Why Culture Matters

After being scolded by the baristas for doing a crappy job, the Manager dug up her emails to recover the yet-to-be-posted article submitted by one of our favorite guest hosts, Roby. You see, Roby complained that his submission about “toilets and culture” was never posted here on the Café with nary an acknowledgment from the management, which shows just constipated (sorry, can’t help it) our “review” process is (hint: it involves email forwarding and little else).

The Manager finally found the said submission, originally received by the Café in December 2007. The only problem is, instead of “toilets and culture” the post was more about “table manners and culture”. There may be confusion between things that are going in one end and going out the other end, that’s understandable (happens to the Manager all the time). In any case, the post is indeed very relevant to A.P.’s toilet contribution. So here it is, without further ado, an excellent rejoinder.

- Kate, the remorseful Manager

Why Culture Matters

by Roby

It is common to put culture and the concept of economic man in a diametrical term. Taking the risk of oversimplification, the debate can be summarized as follow. The cultural argument argues that people behaviors are largely determined by cultural scripts, not by rational cost-benefit calculations. On the other hand, economic argument insists that individual decisions are independent of cultural factors.

Here I would like to argue that the picture of economic men is still plausible in cultural analysis and culture is a necessary prerequisite for rational calculations.

The key here is to see culture as a toolbox. That is as a set of tools that are accessible for solving problems. People face problems in their daily lives and use whatever they have in their toolboxes to solve the problems. Once they have picked a tool, they can use it in a highly rational way. This rational calculation, however, is only possible when a person has chosen a tool.

For example, imagine a group of people who use their hands when they are eating and another group who use utensils. Now because of health concern, we want to make those who use their hands to switch to use spoons and forks. Economists tend to jump to the conclusion that the whole problem can be solved by finding the right incentive. As they soon found out, however, the former group did not switch even though they completely understood the health benefit of using spoons and forks.

The problem here is that the first group does not consider spoons and forks as eating tools. For them, eating using spoons and forks is as absurd as, say, eating bugs. They just don't do that - despite the fact that bugs have nutritional values. Therefore, persuasion, bargaining, socialization and inspiration can be as much useful as incentive.

If we see culture as tools, then the rational calculation only applicable to available tools. We cannot perform cost-benefit analysis on the tools that are not part of ones' toolbox. Therefore rationality is local instead of global. It is in this sense culture matters for economic analysis. On the other hand, cultural analysis would benefit by applying rational choice to understand behavior in a given context.

Network and Inequality

And now our sociologist friend, Roby shows us that inequality can be a manifestation more of network effect than of prejudice (or discrimination for that matter)...

-- Manager

Network and Inequality
by Roby

An asset-management company has this problem:

The business of asset-management companies is to attract rich individuals to give up their money so they can be managed by these companies. The sales people rely on their own social networks to access these high net worth individuals; and they are compensated based on how much money they can bring to the company.

A problem arises when there is an allegation that the company implements a disriminatory practice in its compensation structure. The company has several Blacks in its sales group and their earnings are consistently lower than their White counterparts. Thus, the company is accused of discrimination, and furthermore this case has been exemplified as a discrimination practice that is rampant in the corporate world and responsible for the high income inequality
between Blacks and Whites.

The argument here is that discrimination - with respect to racial prejudice in this case - is the main cause of inequality.

If we take a closer look, however, we will find out that those Black employee come from lower Social Economic Status (SES) than their White colleagues. Since SES affects one's social network greatly (rich people know more rich people than poor people and vice versa), interactions between people within the same SES groups are more likely than interactions across SES groups.

What happen is that the compensation (incentive) structure only reveals the underlying social structure. Therefore, in this case, the inequality stems as a network effect; not as a form of discrimination.

There are two important points here. First, inequality can be a network effect that has less to do with individual prejudice or preference. Second, it is important to pay serious attention to the
relevant social structure in designing an incentive structure since disregarding social structure completely can lead to unintended and undesired consequences as illustrated in this case.

Microfinance, anyone?

Social networks or social capital is one of the topics have been discussed in this Cafe (even debated among its barristers). It is a topic that has been of a growing interest of some economists. Harvard's Economic Department even offers a course devoted specifically to this issue.

Roby, a sociologist, regular visitor of this Cafe, as well as close friend of the barristers, can be considered as the authority of this field. He sent us this piece about microfinance as a potential intersection for social scientists to study more about mechanism design problem. Although it is not the first time that microfinance is being discussed in the context of social network (this is one example, or here is a list of more serious stuffs), still it is interesting to see Roby's challenge will be answered in the Indonesian context.

Microfinance, anyone?
by Roby

I am one of the fans of this blog but so far I only contribute by writing rather negative comments. In this post I want to share something positive.

As you may know, I am not an economist but some of my colleagues here are economists or working on topics that are also of interest for economists. I must say that I like economics but can't stomach some economists especially when they start to pretend to understand something and come up with "explanations" that actually don't explain anything. Having said that, I do think economists have succeeded in creating some useful arsenals and insights to understand human behavior.

Recently my boss left his tenured position to join the microeconomic research group of a leading web company. Since his departure, I regularly come to his new office and meet a lot of interesting people with different background, including economists. I try to know more about the kinds of interdisciplinary work where computer scientists, physicists, mathematicians, economists, psychologists and sociologist are working together.

Social scientists and economists are hired by major internet firms to help those firms to understand user behavior, from buying or selling products to hanging out in social networking sites. Armed with the understanding, these firms hope they can find better ways to monetize the services they offer through their websites. From the scientific point of view, access to huge data of human interactions and relatively "unlimited" resources (in comparison to resources in
academia) give us the chance to study human dynamics in unprecedentedscale and detail.

All of these are interesting but these kinds of work are not very relevant to Indonesia. Although the Internet in Indonesia is growing, the scale of the usage – in terms of business or social – won't be even near the usage in the US anytime soon.

However, I think there is an area in particular in which similar basic ideas can be applied in Indonesia: the microfinance industry.

I know next to nothing about microfinance, but here is what I think. To my understanding, microfinance is about figuring out ways how to do business with people who are traditionally unbankable. They are usually poor people in rural area. They are untouched by traditional
finance system because it is too hard to assess their credit worthiness or it's simply too risky.

One way to overcome the problem is to deal them collectively instead of individually. The idea is to utilize some group mechanisms to minimize the risk: group members would make sure everyone to repay the loan and hence guarantee continued access to lenders.

We can approach the problem as an interdisciplinary mechanism design problem: social scientists and social psychologists could study the relevant properties of group dynamics in (rural) Indonesia, then, together with economists, design how incentives could be structured
in a particular setting.

The project, I think, is intellectually interesting and would be easy to gain support since everyone cares about the poor in Indonesia.

Is this possible?