Why Mindset Matters More Than Institutions for Economic Growth

Many commentators emphasize the primary importance of institutions (e.g., the stock market and pension funds) for the growth of savings and investments.

I would add to this list educational, medical, and cultural institutions that are as self-sufficient as possible, the successful operation of which in the civilized world requires our savings.

And I am glad that after last year's Nobel Prize, society is keeping institutions in the focus of its attention.

But friends, there is this year's (!) Nobel Prize in Economics, whose main laureate, Professor Joel Mokyr, overturns this already familiar institutional logic.

Compared to institutional economists (e.g., North or Acemoglu), Mokyr asks a deeper question: why do societies at all introduce and maintain institutions that promote growth?

His answer: because the culture changed first.

Europe did not grow because it suddenly "discovered" good institutions. It grew because a culture of progress and useful knowledge was formed, which demanded such institutions and ensured their stability.

For Mokyr, culture is primary (the root cause), and institutions are secondary.

Mokyr considers culture—that is, beliefs about knowledge, progress, and innovation—to be the ultimate driver of long-term economic growth.

Culture determines whether societies value curiosity, tolerate dissent, and believe in the possibility of progress. It is these beliefs that shape the idea of what rules are considered legitimate, desirable, or even conceivable.

In Mokyr's terms, culture is the mental infrastructure of growth. Institutions are secondary (a supporting mechanism).

Institutions—laws, property rights, universities, patent systems—are of great importance, but only to the extent that they are supported by the culture of society.

The same formal institution can function in radically different ways under different cultural beliefs.

Institutions that protect innovation cannot survive if the culture perceives novelty as dangerous or immoral.

Mokyr explicitly states that institutions do not explain themselves—they rely on prior cultural acceptance.

Original