The Destruction of Trust

We often take so much for granted. When we take something for granted we are often unaware of just how important it is to us. One thing we take for granted in contemporary America is the conditions that are necessary for progress, and trust is one important condition for progress that we rarely consider. We trust that others are not out to take advantage of us, we trust that the labels on the products we buy are accurate, and we trust that others recognize that their own path to wealth is to honorably serve others. As trust diminishes our prosperity vanishes.

Trust, Warren Buffet has observed “is like the air we breathe — when it’s present, nobody really notices; when it’s absent, everybody notices.”

Nobel laureate Kenneth Arrow has argued “that much of the economic backwardness in the world can be explained by the lack of mutual confidence.” The statistics support Arrow’s contention. Transparency International’s Corruption Perceptions Index is inversely correlated with per capita GNP. Societies with a high degree of corruption—and thus low trust—are inevitably poor countries.

This strong correlation—between trust and prosperity—is succinctly explained by James Surowiecki in this excerpt from his Forbes essay “A Virtuous Cycle”.

Over time, in fact, the evolution of capitalism has been in the direction of more trust and transparency, and less self-serving behavior; not coincidentally, this evolution has brought with it greater productivity and economic growth.

That evolution, of course, has not taken place because capitalists are naturally good people. Instead, it’s taken place because the benefits of trust—that is, of being trusting and of being trustworthy—are potentially immense and because a successful market system teaches people to recognize those benefits. At this point, it’s been well demonstrated that flourishing economies require a healthy level of trust in the reliability and fairness of everyday transactions. If you assumed every potential deal was a rip-off or that the products you were buying were probably going to be lemons, then very little business would get done. More important, the costs of the transactions that did take place would be exorbitant, since you’d have to do enormous work to investigate each deal and you’d have to rely on the threat of legal action to enforce every contract. For an economy to prosper, what’s needed is not a Pollyannaish faith that everyone else has your best interests at heart–“caveat emptor” remains an important truth–but a basic confidence in the promises and commitments that people make about their products and services.

Now here is a key point: The social norms of being trustworthy and being trusting develop over many generations, and trust can only develop in an economy when competition is the norm. Competition begets quality, transparency, integrity, respect, and trust.

When I write competition, I’m not referring to the kind of a competition that occurs under crony capitalism. Defense companies competing for Pentagon dollars is not real competition. Ethanol producers competing only because they are receiving government subsidies is not real competition. Bankers who receive bailouts and then compete against each other are engaged in crony capitalism. Competition that occurs under crony capitalism erodes trust because the public perceives the game is rigged.

The erosion of trust to the levels that are commonly seen in developing countries would be catastrophic for this country; damages from the lack of trust would take many generations to repair. Nobel laureate Friedrich Hayek sounded this alarm: “While it may not be difficult to destroy the spontaneous formations which are indispensable bases of a free civilization, it may be beyond our power deliberately to reconstruct such a civilization once these foundations are destroyed.”

Trust in the integrity of our capital markets has already eroded. Many disagree about the consequences of the Fed’s unprecedented intervention into the capital markets. Some see hyperinflation as a likely result; others predict deflation as the inevitable consequence of monetary expansion that has occurred over so many decades. Others see us muddling through, albeit with less economic growth than we would ordinarily have. My own assessment is that those who make the deflationary argument—Robert Prechter, Mish Shedlock, and Nicole Foss—are more persuasive. We can only hope that somehow we do muddle through because the consequences of either hyperinflation or a deflationary depression would be catastrophic for society. Trust would be severely crippled in either scenario.

In any case, I think it is important that you consider the possibility of a deflationary depression in the not so distant future. There are many videos on YouTube that contains talks or interviews with Robert Prechter (these are good ones: listen here and here). Mish Shedlock and Nicole Foss run economic blogs that are updated often. Recently I heard this 45 minute podcast with Nicole Foss and listening is well worth your time.

Foss argues that when there are more claims on assets than there are assets, deflation is the inevitable result. What is going on today is similar to a game of musical chairs. When the music stops there are fewer chairs then there are participants. Foss argues that those at the top of the financial pyramid will find their seats first. The inevitable consequence of this is that many Americans will find that their trust in the fairness of the economic system to be irreparably damaged.

About politicians, Foss offers a sobering perspective: No one can make what we face better but many can make it worse.

I don’t know if Foss has read Hayek, but she too believes that trust, which takes a long time to build, can quickly be destroyed.

As trust is destroyed, Foss believes that repression is the inevitable result. Why? Growing number of Americans will believe the game is rigged.  Attacks on our freedom will intensify. Foss believes that the antidote for repression is decentralized, voluntary community action that is based on trust.

I’m more of an optimist than Foss. I believe that if allowed to do so, entrepreneurs will discover solutions that will prevent or mitigate the most dire scenarios. I do believe that many Americans are ready for new alternatives, yet those who have benefited by our current system of crony capitalism will not surrender their privileges easily.

Being exposed to the sobering perspectives of Precter, Foss, and Shedlock is worth your time. I know that some of you are thinking I’m depressed already about America’s future and my future and the future of my children; I don’t want to be depressed any further. Don’t let those thoughts stop you. The more we are motivated to consider the worst alternatives, the more we are motivated to take actions that will prevent the worst from happening.

4 Responses to The Destruction of Trust

  1. Chris Claypoole says:

    I have long been a believer that trust and prosperity are connected, if for no other reason than distrust entails far more work checking out the background of a person or entity with which you wish to do business before proceeding. “Friction” is a significant economic cost.

    Lack of trust is also the corrosive social force you noted. It breeds corruption because of the “I’ll get mine first” attitude that pervades societies without a general climate of trust. And the perception of corruption, much less the blatant examples of it that Americans have seen since the Dot Com and Housing Bubbles burst, will further poison all segments of society and economic activity. Where are the indictments of those who manipulated the system by packaging sub-prime mortgages into packages that they sold while betting on the failure of those investments? (I won’t even start in on the pathetic lack of anything resembling competence by the regulatory folks. “Regulatory capture” is a well-known phenomenon and those agencies don’t generally attract the “best and brightest” anyway.) No reasonably well-informed person can have any trust in a system, private or governmental, that fails to punish such blatant criminality.

    I am seeing this in my own day-to-day interactions. As a salesman, I am used to being distrusted. Few people like salesmen because of the negative stereotype that too many of my peers have created by their actions. But lately, even long-time customers feel the need to read over terms and conditions (the “fine print”) in a contract, despite having signed the same contract several times in the past. I can understand such reluctance in a market in which there is little likelihood of repeat business (buying a mattress, or a used car). But in a market in which repeat business is vital to the success of a company and its salesmen, why would we risk losing significant amounts of business by cheating a small number of customers? But that is exactly the attitude that prevails under the miasma of distrust! So business takes much longer to transact, or doesn’t take place at all. And eventually, everyone suffers.

    And the lack of trust carries over into the political arena, too. Many people cannot accept any proposal put forth by those they consider political opponents, no matter how good that proposal would seem if one of their political allies had advanced it. Distrust encourages group-think; only trust those with whom you agree on basic beliefs. It’s Us and Them. Soon, the war of all against all. Sorry, I am one of the pessimists.

  2. Barry Brownstein says:

    Chris,

    Your astute comments made my post so much richer. I appreciate your insights.

    As far as being an optimist, I’m only one compared to Prechter and Foss :-).

    For the sake of our children we can hope that we collectively wake up before it is too late.

  3. James D. says:

    To me, the telling point that most people don’t seem to understand is that what’s going on is that they will go begging to politicians for the solutions to problems that the politicians created. Given the capacity of people who have no vested interest in the competitive system (politicians and crony capitalists) to take advantage of situations for their own best (if short term) interest, if this isn’t a recipe for repression, I don’t know what is. It was Jefferson who is commonly quoted as saying “a government large enough to give you everything you want is large enough to take everything you have.” Including your freedom. I won’t pretend that I understand the nuances of the economics enough to forward either the deflationary or hyperinflationary arguments, but I can clearly see that there isn’t much to make either of these options the “lesser of two evils”.

    • Barry Brownstein says:

      Thanks Jim for your wise comments. Indeed in coming years as fear increases the public will be looking for more political solutions and politicians will be only too eager to oblige.

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