National Cultures and Social Protection as Alternative Insurance Devices

Abstract

In a mobile market economy there is a continuous process of creative destruction and specific investments in human capital can be particularly risky. For this reason market economies are likely to be characterised by a painful trade-off between the advantages of market flexibility and those of specialization. The claim of our paper is that the State can do much to improve the terms of this trade-off. National States can invest in the development of homogeneous national cultures that can decrease the specificity of many human capital investments. At the same time, the State can insure the individuals who undertake specific investments by providing them with some form of social protection. In this respect, cultural standardization and social protection can be seen as substitutes, and the optimal mix of cultural standardization and social protection changes in different countries. We observe that the process of European integration has reinforced the role of cultural standardization relatively to that of social protection. We argue that, by mimicking the same mix of policies as the U.S., the E.U. would end up doing too much for cultural standardization and too little for social protection.