Interest and murder

Hey CasP researchers,

I am in the midst of writing a detailed review of Joseph Henrich’s book The WEIRDest People in the World. It’s a fascinating book about the origins of Western psychology, with some dabbles into the origins of capitalism.

The thesis of the book is that with its obsession for banning incest (which start in the year 300), the Catholic Church killed off kin-based institutions in Europe, eventually giving rise to modern capitalism. I know this thesis is a whole can of worms, so that’s not what I’m going to talk about here. Instead, I want your opinion on some evidence. Later in the book, Henrich discusses the chart below, which shows the simultaneous drop of interest rates in England and rates of murder in various European countries.

Henrich argues that both trends indicate a growing level of ‘patience’ in the European population. Here’s his reasoning for how ‘patience’ relates to the interest rate:

Interest rates are heavily influenced by people’s willingness to defer gratification, to discount the future. To see this, consider a choice between spending $100 tonight on a delicious meal with friends versus investing this money at 10 percent for 30 years. At this interest rate, you’d get $1,745 in 30 years instead of just the $100. The question is whether you are willing to forgo the nice dinner tonight for a big payoff in three decades. If you don’t discount the future much, you’re more likely to invest the $100 and skip the fancy dinner. But, if 30 years seems too far off to worry about, you’ll enjoy the feast. In this situation, the more patient people are, the lower the interest rate can be without the dinner option tempting them. In such populations, we expect the interest rate to decline. By contrast, if people became less patient—more inclined to “eat, drink, and be merry” today (i.e., take the tasty soup cube now)—they’d only forgo immediate payoffs when the future rewards on offer were really big—so, interest rates would go up (or, no one would ever invest). Thus people’s willingness to defer gratification is a key contributor to interest rates.

The connection between interest rates and patience is consistent with a wide range of other psychological findings. Adults who, as children, resisted eating the marshmallow immediately (Chapter 1) go on to save more money in their bank accounts, invest more in schooling, and stay out of prison. Those better able to wait were also less likely to have addiction problems and more likely to have a retirement plan. Among adults, those showing greater patience in delay-discounting tasks (e.g., $100 now, or $150 in one year) save more of their income, invest more for the future, and attend school longer.

And here’s Henrich on the link between ‘patience’ and murder:

The idea here is that people were adapting psychologically to a world that was transforming from one governed by the external constraints of kinship ties and the incentives generated by family honor to one in which independent shopkeepers, artisans, and merchants held sway, interacting flexibly with myriad strangers in mutually beneficial transactions. In this expanding individualistic world, a reputation for sudden, violent, and undisciplined responses to minor insults or simple misunderstandings didn’t pay anymore. Who wants to defend, marry, or do business with a hothead? In an open market of strangers where people are shopping for relationships, you can just find another friend, fiancée, or employee, one with better self-control

I’m interested to get your opinions on this psychological explanation of interest rates (in particular). The whole discussion of discounting is very neoclassical. What are some alternative interpretations of the trends? What does it mean that the rate of interest — the ‘normal’ rate of return — trended downward for so long?

Also, you’ll note that the data stops at shortly after 1950. I wonder if that’s a purposeful omission, given the high interest rates of the 1980s.