Trust: a scarce commodity

We evolved in small societies. This has been the human condition for the vast majority of our existence. We have inherited the psychology of the great apes, and in particular of the human hunter-gatherers that succeeded them. In these times the dominant emotion was suspicion – it was not a good idea to place your trust in strangers. When we lived on the savannah, if another tribe came along, you’d have to have been very trusting to see it as an opportunity for trading. The competition for a fixed pool of animals meant that inter-group violence was prevalent. Yet since this beginning humans have somehow managed to construct an edifice based on trusting people who we don’t know. Trust allows us to become much wealthier as a society. But there is a fundamental paradox here. While it may be good for society, it can be very dangerous for individuals. Those who invested in Madoff know this lesson all too well. His company website sought to inspire trust:

In an era of faceless organisations owned by other equally faceless organisations Bernard L Madoff Investment Securities LLC harks back to an earlier era in the financial world: the owner’s name is on the door.

If you can get people to trust you, you have a very powerful tool. To this end the company Verolabs has a product called Liquid Trust, a spray which contains oxytocin, a mammalian hormone that plays an important role in orgasms, social recognition, pair bonding, anxiety, and maternal behaviour. You spray it on in the morning or just before an important meeting. Liquid Trust will work its magic – people around you will automatically trust you. The company website is full of glowing testimonials. Joe says:

I just wanted to say thank you……I was stuck in the same old job, barely making ends meet…I tried Liquid Trust and I finally got a very nice corporate job…While I was using Liquid Trust my relationship with my girlfriend wasn’t going well. Without really knowing what was going on it went from bad to wonderful. Best of all, she asked me to marry her! I would highly recommend this product. It can and will change lives for the better.” And all this for just $49.95 for two months’ supply. 

The word trust can be used in so many different contexts. Here are just a few examples of trust and its derivatives:

Trust me — I would never lie to you.

Shelia’s not the sort of person who you can trust with a secret.

He took it on trust.

You betrayed my trust.

I trust you slept well?

Trust Bill to be caught with his pants down.

I had my trust weapon with me.

He was a member of the museum’s board of trustees.

Microsoft is embroiled in a protracted anti-trust lawsuit.

Trust law was undoubtedly a vital innovation to the English common law legal system.  It could be described as a historical accident, but it was to have far-reaching implications that go way beyond the legal system. Its origins were in a feudal England around the time of the Crusades during the 12th and 13th centuries. It was designed to solve problems related to land. When a wealthy man died, the heirs to the estate had to pay a heavy death duty or his lands would revert back to the monarch.  One ingenious solution was to transfer this wealth to somebody else before he died, thus invalidating the attempts of the crown to seize the land. Those lawyers thought of a brilliant ruse –choose a group of friends of the property owner. They would hold it in trust for the use of another. The trust became a separate entity, technically it was a corporation. It did not belong to the state, but it had real powers, which caused resentment among rulers. Indeed Henry VIII tried to ban them in England. And they were outlawed after the revolutions in France, Russia and China. This simple tax-dodging device would take on a life of its own and would be exported to many other fields. The East India Trading Company, Lloyds of London and the London Stock Exchange would all follow this model. Nowadays organisations such as the Scouts, the RSA and Oxfam are governed in this way. Britain would get a thriving civil society that had nothing to do with the government. They formed a buffer between the state and the private citizen. Ultimately it was applied to democracy by such thinkers as Edmund Burke. In Burke’s model of representative democracy voters elect their representatives as ‘trustees’ for their constituency. These trustees are not automatons; they can act in what they believe to be the common good even if that goes against the short-term interests of their constituents. It later migrated to the USA and was behind the mighty trusts and corporations that now dominate economic life.

Economists have a lot to say about trust, which they see as essential for the creation of a well-functioning system and the cultural key to prosperity. All of economic life involves exchanges between people – buying, selling, borrowing, lending, investing and so forth.  All of these transactions depend on trust. All societies exhibit trust but if that trust is maintained within small groups only, then this is a serious impediment to wealth creation, because your transactions are going to be limited. One of the ways we have learned to trust other people is that we trust the institutions within which they work. Even the most basic goods such as a pencil or a shirt, depend on complex links between suppliers from across the globe. Without the glue of trust the system would come unstuck. You need to be sure that the suppliers will deliver the right goods on time and payments have to go on down through the supply chain

How is trust enforced? There are two key mechanisms: the rule of law and social norms. Laws need to be made and enforced so that contracts and agreements will be respected. But law does not exist in a vacuum and by itself it is not enough. You need citizens who are engaged with the system. Social norms mean that if somebody fails to fulfil his side of the bargain, you will not do business with them in the future. The trick is to find ways to make it worth your while not to break trust. In stable societies, transactions between strangers are often self-policing.

And what about the financial system? For all its mathematical models, finance is not physics. In fact, it runs on faith. Trust is crucial in financial exchanges. The system worked well for many years but there is always a certain fragility. We forgot about what happened in 1929. We thought that the good times would continue for ever. There was a transformation in the sector from traditional relationship banking, where lenders knew the people who were borrowing from them, to a new system of arms-length finance, where investors bought bundles of anonymous securitised loans. Banks can be bailed out, but faith in the financial system may prove harder to repair.

Am I optimistic? No. It’s far easier to destroy a society than to build it. Trust is an elusive, fragile element. Social norms stop working and laws break down. Building trust from scratch is a daunting task. This is a pessimistic view if we consider countries like Somalia. You can’t bomb countries into a trusting state. Maybe the Pentagon should have got in touch with Verolabs. They could have sprayed Afghanistan or Iraq with Liquid Trust. I don’t think the results could have been much worse than they actually turned out.

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One Response to Trust: a scarce commodity

  1. Alberto says:

    I fervently trust in what you say 😉

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