A bit of history:

In 1905, Max Weber, in his masterpiece, “The Protestant Ethics and Spirit of Capitalism”, proposed an interesting hypothesis which claimed that Protestantism, Calvinism, and Puritan ethics influenced the development of capitalism. Since Catholic Church rejected worldly affairs and constantly preached for its parish that the goal of existence is the afterlife rather than life itself, it also implied rejection of the pursuit of wealth and possession. Starting from the 17^th century, the emergence of various Protestant church movements, first in England (Puritans) and then in the rest of Northern Europe, set foundations for a revolutionary view of life and its goals. According to the Protestant work ethics, a person’s salvation was no longer possible only through prayers and tranquil humble life rather, hard work, prosperity and frugality turned out to be no less important. For instance, Quakers, Calvinists, and other Protestants believed that wealth is bad as far as it is a temptation to sinful enjoyment of life i.e. its acquisition would be bad if it is for purpose of later living without care. Even wealthy men, who have enough capital to hire labor and then relax, must work hard to eat. To have opportunities and potential for acquiring wealth and not to do so is the same as wishing to be unhealthy and is derogatory to the glory of God. The new idea gave birth to a totally new segment of societies that were hard-working, accumulated wealth, lived humble lives, and used the maximum potential of their abilities and skills for the sake of developing the life conditions of societies. This sort of ethic was common in Northern Europe and USA thus triggering and then accelerating the development of capitalism there.

While this was the case for Northern Europe (Germany, Scandinavia, Netherlands, Switzerland, and the UK) and the USA – Southern and Eastern Europe maintained traditions of Orthodox and Catholic Christianity which rejected acquisition of wealth and innovation and created societies with strict hierarchical structures where status played a huge role. For example, in the XVII-XVIII century, France was a classical example of such a social structure where society was composed of three segments: Clergy, Aristocracy, and others. Clergy and Aristocracy enjoyed institutionalized privileges (eg. they were exempt from taxes) because of their status and perceived importance for society. Weber distinguished between two categories of leading social classes of those times where the first category’s life chances were determined by market activity and the second category’s life chances were determined by status which was institutionalized in law and expressed via lifestyle. There was a small space for the first category in Catholic countries while there was a small space for the second category in protestant countries.

During that period, Georgia remained an Orthodox Christian country with its leading social class fitting into the second category. Acquisition of wealth, innovation, and pursuit of earthly happiness was a Forbidden Fruit for the masses. Nobility and aristocracy, under the patronage of the clergy, enjoyed all the fruits of life without creating any value. Starting from the mid 19th century Russia started abolishing serfdom in Georgia and by the end of the century, the entire system of serfdom and nobility was already a case from the past. Such a sudden need for social transformation, which was not preceded by any religious or cultural grounds, left Georgian aristocracy impotent to meet requirements of the new world while on the other hand, reaped benefits for many former peasants and low-status clerks who managed to assimilate into the new system quickly and to grab the opportunities brought by capitalism. Fortune was taken away from ex-aristocrats either by Russian Empire or by aristocrats’ own inability to meet the new requirements of the new world. There is a vast literature about characteristics of Georgian aristocracy of that period who because of having "blue blood" would not do any agricultural work or trading and preferred to live with empty stomachs and would not even complain about this. For example, Mikheil Javakhishvili's "Jako's Migrants" illustrates the spirit of those time's social life where aristocrats were becoming poor while peasants who were previously under the rule of those aristocrats start gaining power and become aggressive because now they have a chance to prove to themselves that they are no longer inferior to aristocrats. There is also a good old Georgian movie (Lazare) which also has a really great character of Georgian aristocrats of those times.

So, summing up, the industrial revolution, in the West, was not a revolution at all, it was a logical consequence of favorable religious transformations which started in the 17^th century and culminated in Capitalism. For Georgia, Capitalism was a revolution coming unexpectedly without having any kind of preceding grounds which would prepare society to assimilate into the system based on the totally new concept of life thus; creating two new segments of society – ex-aristocracy unable and unwilling to meet new requirements because of status and prestige related concerns and; snobs who were previously under the rule of those aristocrats and now that they see opportunities to spread their wings they grab those opportunities, become aggressive and try to prove to themselves and others that they are no longer inferior to aristocrats.

A bit of history… repeated once again:

For the 20^th and 21^st centuries, the story is similar to that historical one. Until the early ’90s, under the rule of SU, Georgian society was getting used to a specific social order and political structure for at least 70 years.  Then, suddenly democracy, rule of law, human rights, and liberalism appeared as a flash of light on a cloudless sky. Again, creating two new segments of society – ex-elite (people who held high governmental positions during SU and ex-city coloratura elite) unable and unwilling to meet new requirements because of status and prestige related concerns and; snobs who leave their villages and come to cities either to grab opportunities of liberalized markets or just to mimic the behavior and lifestyle of ex-elite and to prove that they are no longer inferior to them.

The forms of behavior and the tools for achievement goals have changed, for those two segments, but goals and psychological sentiments have remained the same indicating that history is repeating itself over and over again simply disguised differently in various epochs.

Economic implications:

The hypothesis is that snobbism (at least partially) and status concerns lead to market failures by distorting incentives, which then leads to lower welfare.

The idea is related to Ala Avoyan’s thesis, “Conspicuous Consumption in Education”. In her model, students choose prestigious professions even if those professions have lower expected returns compared to other less prestigious professions. This happens because there is a prestige premium that urges people to choose things with lower monetary payoffs. Now, there is all sort of premiums some of which are objective for instance risk premium, career premium, and some of which are subjective (psychological) like prestige premium. Objective premiums are objective in the sense that given data a reasonable person can calculate those and convince other reasonable people that she is right. Subjective premiums are present when, even if calculated, one cannot convince another reasonable person that she is right (defined in spirit of Itzhak Gilboa and David Schmeidler's definition of subjective and objective rationality). From this definition follows that one can estimate objective premiums before a choice is made by an agent and subjective premiums can only be estimated after observing a certain choice.

Prestige premium is an important element in the decision-making processes of the two segments discussed above.

Voluntary unemployment case relevant for the first segment:

There is a segment of society mainly consisting of ex-elite who do not possess skills that would be relevant for high-paid jobs mainly because their skills which were useful during SU times are obsolete. However, those people have some opportunities to go out and become taxi drivers or go to construction jobs, etc., in order to avoid poverty. In spite of this, they prefer to stay unemployed and to live in poverty because such jobs are unacceptable due to reasons related to snobbism and prestige. On such low-paid jobs, average monthly earnings are up to 500-600 GEL. This means that the segment’s prestige premium is a minimum of 500-600 GEL. Also, taking into account the fact that they are poor and their marginal utility of wealth is high - the forgone utility for the sake of "prestige" is really huge.

Excess urbanization case relevant for the second segment:

At present, there is a tendency in Georgia to leave villages where people usually have houses, land, and farms and to go to cities where they have nothing, frequently cannot find jobs, or even if they find one they have way lower returns than they would have otherwise (if they stayed home and did farming), live in terrible conditions, etc.  So, although there are lower returns and lower living standards in the cities villagers go there. According to the traditional economic theory, the rational decision-maker should not be behaving in such a way. So, the rhetorical question is - why does this happen? And the answer is - snobbism.

Snob believes that because of whatsoever reasons some people are inferior to her. For example, if a snob believes that poor people are inferior to wealthy people then she will try to become wealthy because, given such beliefs, the feeling of being inferior is a disutility. Those people having snobbism premium and because of that coming to cities think that city people are superior to non-city people for whatsoever reasons. This distorts competitive market outcomes by shifting people from higher return agricultural jobs to lower return jobs (or frequently unemployment).

Conspicuous Education case relevant for both segments:

Some segments of Georgian society consider education as a signal of high status and prestige. Ideally, an educated decision is a decision made by youth who did not have any SU experience. If the decision was autonomous I suppose we should see less effect of prestige premium if we assume that youth are less concerned about prestige than older generations that experienced SU rule. The thing is that education decisions are not autonomous (see a blog post: “A personal view on why people choose to get higher education in Georgia”) and frequently parents decide for their children. If those parents belong to those two segments of the society then there is a greater chance that their prestige concerns and snobbism will be spilled over to their children and/or their paternalistic decision will be highly determined by prestige premium. This mechanism creates wrong incentives for youth and distorts optimal decisions leading to a large number of students and lower quality of education.

Back to Weber to see a big picture:

Going back to Weber and the history of protestant countries vs catholic ones, it is clear that if a society is not prepared for structural changes on conceptual levels then some of its segments start suffering the new consequences and cannot cope with new ways of life. Hence, some segments of pre-new system generations are becoming burdens for society and impediments to economic growth because they are voluntarily unemployed, behave in a contradictive way to market forces, and spillover negative externalities to future generations.