Institutions and cultural capacity: A systems perspective

Societies rely on a mixture of markets, hierarchies, and democratic institutions to allocate resources, make decisions, and establish order. The success of any one institution depends on its design features, the nature of the task, and society’s cultural capacities. They also crucially depend on one another. In this paper, we model institutions and cultural capacities as interdependent. We define cultural-institutional equilibria as configurations in which cultural capacities are consistent with institutional choices, and institutional choices are optimal given tasks and culture. There is a disconnect between producing and leveraging cultural capacity. We consider the implications of this disconnect. In particular, some institutions produce generic cultural capacity, generating positive externalities that improve the performance of other institutions in society, while others are primarily leveragers, taking advantage of the cultural capacity created by other institutions.