The question of trust is of course core to our lives. When trust breaks down in a relationship due for instance to an affair, it is probably over. This is not just true of personal lives. Trust is clearly important in the economy too. For instance, after 2008 and the ongoing scandals such as Libor, the banking industry was deeply concerned with the fact that trust in their industry had plummeted.
Political pollsters will often insist that trust is an important exploratory factor, even though politicians’ trust levels always track second hand car dealers’. The Brexit vote and the recent US, UK and French elections all seem to be cases in point.
However the concept of trust doesn’t feature much in mainstream economics. Rationality, profit maximisation and efficiency are the key ideas. This doesn’t exclude trust totally, but in this framework, gaining trust is only a means of maximising your profit or utility. So if you are a good manipulator and/or have a great PR firm, you can potentially maximise your profits from being trusted without actually being trustworthy at all.
You may get found out. But if you control enough resources, you could probably avoid that ignominy. You could threaten legal action under the UK’s draconian laws of libel. You could even buy a newspaper or two, and maybe some politicians that seem to come along as part of the package. So any voices that question your integrity can probably be silenced because, in the face of respectability and power, few dare speak out anyway – consider Jimmy Saville. Furthermore if the questioning voices are those of poor, and therefore unimportant, folk those voices can be ignored, as the tenants of Grenfell found out.
This raises the question as to whether economically rational actors can ever be seen as trustworthy in any sense. How can you trust someone who’s only motivation is maximising their benefits? Surely someone who only ultimately looks out for themselves is precisely the sort of person you can never quite trust.
Luckily, the concept of a rationally economic actor is only a theory that helps (or hinders) us to understand reality, which everyone agrees is much more complex. But has this theory actually affected reality? Do we now have a lower opinion of the private sector and particularly the finance sector? Have private firms taken the theory to heart so that cynical manipulation to maximise profits has actually become legitimised? Is it more difficult for those working in the private sector to defend an ethical approach without being seen as naïve?
Friedman, one of the key figures in the 70s behind the rise of neo-liberalism, seemed to want it both ways. He emphasised rationality as only a simplifying theory but also saw company managers’ maximising returns to shareholders as their sole duty.
Sometimes it seems that if markets don’t work, and companies manage to extract excessive returns from their customers, we are at fault as inadequate consumers. Companies are just doing what they are expected to do. Banks, mobile phone companies, utilities and others all exploit the so-called inertia among consumers – the tendency not to keep shopping around and act as “rational” consumers. The advocates for inertia selling say we shouldn’t complain if we are paying excessive prices, if we can’t be bothered to look for better deals. Our inertia is seemingly their rightful gain.
So why shouldn’t we expect companies to act reasonably and fairly? Why shouldn’t we be able to find companies that we can trust? Why should we be expected to put our limited time into continuously checking the prices they are charging and reading the fine print in endless contracts?
The Conservative manifesto’s proposed cap on electricity prices is clearly a rejection of this position. Whether it is implemented is a mute point. An even greater rejection is Labour’s nationalisation plans. But are either of those the answer? The former seems very limited, while the latter retains the idea that the private sector can never be trustworthy. The private sector is made up of people so why can’t it be trustworthy?
Outside mainstream economics, the concept of trust does play a significant role, particularly in institutional economics.
In mainstream economics, markets are seen as ideally being “free” so they are as efficient as possible and rules are seen as a problem creating “sticky”, inefficient markets. Hence the desire to strip out red tape. In institutional economics, all markets are seen inevitably as involving “rules of the game”. Then questions of fairness and trust come to the fore. Do the rules lead to fair outcomes? Do the rules support trustworthy behaviour?
Interestingly if we think the rules are fair and trust actors to follow them, then this can substantially reduce transaction costs, a key interest for institutional economics, and increase efficiency. We don’t waste so much money negotiating detailed contracts, fighting over planning applications and taking people to court. They also provide a level of certainty over who gets what. This can all improve economic performance. One theory suggests that modern religions have thrived because they provided the basis to trust strangers and hence cooperate and trade with lower transaction costs.
Institutional economists have demonstrated that institutions or ‘the rules of the game’ can have dramatic impacts on levels of economic activity. Acemoglu and Johnson, based respectively in MIT’s and University of Chicago’s economics departments, compare the economic trajectories of North and South Korea who started from the same point in terms of resources, skills and culture in the 1960s. The clear difference was in terms of their institutions alone. They also examine the contrasting fate of Nogales which spans the Mexican and US border. The difference in economic success is significant, with the US side doing substantially better. Again the difference is their institutions, as in all other respects they are very similar.
This issue focuses on the interplay between the rules of the game, trust and economic activity. Ann Pettifor talks to The Mint about the centrality of institutions and trust for money to function. Oliver Hart, the most recent economics Nobel Laureate, discovers that fairness matters in long-term economic relationships. Dean Baker explains how economic rules have been rigged to benefit the few. Rick Rowden writes about how international economic rules have constrained countries’ policy space to achieve social and environmental goals, while Howard Stein and his research team summarise their findings on the impacts of seeking to enforce Western rules of formal property rights on African countries. Graham Boyd and Jack Reardon ask whether we need to redesign one of our fundamental institutions; the limited company.
We recognise that the economy is dependent on ecosystems, and overexploitation of the environment can destroy the underpinnings of the economy. Maybe we need to understand better that economic institutions are also underpinned by social institutions that provide the basis for trust. Furthermore if economic institutions are badly designed and unfair, they can actually undermine social institutions. So it is interesting that Angus Armstrong, in the discussion of the economics of Brexit, notes that one of the unforeseen impacts has been an increase in divorces. A badly designed economic system can be seen to be like a parasite that actually consumes its own social and environmental host. This is not actually a good strategy, even for a parasite.
Behavioural economics famously introduced the concept of nudging. With a focus on institutional economics, maybe we need a new economic concept, that of “gluing”. We need to understand more about how we can glue society together with fair and sustainable rules. Not too tightly so we are bound and unable to manoeuvre, but tightly enough so we don’t fragment into factions that don’t trust each other. As Elinor Ostrom, another Nobel Laureate economist, wrote (I paraphrase): economists need to stop focussing on designing systems to get people to do things and start designing institutions within which people are more likely to do the right thing in a complex and uncertain world.
