The Psychology of Economic Growth

Much of the worldwide economic and political debate these days circle around ensuring continued growth—which, it's hoped, will help various countries escape the global downturn, create more jobs and finance the rising cost of social services. What the conversation overlooks is that it turns out some countries might not want to grow. At least that's what Meinhard Miegel, director of the Bonn-based think tank Denkwerk Zukunft, argues in a book just published in May. Analyzing a mass of survey data, Miegel finds that while two thirds of Germans favor economic growth in principle, only about a sixth of them are willing to work for it. The rest value leisure, safety and early retirement over work and achievement. Given these attitudes, says Miegel, the popular idea that a low-birthrate country like Germany can grow its way out of the rising costs associated with an aging population "is reckless and built on sand."

Miegel might be unduly pessimistic, but he is part of a growing movement of experts who argue that economic growth is actually dependent on a state of mind. In fact, the idea goes back to Max Weber, the German sociologist who argued more than a century ago that England's Protestant work ethic gave rise to modern capitalism. Today's Weberians aren't sociologists wielding historical arguments, however, but economists, pollsters and biologists working with actual numbers and data sets. Their interest in how personal attitudes might affect growth is part of the broader reinvention of economics, in which the classical view—that people make rational choices in a world of perfect information—is coming under increased scrutiny. The movement also reflects rising concern over whether growth can be increased—especially now with the ugly specter of stagflation in large parts of the globe.

It's certainly clear, looking at the developing world, that economic success requires good government policy such as ensuring property rights, access to start-up capital and a bureaucracy that doesn't stand in the way. But new research suggests that policy may not be the most important thing. Edmund Phelps, a Columbia University economist and Nobel laureate, discovered in a 2006 study that attitudes toward markets, work and risk-taking—as measured by a number of international surveys—are significantly more powerful in explaining the variation in countries' actual economic performance than the traditional factors economists have looked at, including tax rates, social spending and labor-market regulation. Now, he is looking at how a more dynamic economy, in turn, raises the level of happiness and job satisfaction. Another recent study, by the Cambridge, Massachusetts-based Monitor Group, looked at nine countries from the United States, to Sweden, to Singapore, and found a strong correlation between attitudes about entrepreneurship and the rate of business creation. The researchers found that attitudes explain 40 percent of the variation in start-up and company-growth rates—the strongest correlation of any of the 31 indicators they tested, including the availability of capital, the level of R&D funding and the ease of starting a business.

Of course, correlation isn't causality. But good policy doesn't fall from the sky, says Stefan Voigt, an economist at Germany's Marburg University. In a soon to-be-published study, he correlates differences in attitudes and values with business-friendly government decisions. "If voters have a strong preference for security and social justice and are envious of the better-off, that will be reflected in regulation and social welfare," he says.

So how do you turn more Germans into entrepreneurs? Monitor chairman Mark Fuller, who advises governments on economic policy, says one of the most effective ways to boost entrepreneurship and innovation is to use education to improve the cultural legitimacy of going into business. The government of Denmark, for example, is using Monitor's study to rewrite the curricula for primary and secondary schools (and teacher education) to focus on creativity, innovation and entrepreneurship. At many Danish schools, students are encouraged to start companies.

Another result of Denmark's new focus on attitudes was to reform the bankruptcy law. The aim, says Danish Economics Ministry official Anders Hoffman, is to lessen the social stigma associated with business failure and help raise the number of serial entrepreneurs. In France, where President Nicolas Sarkozy hopes to similarly boost the French entrepreneurship rate, critics have long complained that the education system trains the young to be suspicious of business. The Education Ministry has now ordered a review of books and curricula with the aim of improving economic knowledge and attitudes toward business.

Some researchers are taking the "growth is in the head" idea literally. The fast-developing science of "neuro-economics" looks at the brain patterns that occur when people make economic or financial decisions. Biologists at Rotterdam's Erasmus University and elsewhere are investigating the human genome, comparing the gene sets of successful entrepreneurs with those of non-entrepreneurs. The implications are fascinating—or scary, depending on your view. To name one, "in the future, banks might require a gene test along with the application for a business loan," says Roy Thurik, an Erasmus University economist. The era when business success and economic performance were just a matter of dollars and cents may be over for good.