Trust—The Magic Elixer
January 17, 2012
Via Brad DeLong comes this quote from Declan Trott:
[W]ealth depends on the division of labour, and the division of labour is limited by the extent of the market. But the extent of the market is not limited only by transport and taxes. It is limited also by trust: by the rules and expectations that allow cooperation for mutual gain between people who do not know each other. And these rules and expectations, particularly the expectations, are hard to build but easy to destroy. In the worst case, not just the extent of the market but its very existence is threatened.
[Image from http://perkettprsuasion.com/2011/04/07/define-trust-not-so-easy-is-it/]
Trott is reviewing Partha Dasgupta, Economics: A Very Short Introduction (Oxford University Press, 2007). The key point of the book is that trust has huge implications for "communities, markets, households and firms." While economists generally assume that transactions involve homogenous products and anonymous traders, the reality is that most transactions involve face-to-face contact and a wide variation of service quality. When services are involved (e.g., finance, medicine, construction, and education) a huge problem of asymmetric information exists. The seller generally knows more than the buyer about how the house was constructed. That is why trust is so essential.
A theme developed on this blog is that trust does not arise simply from enlightened self-interest. If that were the case, people would be trustworthy only if there were a reasonable chance of being caught and punished. While such accountability is crucial, it is not the only part of the story. There is a deeper kind of trust that arises when people adopt Kantian duty as their mindset, or when people uphold honesty because of that virtue for virtue's sake.
The problem I have with neoclassical accounts of markets is that they do not accurately convey important elements of the philosophical and psychological dimensions of trust-creation.
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