The Value of Trust

It’s a currency that many economists discount.

Posted Oct 24, 2011

Despite all the recent evidence to the contrary, many "mainstream" economists still cling to the myth that our economic progress can be attributed to our competitive "free market" capitalist system - based on a Darwinian "selfish gene" model of human nature.  The myth persists in part because it has acquired the status of an ideological catechism.  The reality, of course, is more complicated.

True, free enterprise and market competition has many virtues.  It encourages innovation; it creates choices; it can motivate us to improve our performance (though intrinsic motivations are also important); and it provides a counterweight against the abuses that may occur when there is monopoly power in the market place.

But this is only part of the story.  A so-called free market economy can also come to resemble a rigged game, where rich and powerful oligarchs write the rules in their own favor and crush upstart competitors, where government can come to resemble a handmaiden rather than a policeman or an honest broker, and where customer preferences are manipulated in ways that can be harmful or even lethal. 

The root of the problem, though, is that many economists are still wedded to a flawed model of human nature.  What the discipline of behavioral economics has learned - and the financial crisis and meltdown of 2008 tragically proved - is that humans are much more complicated than many mainstream economists assume, and that other aspects of human nature are also influential in the marketplace.  The term "animal spirits," coined by the economist John Maynard Keynes during the Great Depression, has recently come back into vogue.  It implies that sometimes quite irrational behavior can control market outcomes.  One such influence is our sense of fairness, which is the focus of my book about The Fair Society.  Another influence, still underappreciated among many economists, is trust!

In fact, smoothly-operating markets depend on trust. Another way of looking at a complex modern economy is that it represents a vast network of cooperation and mutually beneficial exchanges of goods and services.  And trust is the lubricant that makes it all work.  As science writer Matt Ridley points out in his book, The Rational Optimist, the human species is not unique in displaying trust toward others - families, companions, other members of your social group.  Studies in chimpanzees and capuchin monkeys, for instance, reveal similar tendencies.  But we are quite unique in our pre-disposition to trust and trade with strangers.

Neuroeconomist Paul Zak and other researchers have shown that our trusting behaviors are closely associated with the release of the brain hormone oxytocin.  It has been referred to as the trust hormone, and humans seem to have become oxytocin addicts.  Some theorists believe that our predisposition toward trusting one another co-evolved in human evolution with the growing propensity of our ancestors, tracing back tens of thousands of years, to engage in extensive trade.

In small communities and established trading networks, trust is based on personal relationships.  Many small towns still pride themselves on the fact that nobody locks their homes, or their cars, and lost items are always returned.  But in large impersonal cities with many transactions between strangers, trust may depend on external trust-builders -- such as the reputation of a manufacturer and its brand, past experience with a product or service, advertising, endorsements by friends, celebrities (or doctors), government regulations and consumer protections, warranties, or perhaps the reputation of a middle-man or retailer.  

However, trust is also a fragile commodity.  It can quickly be dissipated by actions that are exploitative, dishonest, or unfair.  Or simply harmful.  Thus, Toyota suffered a steep drop in sales after it was disclosed that the company had been hiding problems with some of its models.  Spinach sales in this country plummeted after an outbreak of lethal e-coli food poisoning that was traced to a farm in California.  It has been reported that Greeks engage in widespread tax cheating because they do not trust a government that is perceived to be corrupt.  And Wall Street banks experienced a deep freeze in the financial markets in 2008 when it became apparent that many of them were trading in toxic mortgage-backed securities.

Indeed, it seems that whole societies may differ significantly in relation to a cultural bias toward social trust, or distrust.  Surveys have shown, for example, that some 65 percent of the population in Norway are predisposed to be trusting, whereas in Peru only 5 percent are trusting.  Distrust in that society is widespread.  And in our own society, the survey data suggest that social trust, and trust in our government, are at all-time lows.

Economists may still prefer to deal in the currency of dollars and cents.  But the bottom line is that trust (or distrust) greatly affects the bottom line.