gain Societal organization Moral enforcement mechanisms

The Maghribis and Genoese faced: A similar environment Comparable naval technology Similar goods Their efficiency of trade depended on their ability to mitigate an organizational problem related to a specific problem, the provision of the services required for handling a merchant’s goods abroad Trade was based on agency relations among non-family members

Medieval Trade Routes

AGENCY RELATIONS How each group mitigated the merchant- agent commitment problem One-Side Prisoner’s Dilemma game M- merchants, A-Agents (M<A) Infinite number of periods in a game β- time discount factor of agents Φu – reservation utility of agents 1 Merchant 1 Agent Matching is random

A merchant who does not hire an agent receives κ>0 A merchant who hires an agent decides what wage (W>0) to offer to the agent An employed agent decides to whether to be honest or to cheat A h c γ-w 0 (Merchant’s payoff) w α>Φu ( Agent’s payoff) γ

σ – Probability that a merchant is forced to terminate agency relations In neither group was wage a function of political or legal considerations

Proposition 1 hh -The probability that an honest agent will will be hired again hc - The probability that a cheater agent will be hired again The lowest wage for which agent’s best response is to play is; W*=w(β, hh, hc, σ,φu, α) > φu

Agency Relations- Individualist vs Collectivist Societies A merchant hires an unemployed agent for a wage W*, whom he rehires as long as cheating or forced separation does not occur. Under Individualist Strategy- a merchant randomly hires an agent Under Collectivist Strategy- a merchant randomly hires among the unemployed agents who have never cheated

Proposition 2 Assuming there is an perfect equilibrium on the one side prisoner’s dilemma game (γ -κ≥0) Under Individualist Strategy; hh = hc Under Collectivist Strategy hh > hc

Investing in Information Investing requires ∧ each period, in return for which the merchant learns the private information of all agents Under the individualist equilibrium; history has no value- no merchant will invest Under the collectivist equilibrium; merchants will invest since the optimal wage is a function of an agent’s history

Proposition 3 W*-i – Minimum wage that merchant i has to pay his agent if only he does not invest W*c - Equilibrium wage under the collectivist strategy in the full information game W*-i - W*c ≥ ∧ Invest & Collectivist Strategy is an equilibrium Not to invest & Individualist Strategy is an equilibrium

Origins of Diverse Cultural Beliefs Maghribis Musta’ribun, Umma All Israel is responsibe for all members Immigrant group Genoese Christianity Establisment contract High level of immigration to Genoa

Punishment and Investment in Information Magribis Informative letters Small group, common language and religion Collective punishment Genoese Jelaous of their business secrets Individual punishment

Social Structures Two types 1) Vertical social structure Merchant or agent 2) Horizontal social structure Merchant and agent

Social Structures Horizontal Capital as a bond Cheating decreases the future return on capital Collective cultural beliefs Vertical Cheating does not decrease capital’s rate of return High reservation utility of merchants Individualist cultural beliefs

𝑉 ℎ 𝑎 + (𝛾− 𝑊 ∗ ) (1−𝛽) ≥𝛼+𝛾− 𝑊 ∗ + 𝑉 𝑐 𝑚 + 𝑉 𝑐 𝑎 For preventing a merchant from cheating 𝑉 ℎ 𝑎 + (𝛾− 𝑊 ∗ ) (1−𝛽) ≥𝛼+𝛾− 𝑊 ∗ + 𝑉 𝑐 𝑚 + 𝑉 𝑐 𝑎 For preventing an agent from cheating 𝑉 ℎ 𝑎 ≥𝛼+ 𝑉 𝑐 𝑎 For collectivist merchant (𝛾− 𝑊 ∗ ) (1−𝛽) >𝛾− 𝑊 ∗ + 𝑉 𝑐 𝑚 For individualist merchant (𝛾− 𝑊 ∗ ) (1−𝛽) =𝛾− 𝑊 ∗ + 𝑉 𝑐 𝑚

Social Structures of Magribis and Genoeses No mechant and agent classes Agency measure 70% is between 0 and1 Partnerships and formal friendships Genoese Merchant class : nobles and rich men Agent class: poor men Agency measure 11% is between 0 and 1 Commenda contracts Agency Measure : 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑡𝑖𝑚𝑒𝑠 𝑎 𝑡𝑟𝑎𝑑𝑒𝑟 𝑜𝑝𝑒𝑟𝑎𝑡𝑒𝑠 𝑎𝑠 𝑎𝑔𝑒𝑛𝑡 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑡𝑖𝑚𝑒𝑠 𝑎 𝑡𝑟𝑎𝑑𝑒𝑟 𝑜𝑝𝑒𝑟𝑎𝑡𝑒𝑠 𝑎𝑠 𝑎𝑔𝑒𝑛𝑡 𝑜𝑟 𝑚𝑒𝑟𝑐ℎ𝑎𝑛𝑡

Wealth Distribution - Vertical Better opportunity for upward mobility Declining concentration of wealth over the time Growing wealth of the commoners Demand greater say in politics

Social Structures Two types 1) Segregated society Trade only with each other 2) Integrated society Trade with other groups

Social Structures of Magribis and Genoeses Segregated Only 2 out of 97 were Muslim Not religious, also didn’t traded with Italian Jewishes. Forced by Egypt ruler to trade and vanished Genoese Integrated % 18.3 of agents were non-Genoese

Social Structures Different responses to same exogenous change in the rules of game To hire an agent from own economy, who sails or emigrates abroad To hire an agent from native economy Efficiency against profitability

An Example Two identical economies integrated μ : probability of collective punishment to intereconomy relations η : probability of collective punishment to a honest agent in intereconomy relations

Proposition 4 If prechange economies are collectivist, new economy will be segregated if μ ≠ 1 and if η ≠ 0. If prechange economies are individualist, new economy will be integrated for all η and μ.

Relations between a collectivist and an individualist economy A collectivist merchants doesn’t initiate intereconomy relations. Wages will increase. An individual merchant may find intereconomy relations optimal. If η = 0 and μ = 0.

Proposition 5 For any η and μ, collectivist merchants will not initiate intereconomy relations. Necessary condition for segragation is μ<η. Sufficient condition for integration is μ≥η.

Organizational Evolution Collectivist cultural beliefs led to: Self-enforcing collective punishment Horizontal agency relations Segregation In-group social communication network

Organizational Evolution Individualist cultural beliefs led to: Vertical and integrated social structure Relatively low level of communication No economic self-enforcing collective punishment

Legal System Maghribis Genoese Informal contracts Informal code of conduct Attempts to resolve disputes informally Genoese Extensive legal system for the contracts Customary contract law Permanent courts for trade affairs

Organizational Structure When the number of traders was low, each trader’s future gain was sufficient to respect each other’s decisions. When it is high, an enforcement mechanism is required ‘‘Embargo’’ Compliance with embargo decisions: -Informal enforcement mechanisms in Maghribi society -Specialized organizations in Genoese

Example: Informal Enforcement Mechanism The Muslim ruler of Sicily abused the rights of some Maghribi traders. An embargo was organized with an informal letter. ‘‘Hold the hands of our friends not to send to Sicily even one dirham.’’ Sailing to Tunisia, not to Sicily.

Example: Formal Enforcement Mechanism In 1340, Genoese traders were abused by the ruler of Tabriz. A ‘‘devetum’’ was declared against the city. A Genoese merchant fell sick in a travel to China and turned back by the shortest route. Because he passed through Tabriz, he was exposed to justify it in the formal court.

Shipping process in the Genoese A receipt for the goods that the merchant deposited: bill of lading Sent by the merchant to his overseas agent. The letter of advice was sent after the ship arrived by the ship’s scribe to the consignee.

Shipping process in the Maghribis Rejected the bill and solved the organizational problems in informal ways. Handshake Trust Watching each other’s goods

Differences in organizations related to agency relations Proposition 1: probability of forced separation(σ) , optimal wage Prob. of rehiring cheaters and prob. of rehiring honest agents , gain from changing the prob. of forced separation Collectivist merchants have no incentive to reduce the forced separation. Individualists established organizations to reduce it.

Evolution of family relations The ongoing business was restricted with the father’s lifetime in the Maghribis. Emerging family firms among the Genoese in the 13th century.

Uneven development of the two societies Maghribis: segregation, collective punishment, horizontal relations no gain by introducing organizations Genoese: -individualist cultural beliefs -increased security of employment -growing family firms with infinite life- span

Family Firms Modern companies Organizational macroinventions of the family firms Microinventions among the Italians Sale of the shares to the non-family members Tradable share required a suitable market Stock market were developed Information transmission, accounting procedures

Conclusions Two society constrained by the same technology and environment and facing the same organizational problem But different cultural, political and social histories. Diverse trajectories of societal organization related to different cultural beliefs

Conclusions Maghribi Society: Collectivist cultural beliefs Segregation, horizontal interactions, share of information A societal organization based on beliefs and trust

Conclusions Genoese Society: Individualist beliefs Low level of communication Second party enforcement mechanism Societal structure based on legal, political and economic organization

Efficiency of the two systems The collectivist system is more efficient in supporting intraeconomy agency relations However, Italians drove the Muslim traders out of the Mediterranean Maghribis symbolize modern developing countries whereas Genoese symbolize the developed West In the long run, developed institutions and efficiency gains in the Genoese society

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