The Effects of Chinese Culture on Chinese Economic Behavior Qingjin Zhang Institute of Economics，Shandong Academy of Social Sciences Ping Shu College of Economics，Nankai University

Ⅰ. Introduction

The earliest investigation of the relationship between culture and economic performance may be Weber’s The Protestant Ethic and The Spirit of Capitalism, which ascribes the formation of capitalist society to Protestant ethics.^A Following this work, the relationship between religion and economic development received substantial attention in the literature. The study of the economics of religion was thus born (for a review on economics of religion, see Iannaccone, 1988). Recent literature includes Kuran (2004a), who ascribes the underdevelopment of the Middle East to some elements of Islam, such as inheritance law, avoidance of interest and the deficient perception on corporations; Guiso et al. (2003) compares the economic attitudes of different religions (Catholic, Protestant, Jew, Muslin, Hindu, Buddhist) towards cooperation, the government, working women, legal rules, thriftiness, and the market economy, but they do not include Confucianism in their analysis; Lipford and Tollison (2002) studied the relationship between religious participation and income level and argued that there are two kinds of treasure: “treasure in heaven” and “treasure on earth”.

The relationship between culture and economic development is also probed in the literature. Berger agrees with Weber and admits that there is a crucial link between culture and the economy.^B Guiso et al. (2006) argue that culture has effects on economic growth through its influence on people’s preference and beliefs. Greif (1994) believes that cultural beliefs are significant for the formation of different social organizations and for the distinction of different trajectories of institutional structure in the Muslim world and Latin world. Kuran (2004b) thinks that culture plays a role in economic development, even if the roles are different in different environment.

Literature on new institutional economics should not be ignored in studying the relationship between culture and economic development, for the concept of culture and the definition of institution is quite similar. ^ANorth (1994) investigated the link between ideology and economic performance. He showed that a good ideology can reduce “free riding” and thus decrease transaction costs. Chueng (2002) believes that there is a link between economic performance and its environment; he also tried to connect western Christianity and Chinese filial piety with the concept of transaction costs. Obviously, the concept of transaction costs is useful in studying the economic effects of culture.

Zhang (2006) believes that institutions can be classified into two kinds: institutions based on strong preference and those on weak preference. Strong/weak preference is defined as the preference closely/less related with competition efficiency. As the concept of culture is similar to the concept of institutions in economics, we can also sort the cultural components into two parts: one part is the cultural components having (significant) effects on economic development and the other part, having little effect on economic development.

There has been a continuous reflection on traditional Chinese culture among Chinese intellectuals since western culture invaded China. Liang Qichao criticized the Chinese personality as being servile, hypocritical, selfish and timid and he regarded these collective blemishes of the Chinese personality as fundamentally responsible for the weakness and poverty of the country. ^BLiang ([1990a, 1990b) and Lin (2000) have a similar argument with Liang Qichao, Liang ( 1990b, pp.38-43) believed that the features of Chinese economic development is formed by Chinese culture. The rural reconstruction done by Yan Yangchu in Dingxian, Hebei, is aimed to cure the main chronic illness of Chinese-“ignorance, poverty, weakness and selfishness”. ^AHowever, none of them articulate the direct link between traditional Chinese culture and Chinese economic performance. Recently, some analysis of Chinese culture has been done by economists like Lin Yifu and Wei Sen. For example, Lin (2003) admits that there are some factors among the components of Chinese culture that hinder economic growth. But he insists that economic growth is dominant relative to culture and cultural progress could be achieved with economic growth. However, he neglects the argument that cultural progress is relatively slow, and existing culture has effects on economic growth, either positive or negative. He also fails to show which cultural factors need improvement. With the comparison of the trajectory of institutional change between the western world and China, Wei (2005) believes that China stagnated in conventional society and failed to evolve into a modern society characterized by legal constitutionalization. But he also lacks detailed articulation on the link between Chinese economic growth and cultural factors. Interesting enough, the relationship between traditional Chinese culture and Chinese economic performance receives attention from entrepreneurs. Li Dongsheng, the chairman of TCL Group, believes that the phenomenon that the integration of Chinese enterprises is not as good as foreign enterprises can be traced as far as to the Chinese culture. ^B

The pattern of Chinese economic development has distinctive features relative to the economy of the western world, even to that of Japan and Korea. For example, most successful Chinese firms are family based; the path of economic reform taken by China is very different from that taken by Russia and other Eastern European countries. China is a country with a long history and unique culture, and Chinese have unique behavior; these have been widely recognized. ^CBut systematic and theoretical analysis is still in short supply. For example, almost everyone knows that Chinese are good at struggling individually and poor at cooperative actions, but there is no analysis to show these effects on economic growth.

This paper intends to interpret some important phenomena of Chinese firms and Chinese economic development by discussing some important features of traditional Chinese culture which have a significant influence on economic growth. This paper argues that culture influences economic development through two paths: one is that some cultural factors, as certain institutions, have effects on cost, especially transaction costs. A good institution within a firm could directly reduce production costs, and a good ideology could decrease “free riding” incentives and thus reduce social transaction costs. Chinese have a weak sense for legal obedience and strong inclination for “free riding”; this would increase social transaction costs. Another point is that culture forms people’s preferences and influences people’s choices. For example, the broad economic success of East Asia is partly a result of people’s strong preference for saving; the family centered tradition of Chinese society results in Chinese features such as being good at individual struggles but poor at cooperation, the alienation between civil society and government, a strong sense for competition and a weak sense for legal obedience, seeing material wealth as important and neglecting scientific innovation.

The structure of this paper is as follows: the second part sets out the main features of traditional Chinese culture which have economic significance. The third part analyzes these features with respect to economic ideas; the fourth part shows Chinese preference in economic behavior; and the fifth, the distinctive features of Chinese firms. The last part is the conclusion.
Ⅱ The main features of traditional Chinese culture

To discuss Chinese culture, we need to distinguish two different parts: elite culture and mass culture. The difference of these two parts can be seen from the following examples: first, god and ghost exist in mass culture, but not in elite culture; second, although “loyalty” and “filial piety” are regarded as the core of Chinese culture, but “loyalty” has significance only in elite culture, not in mass culture. Filial piety is the only core value of the latter. ^ABecause the mass is the main body of economic activities, the more relevant content here is mass culture.

To articulate the features of traditional Chinese culture, comparison of culture between China and other countries is unavoidable. From the idea of “Zhong Ti Xi Yong” (Chinese culture is the core and western culture is technique) to the combating tradition^B in the May Fourth Movement in 1919, and then to the recent “popularity of national culture studies” (Guo Xue Re)^C, the comparison between Chinese culture and western culture has never stopped in modern times. Though we have no clear answer about which is better between the two kinds of cultures, but the difference and the gap between China and western countries can not be ignored, and the effects of cultural difference on different economic patterns should not be denied. As the first step, we want to show the main features of Chinese culture, which have influenced the economic development of China.

1. 
   Ethics centered on blood relationships and the weakness of socialization
   

Chinese culture is centered on the family. This is the conclusion not only coming from the comparison to western culture, but also to Japanese culture. Zhang (1993) argues that the concept of the Chinese family contains of three levels: family, clan and patriarchal clan, and they are combined together by blood relationships (pp.22-23). But one character of Japanese family system is the weakness of blood relationships. He argues that while “Chinese family is an association of blood relationship, Japanese ‘family’ is an ‘institute’ with some characteristics of a financial group” (p.27). The family is a group that is operated by different generations in an industry. It offers services for payment. It is like a company.” Therefore, we could say that Japanese family is an epitome of the organizational structure of Japanese society.

From the above we can know that valuing family only is a unique feature of traditional Chinese culture.
2. The local autonomy of traditional Chinese society

Conforming with family centered Chinese ideology, traditional Chinese culture was strongly autonomous. Liang (1990b）argues that, In China, different from the western countries in which people used to ask help from the government when facing difficulties like unemployment, the sustaining of the social order and the operating of society depend on society itself rather than the state(p.72, 84), the communication between the civil society and the government is very sparse (p.158). He believes that in traditional Chinese society, there was only the idea of the world, no idea of state. Weber（1995，pp.145-150）also argues that traditional Chinese society is autonomous.

Historically, the economic function of Chinese governments was confined to keeping the market order and monopolizing some profitable or significant industries, like salt and iron. ^AThe economic role of the Chinese government is something similar to that promoted by liberal economists.

In fact, governmental power extended only to the county level in traditional China; its main function was for tax collection and juridical judgment. Even for criminal cases, the government would not intervene without lawsuits. Civil affairs were completely autonomous.^B Liang Qichao described the autonomous situation in his hometown as the following: with the autonomy in countryside, lawsuits rarely happen; people have almost no communication with local government. ^CDuara’s（2004，p. 2） research shows that, until Yihetuan Movement was repressed, the government of the Qing Dynasty began to extend its power to the township level so as to levy more tax to pay huge indemnities.

The interesting thing is that, up to now, local autonomy is still effective in some rural areas in China. According to a report in the Legal Report Daily, a TV program from CCTV, Zhou Yuzhong, a farmer in Guangxi Autonomous Region, was accused of sexual harassment by a woman. He had to accept a “clan punishment” decided by elders of his village rather than a legal punishment.^D Another case from the Southern Weekly (Nanfang Zhoumo) shows the same story: When reporter asked a man named Li Ping, whose daughter was beaten and killed in primary school, whether or not he would ask for help from the policeman, Li replied that people used to seek help from Elders Association in his village when having difficulties.^E
3. Utilitarianism

Weber（1995，p.280）regards Confucianism to be the most secular ethics in the world. About the way of thinking, Nakamura (1990) believes that Chinese nationality is usually based on the thinking way of generally known utilitarianism (p.206); because Chinese only concern about the ethics and politics needed in daily life, some aspect of Chinese ideology could be called “realism”(p.207); He also believes that Chinese people concern carnal desire and material desire more than spiritual things. Even the Buddhism, which is from India, was changed by Chinese utilitarianism after it was introduced into China (p.209).

With cultural comparisons among China, India and the western world, Liang (1989) shows that Chinese culture is very weak in religion and pays less attention to knowledge; almost all its philosophy is about life and secular things.(p.396) Confucius had a well-known saying: “How can we understand death before we understand life”. Liang also believes that “living” is the most important idea for Confucianism. (p.248)

Zhang points out (2005) that, while the behaviors of people in religious societies are constrained by dual utilities: afterlife utility and secular utility, Chinese people are only constrained by one kind of utility: secular utility, because there is no religious tradition in China.

Liang (1990b) insists that the major difference between Chinese and western culture is religion: religion is really the watershed between Chinese and western culture (p.52). Actually, religion is the watershed not only between Chinese and western culture, but also between Chinese and all religious cultures. Therefore, only through comparison to religious cultures can we truly understand Chinese culture.

In religious societies, people have two utilities: afterlife utility and secular utility. ^AOne needs to input in religious activities to gain afterlife utility and input in market activities to gain secular utility. We assume that time input is identical in all kinds of activities, whether they are secular or spiritual. The total resource constraint is the total amount of an individual’s available time. We also assume that both secular utility and afterlife utility are a positive function of time. The reason that secular utility is a decreasing function of time input is easy to understand, for the assumption of diminishing marginal utility of income is regarded by most people as reasonable^B. The decreasing marginal utility of religious input comes from the idea that religious utility can’t be deposited: utility of one worship or consecration can’t be used throughout a whole lifetime; an individual is required to participate religious activities continuously. People’s utility function must therefore be the sum of afterlife utility and secular utility. But for Chinese people, no afterlife utility is meaningful, so people’s total utility only consists of secular utility.

The difference of the different functions between Chinese and religious people is very important, for different utility function may result in different consumption preferences and behavior preferences. The unity of the Chinese utility function means that Chinese people value secular consumption only, and this preference can also be seen in the developing pattern of Chinese enterprises.

Since afterlife utility is spiritual, the gain of this utility is in the cost that one has to subject to some religious doctrines and moral constraints. However, Chinese people do not have such a cost. Zhang (2005) decomposes the values of afterlife utility and secular utility. According to Zhang, secular utility can be decomposed into values like material consumption, entrepreneurship, risk taking, creativity, selfishness and incentives for committing crime; afterlife utility can be decomposed into values such as spiritual happiness, altruism, legal obedience, cooperation and expansion. Now, one more value must be added to the afterlife utility: trust. Guiso et al. (2006) compare the degree of trust among different religions. Unfortunately, they did not include Confucianism in their analysis. The trust level in Chinese culture might be very low compared to that in other religious cultures (see the detailed discussion in the following section). Some values of afterlife utility have the effect of offsetting the negative aspects of secular utility. For example, altruism and legal obedience could decrease the inclination towards committing crime or free riding. Because of the lack of afterlife utility, we will argue that the inclination towards crime and free riding is relatively strong among Chinese.

Furthermore, when the increase of secular utility is limited by such issue as technology stagnation, the total utility of Chinese people might be less than religion believers in other societies. This was confirmed by an investigation by Ng (2002), who found that people in East Asia enjoy less happiness.

Social values in society certainly include economic attitudes. Guiso et al. (2006) compared the different economic attitudes between the different religions of Catholic, Protestant, Buddhism, Judaism, Islam and Hinduism. It is a regret that Confucianism is less analyzed. This paper tries to make up for this omission.

Determined by the distinct features of traditional Chinese culture, such as the lack of afterlife, we believe that the distinctive economic attitudes embodied in traditional Chinese culture include the following: preferring individual struggle and belittling cooperation; the alienation of civil society from government; ideology strong in competition but weak in institutional obedience; valuing wealth accumulation and overlooking scientific innovation. The following sector provides the details:

1. 
   Preferring individual struggle and belittling cooperation
   

Nakamura (1990, pp.222-225) believes that Chinese culture promotes inclination to egoism, and Chinese have a weak awareness of both nation and state. With the comparison between Chinese and Japanese culture, Zhang (1993, p.37) shows that the life attitude and life philosophy of Chinese is based on individualism, but that of Japanese is based on collectivism.

This feature comes from the ethics centered on blood relationships and the weakness of sociality. Just as Liang criticized, the lack of religion and organization is prevalent in traditional Chinese culture. Without religious faith, there is no social value beyond the family or clan. Because of the shortage of sociality and social organization, there is no custom for social cooperation in traditional Chinese society. Actually in traditional Chinese society, there is no need for social cooperation. Almost all business can be done by family or clan members, and all problems can be solved within the clan.

Another reason accounting for Chinese preferring individual struggle and belittling cooperation is institutional. Institutionally, the concept of social equality is very helpful for social cooperation. But this concept is very weak in traditional China. Even though the clan is a kind of organization, people could not enjoy equality within the clan. The individual’s position within a clan was determined by blood relationships, which were fixed by birth. Furthermore, cooperation needs legal protection. But the legal system in traditional China was not good enough for cooperation beyond the family or clan. Traditional China is more autonomous than legally administrated. Chinese people used to trust others less, especially strangers. This was confirmed by Weber and Lin. Lin (2000,p.161) said that Chinese used to treat familiar people with friendship, but used to be hostile to strangers. Weber (1995, p.284) said that the distrust among Chinese people is visible everywhere, which is in striking contrast with Puritan’s sincerity. Without a good legal administration, there was a high risk in cooperating with strangers. To reduce risk, cooperation was usually limited to local areas. A good example is that the Shanxi commercial firms that prospered in the Ming and Qing Dynasties only hired employees from local areas.( See Wang & Ma, 2001, especially pp.276-280).