The culture hypothesis argues that different societies have different shared values, preferences, and beliefs that are the key determinants of economic performance. The idea is that certain cultural traits—like a strong work ethic, a high propensity to save, or a deep sense of trust—are more conducive to economic success.

Culture is argued to affect economic outcomes through two main channels:

1. Influencing Individual Behavior: Culture can shape personal habits that are critical for growth. For example, it might influence a society’s average savings rate, its collective work ethic, and the general willingness to invest and accumulate capital for the future.
2. Shaping Social Cooperation: Culture can also determine the level of trust and cooperation within a society. High levels of trust make business transactions smoother, reduce the need for costly oversight, and support the kinds of complex, large-scale activities that underpin a modern economy.

While the idea that values matter is powerful, the culture hypothesis faces a major challenge: it’s incredibly difficult to separate the effects of culture from the effects of the “rules of the game” that govern a society. Furthermore, it struggles to explain the lightning-fast divergence of North and South Korea. These two nations share the exact same cultural heritage, yet one became a global economic powerhouse while the other descended into poverty. This suggests that something else—something that can change much more quickly than culture—must be at play.