The economies of trust: Looking West from the East

Trust is correlated with GDP/capita and economic growth as well as with regulation and cross-country trade patterns

As I went to catch a flight for my annual two-month teaching stint in China, I was caught by the headline on the cover of The Economist magazine: “Who can trust Trump’s America?” I grabbed the journal to read on the 14-hour flight to the East from the West, and by the time we landed in southwestern China, I knew I would write about the economics of trust.

The Economist opinion piece, critical of President Donald Trump’s actions in northern Syria, points out many Americans across the political spectrum support disengaging in the Middle East, among other places. It’s tempting. Our debate over degrees of global engagement is somewhat natural, given that we, unlike much of the world, experience fewer existential threats (to our existence), even though we love to debate why we exist.

Economists conceptually graph trust showing the cost to build and maintain it — and the cost associated with losing it. Typically, the cost of creating trust and losing it are higher than maintaining it. If escalation and retribution results when losing trust, the cost can be greater than almost anything else in life. Think of the carnage that comes from ugly divorces and wars.

Research into trust is most prevalent in behavioral economics and psychology. As a personality trait, trust has been widely studied and is found to have strong predictive qualities. Trust is correlated with GDP/capita and economic growth as well as with regulation and cross-country trade patterns.  A paper published by the National Bureau of Economic Research, “The Right Amount of Trust” (Butler et al., 2009), concludes the cost of either too much or too little trust is equivalent to the lifetime income lost by foregoing a college education. That’s significant. The right amount of trust pays off!

In thinking about this topic, I considered the significant trust issues in Colorado, such as statewide deliberations around water. The conversations between the Front Range, where most of the demand originates, and the Western Slope, where most of the water flows, have a long history where trust ebbs and flows within a well-defined system for arbitrating disputes and a state water plan that creates a vision for the future starting from each river basin’s perspective. Overall, the statewide approach to water management increases a sense of trust. The other trust example that came to mind is in the Four Corners region, where Native Americans’ sense of trust reminds us that history has a long memory — especially when relationships are unilateral.

Reasonable levels of mistrust and trust can be equally effective when it comes to increases in income or GDP. More successful nations and groups create “trust enforcers” such as courts, elder councils and other social arbiters. Mistrust between two people or entities is less relevant as long as there are trustworthy institutions to enforce more fair and certain outcomes. The creation of our national banking system facilitated broader interstate trade in the 1800s as it helped reinforce reliable payment. Our system of vegetable and fruit distribution relies heavily on USDA arbiters who can be asked to rule on the quality of produce when arriving shipments are claimed as spoiled. The political-economic reality is that when societies lack formal mechanisms such as the police or judiciary to reliably act as trust enforcers, then informal groups such as the mafia or corrupt officials step in to create more trust or certainty through protection payments. Such a system can work until protection turns to extortion.

What does this mean as we watch global political economics? We know the right levels of trust are important to well-being. And we know the right level of trust is reinforced by social arbiters. Unfortunately, there is no universally respected global arbiter. Entities including the World Trade Organization and the United Nations were created in the aftermath of horrific world wars, and the United States has played a very significant role as an enforcer with both military and economic might.  But that is waning as the world changes and a new order emerges. Or is it?

The emotional temptation, whether it be with estranged leaders, nations, companies or spouses, is to allow retribution to rule the moment. Such an escalating disintegration of trust is a dangerous proposition. Avoiding it requires a commitment to listening and empathy, along with respected social arbiters and trust rules. As penance for misbehaving years ago, my teenage son wrote, “Trust is easy to lose, and once lost, is difficult to regain.” I’ve been thinking of his adolescent wisdom a lot lately as I look back to my West from the East.

Categories: Economy/Politics, Magazine Articles