The 2 economies
Imagine you’re waiting for a table in a busy restaurant. There’s a huge line of people. You ask the hostess how long it’ll take.
“About 30 minutes,” she says.
Meanwhile, there’s a table roped off in the back. It’s just sitting there, and no one is using it. You ask the hostess about it. “It’s reserved for a friend of the owner,” she says.
Then, that friend of the owner shows up with his dinner date. There’s a huge commotion as he walks in. Everyone turns and looks at him. The owner comes out and greets him and chats with him for a few minutes. Then, he ushers him to that back table, where he sits down. A waiter attends to him right away.
Meanwhile, you’re still waiting for your table, along with everyone else. And you’re getting hungry.
What just happened? How come this one guy gets special priviliges while a bunch of hungry paying customers have to wait?
After all, your money is just as good as the owner’s friend’s money. It’s not like the restaurant owner is gonna make more money by seating him first. In fact, if anything, he’s losing money, because he’s pissing off his customers.
But the owner’s friend has another type of currency: friendship. And that buys him a table.
The 2 economies
The owner’s friend got a table before you because he’s playing in a different economy than you.
You are playing in the market economy. You show up at the restaurant, you pay with cash, you say thank you, and you leave. You may or may not come back. The owner doesn’t know you, so you’re just a dollar sign to him.
But the owner’s friend is not just playing in the market economy. He is also playing in what I call the “cultural economy”.
Where the market economy runs on money, the cultural economy runs on friendship. When you’re friends with the owner, you can ask him to save you a table, and he probably will. If he’s feeling generous, he might even comp your dessert.
One organization that understands the cultural economy quite well is the mafia. In the first chapter of The Godfather (and the first scene of the movie), Don Corleone is shown doing favors for a series of people. Some of whom are ordinary folk who most rich men would scoff at.
Similarly, Don Corleone makes a great effort to befriend judges, politicians, and other people who might be useful to him one day.
How come? Because he knows there’s power in having friends. Whenever Don Corleone needs a favor from someone in the community, all he has to do is ask — and he gets it. This buys him things that money cannot buy.
How to understand the cultural economy
The cultural economy operates by a different set of rules than the market economy. And one of the biggest differences between the 2 economies is the way people understand those rules.
To learn the rules of the market economy, you need to take Economics 101. Thousands and thousands of pages have been written in economics textbooks explaining how the market economy works. There are people who study market economies for a living, making equations and theories that predict how the market economy moves.
Meanwhile, we understand the cultural economy in our guts. Human beings evolved with a set of rules about how to treat their friends. Many of these rules are culturally universal, implying they’re baked into our genes somehow. And then the stuff that isn’t baked into our genes is drilled into our heads as we’re growing up.
We can’t always explain what the rules of the cultural economy are, or why they are what they are. But we know them. And when someone violates them, we get mad.
Because the norms of the cultural economy are baked deep into our gut, we tend to respect the cultural economy. When we hear about people doing things in the cultural economy — like being loyal to their friends, sending out birthday cards, and hosting dinner parties on their own dime — our hearts warm. (Even if they do so for obviously selfish reasons.)
Whereas we don’t respect the market economy quite as much. When we hear about people doing things in the market economy — like haggling over price, charging money for things that “should be free”, and holding employees to strict performance standards — our stomachs churn a little bit.
In fact, the anthropologist David Graeber thinks that the introduction of the market economy forced human beings to totally rethink their moral systems. Around the 8th century BCE, money started to become widespread. Also around the 8th century BCE, the “Axial Age” happened, where new religions were introduced in India (Buddhism), China (Confucianism and Taoism), the Middle East (Zororastrianism), and later Europe (Christianity). Could those 2 things be linked?
How the cultural economy works.
In the market economy, power comes from money. If you have money then you can pay people to do whatever you need done, even if you don’t know them at all.
But in the cultural economy, power comes from having friends. If you have a lot of friends, then you can ask them for favors. As long as you don’t ask for too much, and you’re willing to repay the favor later.
On top of that, in the market economy, you do favors for whoever pays you. But in the cultural economy, you do favors for whoever needs a favor, so long as they’re a friend.
Also, the market economy is about selfishness. It’s very impersonal and it’s all about getting stuff. Whereas in the cultural economy, we try and pretend that everything we do is about helping the people around us, and that we don’t expect anything in return. (Arguably, much of what we do in the cultural economy is unselfish, because we don’t consciously realize we expect something in return.)
Also. You know how Ben Franklin used to ask people he wanted to be friends with for small favors? That shows another difference between the market economy and the cultural economy.
The market economy is based on squaring away debts. When you buy fruit from a man on the street, you pay him. The debt must be square before you part ways, because you might never see the man again.
But the cultural economy is about creating debts. Friends exist in a state of perpetual debt to one another. That means they can call on each other for (reasonable) favors at any time.
Ben Franklin figured this out and used it as a way to get new friends. Whenever he wanted to befriend someone, he would place himself in their debt. And then the relationship could build from there.
This is one reason why your friend might get insulted if, say, he helps you move and you offer to pay for his time. He’s doing the service “as a friend”. If you pay him, then you’re implying that the two of you aren’t good enough friends for him to do it for free.
Making sense of the cultural economy.
Imagine your friend has a birthday gift coming up. And you want to get him a gift. What should you get him?
If you ask an economist this question, the economist will say “cash”. The logic is that your friend can use cash to buy the best gift you can possibly give him. Why take a chance on buying him something he won’t like?
But if your friend got you cash for your birthday, wouldn’t you be offended? And if he asked you why you were upset, you would probably say, “because cash is a thoughtless gift.”
You see, the purpose of a gift is to strengthen a friendship by showing the recipient that you know them well. When you give someone a touching personal gift, you signal to them that they’re valuable to you, and so you’ve taken the effort to think about them. Whereas if you get someone cash as a gift, you’re signaling that you don’t know them well, and they ought to shop for themselves.
Here is another situation that doesn’t make sense in the market economy, but makes perfect sense in the cultural economy. When 2 friends go out to dinner together, they’ll often both insist on paying the tab.
An economist would tell you that you should let the other guy pay! But in the cultural economy, your reputation matters more than the money. If the other guy thinks you’re a cheapskate, that will reflect poorly on you. So you have to at least pretend that you want to pay.
The cultural economy also helps us solve another puzzle: why small towns are friendlier than big cities.
Once I got my backpack jammed in the turnstyle in the New York City subway. I needed a stranger to swipe their card in my turnstyle so I could get out. But I watched as dozens of people passed me by without looking up.
Meanwhile, if you knock on a stranger’s door in a random farm town in Kansas and ask politely, he will probably serve you dinner. How come?
One big reason is because the cultural economy is more dominant in smaller towns because people know each other better. If you do someone a favor in a small town, you can expect them to repay you somehow. Whereas in a big city like New York, if you help a stranger, they’ll probably never see you again.
When the cultural economy and the market economy overlap.
Sometimes there’s no way that the cultural economy and the market economy can mix together. For example, right now people in first world countries are extremely lonely. This isn’t a problem that markets can fix because you can’t pay somebody to be your friend. If you’re paying them to be your friend, then they’re not really your friend.
And sometimes the cultural economy and the market economy overlap. When they do, they usually mix like oil and water. You can clearly see the boundaries between the market economy and the market economy.
For example, if you hire your friend to paint your house, he might give you a 20% discount because he’s your friend. In that case, the transaction is 80% market economy and 20% cultural economy.
Or, he might bring a teddy bear for your young son, or bring cookies for your wife. In that case, the money is the market economy part, and the teddy bear/cookies are the cultural economy part.
Probably the place where the cultural economy and the market economy overlap the most is in the job market. Recruiters and HR people hire people specifically because they are good “cultural fits”. They also hire people because they like them. And getting a reference from a friend drastically raises the chance you get hired. (Plus, being friends with the boss can get you special perks.)
However, at the end of the day, people (hopefully) remember that they have a job to do, and focus on doing good work and promoting good people rather than cultivating friendships and kissing butts.
Sometimes things can be stronger if you combine the cultural economy and the market economy. For example, most people hire their gardeners, lawyers, tailors, accountants, and pet sitters through referrals. This is partially because when you meet someone through a referral, they have an extra incentive to do a good job, because they don’t want to let their friend down.
However, in other situations it’s best to keep the cultural and market economies separate. Some people refuse to hire their friends in their business because they don’t want to lose them as friends if something happens in the business. Similarly, if you start dating one of your coworkers, HR will make you fill out a whole bunch of paperwork, because office romances often end badly.
On a similar note, when I went to the small town of Cahuita, Costa Rica, I found that many of the local grocers were Chinese. That seemed odd to me at the time, because I didn’t even know there were Chinese people in Costa Rica, let alone in a small beach town in the middle of nowhere. But later I learned that it’s pretty standard for small grocers to be a different race, religion, and/or ethnicity than the community they serve.
How come? If a member of the community’s majority opened a small grocery store, they’d face a hard choice. They’d either have to play in the cultural economy, give free food to all the needy people in the community, and put themselves out of business. Or they’d have to opt out of the cultural economy, refuse to give needy people free food, and lose all their friends. But because minorities are already outcasts, they pay a lower cultural cost by running a grocery store.
The cultural economy vs. the market economy
The cultural economy makes us feel warm and fuzzy inside because it seems nicer and because we understand it intuitively. But I’ve always liked the market economy more, because it seems more fair to me.
How come? Because the cultural economy leads to lots of social bullshit and nepotism. In the cultural economy, kissing people’s asses and being born into a “good family” matters a lot. Whereas in the market economy, my individual talents matter a lot more.
In a Playboy interview, Milton Friedman makes the point that Black people in the United States face more discrimination in the cultural economy than in the market economy. The toughest things for Black people to get are jobs (where the cultural economy usually matters more than the market economy) and government services, like schools (which they do not pay for). But once Black people put some money together, they had little trouble buying the stuff they needed that was for sale, because their dollars were just as good as any dollars.
He didn’t realize it, but basically what he was saying is that the market economy treats minorities more fairly than the cultural economy. That’s because the cultural economy is based on friendships, and it’s hard to make friends when you don’t look like everyone else.
The other big flaw in the cultural economy is that it only works when people know each other well. When people don’t know each other (or don’t trust each other) then they have to square all their debts on the spot, to avoid being exploited. And it’s impossible for 8 billion people, or even 10,000 people, to know each other well enough to make the cultural economy work long-term. (This is one reason why Communism failed.)
In Debt: The First 500 Years, anthropologist David Graeber explains that before the invention of money, most people who knew each other well would do each other favors, expecting nothing in return. However, he provides many anecdotes where tribes that didn’t know each other that well would barter with one another, usually with some surrounding ritual involving music and dancing.
Why did they have to barter with outsiders? Because if you don’t have an underlying friendship with someone, then the cultural economy doesn’t work.
Still, the cultural economy has its place in the world. I wouldn’t want to get rid of it, because it allows people to take care of each other when they’re down on their luck. The market economy is really cruel and if you catch a bad break, you can end up on the street. The cultural economy helps soften the blow.
One final puzzle
I’ll leave you with one final puzzle. Remember the subway turnstyle in New York? Eventually someone came up to me and was like, “I got you, bro.” And then he slid his card in the machine so I could get out. This cost him $2.75 and I never saw the man again.
If all the stuff I’m saying about the “cultural economy” is true, why did he do that? And how come people do favors for random strangers, even when they cannot expect to be paid back.
The evolutionary biologist Richard Dawkins has a theory for this. We evolved to do altruism with people because they’ll reciprocate when they get the chance. But our brains are used to an environment where we only hung out with people we know. They don’t know how to make sense of big cities. So our brains often “misfire” and assume everyone we see is a friend.
In other words, people do random acts of kindness because they’re too stupid not to!
There’s probably truth to this. At the same time, that’s an awfully cynical way to think. I do think that people will find ways to return the favor.
For example, once when I was really young I went to an A’s game. After the game there was “movie night on the field,” where all the fans got to come watch a movie on the outfield.
After the movie was over, there was a bunch of trash laying around. I said to myself, “they have to play a game here tomorrow. How are they gonna pick up all this trash?” So I started picking up the trash.
Well, some bigshot executive saw me picking up the trash. And he was like, “who’s that kid picking up trash?” And he gave me 2 seats to a game of my choice right behind home plate. My dad and I used those seats to watch the A’s clinch a playoff spot later that year.
So I recommend being nice to random strangers, and doing them favors when there isn’t a good reason not to. Obviously there are risks in this, so use your discretion. But you never know who’s watching. And you never know how they might pay you back. (Plus, doing good deeds will brighten your day.)
Hey! Thanks for reading.
If you’re new here, I’m Theo and I write an article every Monday about whatever was on my mind the week before. Usually related to social sciences, learning, personal growth, and long-term trends in the world.
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