The Psychology of Economic Development

cropped-be-papers-wordleI find it annoying that Economics is regarded as a more advanced discipline than Psychology. For example, there is a Nobel Prize in Economics but not in Psychology; this is odd because the field of “behavioral economics” is nothing more than applied cognitive psychology. Several years ago, I started reading The Economist magazine in order to understand what the economists have to say about how to organize human affairs. The big question in economics concerns identifying the policies that are best suited to develop national economies. Therefore, if Economics is a useful discipline, then economists should have something to say about how to grow an economy. If they do, then we can take their (very important) message to sub-Saharan Africa, Cuba, or Venezuela.

The April 14th, 2018 issue of The Economist contains a startling admission: professional economists have no clue about how to promote economic development; specifically, economists have no idea why rich countries became rich in the first place. The problem is, economists study “structural factors” (e.g., tax policy, access to capital, property rights legislation)—objective features of government that can be quantified—and this is the wrong place to look for answers.Consequently, economists have no serious advice for poor countries—or anyone else.

The Economist magazine goes on to note that the most promising approach to understanding economic development is to study “…the ways in which culture and politics constrain economics…” This is because economic development depends on “…decisions about economic governance taken by…leaders, which will in turn be influenced by social and geo-political forces that economists scarcely understand and generally ignore.”

Three observations come immediately to mind. First, it seems to me that the challenge of developing a successful business is much the same as developing a successful economy although on a much smaller scale. Second, there is some consensus among psychologists about how to develop a successful business, and organizational psychology is all about how leaders make decisions regarding the economic governance of their businesses in response to the social and geo-political forces that economists generally ignore. And third, there are important differences in leadership effectiveness, which translate into important differences in organizational effectiveness. Specifically, leadership drives organizations, some leaders are better than others, and some organizations outperform others. Crucially, we can also evaluate leadership potential with our well-validated assessments—something economists cannot do.

It seems obvious that economic development depends on effective leadership. Effective leaders create cultures and build teams to implement plans and strategies that allow their organizations to outperform their competition. Some leaders do this better than others—and some cultures and visions produce better results than others. I know very little about leadership in post-WWII South Korea, Taiwan, or Hong Kong—all of which have developed successful economies—but Deng Xiaoping (1904-1997) in China and Lee Kuan Yew (1923-2015) in Singapore were largely responsible for the economic development of their countries through the plans, practices, and procedures they were able to implement.

As for the industrial revolution that made Western Europe and the northeastern United States rich, Hopper and Hopper (The Puritan Gift, 2009) suggest that a relatively coherent set of values (a particular culture) was the key to their rapid economic development. That is, the ruling elites in Western Europe and the New England colonies shared a set of values that, in conjunction with the development of new technology, were the key to their economic development. I would add that the potential leaders of the industrial revolution inherited productive cultures rather than (as is the case today) having to create them. The values that defined these cultures included being committed to a higher purpose, seeing financial success as a sign of progress toward realizing that purpose, and practicing a leadership style that minimized hierarchy, encouraged individual initiative, and persuaded people to work together.

But my point is, psychologists understand leadership and how effective leadership creates organizations that can outperform their competition. People innately respond to effective leadership because, as group living animals, they unconsciously understand that what is good for their group is good for them. That is to say, I believe psychologists know more about economic development than the economists. The problem concerns translating this knowledge into action—i.e., finding effective leaders who are dedicated to the common good rather than to self-enrichment.