Cows, Capitalism and Social Embeddedness  
Wednesday, October 23, 2013
Daron Acemoglu and James Robinson

Economic theory sometimes portrays people as individuals making decisions completely divorced from their social context. A long tradition in other social sciences, particularly sociology, finds this unsatisfactory.

An example of the problems with examining an economic problem without thinking of how people are embedded in society comes from the new paper “Continued Existence of Cows Disproves Central Tenets of Capitalism?”by Santosh Anagol, Alvin Etang, and Dean Karlan.

The authors collected detailed data from the 2007 Uttar Pradesh Household Survey on two regions that asked questions on dairying behavior, in particular about livestock, farming practices, land holdings, assets. The survey provides detailed information on the costs (fodder, veterinarian, appreciation or depreciation of the animal, number of hours spent looking after the animals) and benefits (milk production, value of dung cakes etc.) of owning cows and buffaloes.

The authors then estimate the rate of return to holding cows and buffaloes. The results are startling. They find that it is -64% for cows and -39% for buffaloes.

What could explain such irrational economic practices? The authors consider a few ‘non-embedded’ ideas - measurement error, preference for home produced milk, preference for illiquid savings, labor market failures, and preference for skewness in returns. But none of these seems particularly compelling.

The final idea they come up with, social and religious values - Hindus regard cows as sacred–sounds more embedded, but then they quickly add:

most economic models of religion predict that customs derived from religion are either beneficial or strengthen the group, and this seems to do neither,

and of course buffaloes are not regarded as sacred.

What to conclude from this? Perhaps one explanation is to embrace the idea, once popular among some social scientists and recently gaining some further traction in more sophisticated forms among development economists, that poor people are irrational and cannot make decisions in their own best interests.

An alternative, however, is provided by the anthropologist James Ferguson in his book The Anti-Politics Machine that is a study of development problems in Lesotho in Southern Africa. There are many points to this book but one of them is to show that economic analyses that failed to take into account the social ‘embeddedness’ of economic behavior often come up with spurious interpretations of what is going on — and as a result, give irrelevant policy advice.

The problem in Lesotho, according to the World Bank (cited at length by Ferguson), was that there was an open range with too many cows and a serious ‘tragedy of the commons’. The interpretation of this by the World Bank was that:

cattle are not held by the Basotho solely for economic gain [and] traditional reasons for keeping cattle, e.g. brideprice, prestige, investment, etc. make farmers unwilling to sell their surplus unproductive stock.

This might be a bit like the idea that the rate of return to holding cows in Uttar Pradesh is low because cows have religious symbolism for Hindus.

The World Bank’s interpretation fits rather neatly into one type of idea about social embeddedness — what the sociologist Mark Granovetter calls ‘oversocialized’ as opposed to economic theory which is ‘undersocialized’ in his famous 1985 article “Economic Action and Social Structure: The Problem of Embeddedness”. In the oversocialized version, the Basotho are traditional ‘peasants’ who do not operate according to modern economic rationality so that social forces (like Hindus regarding cows as sacred) mess up a proper accounting according to costs and benefits. No wonder Lesotho is poor!

Ferguson tries to show, with some success, that this is all nonsense.

It is true that

the peculiarities of Sotho livestock keeping reflect a certain structuring of property which makes of livestock a special domain not freely interconvertible into cash.

But this social norm, which influences the economic rate of return, is not some irrational ‘traditional’ practice but is kept in place by a distinct set of interests. Ferguson first shows that (pp. 146-147):

There exists what one might call a one-way barrier: cash can always be converted into cattle through purchase; cattle however, cannot be converted to cash through sale except under certain conditions.

To understand this, it is important to understand two things:

1. There is nothing ‘traditional’ about the economy in Lesotho. Most of the men are away working in the mines in South Africa but since they intend to (indeed under the rule of Apartheid before 1994 were forced to) retire in Lesotho, their families are there and they wish to keep their rights in the local communities. Cows are an asset that can be lent to other people to build social relationships and standing within the community, which makes them a very attractive way to save for retirement.

2. Cows are men’s property, and as such women do not have access to them. Money is household property so women do have access to it. Therefore men save via cows to stop the women back home spending their retirement money.

So using your wages in Johannesburg to buy cows is a very effective way of keeping control of your resources and maintaining status and links to the community.

There is one more layer in this. Cows are used to pay bride-wealth to the parents of the bride when a son marries. This gives elders a type of claim over cows that they would not have over money, so they have an interest in seeing the system perpetuate itself.

So Ferguson’s argument is that the ‘tragedy of the commons’ and the resulting low rate of return to investing in cattle comes about because cattle are a very attractive way for men absent working in South Africa to save. The attractiveness results from the social norm that cows cannot be sold and they are not the property of women. Thus once invested in a cow, wealth is safe. Cows are also attractive as a way of building social relations in the local society which come in useful once you retire.

No doubt one could think of other social norms that are more efficient from an economic point of view, and Ferguson does not explain why these types of social norms emerged rather than others. But he does analyze convincingly the interests that keep these ones in place and lead to their reproduction. This is far from clear-cut because some people, women for instance, do not like the norms and try to change them.

From the point of view of Why Nations Fail, the types of social norms that Ferguson talks about are institutions — they are rules that people face that centrally govern their incentives and opportunities. Of course they are not laws or written in the Lesotho constitution, rather they are what Douglass North called “informal institutions”. But they are institutions, none the less.

In the next few blogs we will dig deeper into this issue.

Is this also what is going on in Uttar Pradesh? We have no idea but we cannot help but ask: wouldn’t it have been more interesting to place the negative returns to holding cows and buffaloes in a social (and institutional) perspective?

Article originally appeared on Why Nations Fail by Daron Acemoglu and James Robinson (
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