The Economic Benefits of Trust

Trust is essential to economic growth. (iStockphoto)

On the airport bus in Helsinki, a Finnish woman asked my wife, “What is the biggest difference between Europe and the U.S.?” There are lots of possible answers, but the most striking to me is the tremendous diminution of mutual trust in the U.S. over the past few decades. Why does this matter economically? Because a number of economists have shown recently that income levels and real growth depend upon trust—trust greases the wheels of exchange.

Perhaps those who are responsible for this diminution (the media, which gives space to even the goofiest statements if they are sufficiently provocative—“birthers,” anyone?) are one culprit. But anybody who cares about growth and well-being might consider thinking a while before yapping some trust-destroying opinion with an at best dubious factual basis. The economy will thank you.


Sebastian

I think that in States the problem is the hard competition for jobs, study and the access to the so called American Dream. With the crisis, everyone is a rival, and the excess of immigrants are consider a menace. United States as any country in the world has been pushed by those forces of competition and immigration (another way of competition).

Joe

Do we have any data on " tremendous diminution of mutual trust in the U.S. over the past few decades"? I think that it's true and I believe that it's caused in part of growing security awareness over handling of information. Trust is an important concept of information security and it dictates how controls are distributed in a system (ie, less trust, more controls). For example, Sarbanes Oxley compliance mandated the placement of more security controls--I'd like to know if there are metrics in measuring the loss of trust in such a situation.

Jimmy

Seems to me that trust inherently has the prisoner's dilemma built-in. If too many people trust each other, it's very easy for someone sufficiently evil to take advantage to gain economically. I'll leave to the reader the exercise of putting together the correct 2x2 matrix.

Randall Hoven

Before denigrating "birthers", would you please read this (which I wrote): http://www.americanthinker.com/2011/05/inside_the_mind_of_a_birther.html

Also, take a lesson from Mankiw, and yourself, and realize that there is very little that you can be very sure of.

Joseph Larsen

I read your article, I don't agree with you but I would admit that it is well-written. There is one important bit of information you get wrong, however. Regardless of where Obama was born he is a natural-born citizen, due to that fact that his mother is a natural born citizen (the same applies to Ted Cruz, who was born in Canada to an American mother). The "birther" debate is not actually about eligibility to be President, it is more broadly about the discomfort that many Americans feel about being led by someone who was allegedly born in a non-Western country (Kenya, Indonesia, wherever it may be). So you argue that it is plausible that Obama was not born in the US, but even if he had not been, he would be eligible to serve as President.

Miley Cyrax

If diversity lowers trust, and lower trust hampers productivity, ceteris paribus, this seems to imply diversity hampers productivity. "Does not compute. Liberal utopic paradigm questioned. Does not compute. Deny and sputter mode activated."

Dan

That would assume that the only channel of affect diversity has on productivity is through its affect on trust. But diversity may have a number of other effects: increased creativity, increased understanding of diverse mindsets/customers, etc. Furthermore, I believe your assumption may be better stated as "people trust people like themselves." This does not indicate a necessary net loss of trust in a society, inter-group trust may increase. Europe could be said to suffer from a severe lack of inter-cultural trust. France and parts of Italy have laws against wearing burqas. Switzerland passed a constitutional amendment banning the building of minarets.

Impossibly Stupid

That is so true. Trust the banks to manage your investments; don't listen to anyone who says the securities they trade in are worthless at best and a shell game at worst. Don't listen to anyone who would tell you that maybe Google or Apple or the FBI shouldn't be trusted to track everyone for no reason. Don't listen to anyone who would tell you that I can't be trusted with your SSN, bank info, and mother's maiden name. Go ahead and tell away. The economy will thank you!

Let's not turn "think of the economy" into the next "think of the children". Maybe, just maybe, trust issues are more complicated than you indicate. Bruce Schneier recently posted an insightful note about trust/cooperation/security in complex systems:

http://www.schneier.com/blog/archives/2011/05/status_report_t.html

Shane

It's interesting but I wonder if the same process has not been happening in many European countries too? Certainly here in Ireland there has been decreased trust in old institutions like the Catholic Church, the once-largest political party Fianna Fail, banks and the news media. Whether there has been a decline of trust between individuals too I'm not sure.

James

I'm an American living in Australia, and that's also the biggest difference I notice. It breaks my heart.

SN

http://en.wikipedia.org/wiki/Robert_D._Putnam#Diversity_and_trust_within_communities

Diversity -> distrust.

Shane

I was thinking of that too SN, interesting. Since many European countries have experienced immigration in recent decades, it would be useful to know how trust trends are from place to place.

Kevin

Having lived in the USA for several years, I can say that as individuals, many Americans are generous, kind, and trusting.
As a group y'all walk around like a granny who got lost on the wrong side of the tracks.

There are several other differences between Americans and people of other nations though.

1) National pride. It took me six months to get used to the incredible number of flags on display every single day. In my home country of Canada, that many flags were only visible on Canada Day.

2) Lack of a security net. Get hospitalized and you can be in debt for tens of thousands of dollars. That's just crazy, and it seems to make Americans crazy. There are problems with health care in Canada/UK/France etc... but there's something to be said for knowing that even if I get hit by a bus on my way home and spend six months in hospital, my family won't lose our house.

3) You're big. Cross the border on a trip from Vancouver to Seattle, and you suddenly see dozens of people who look like ex-sumo wrestlers struggling to walk around a mall. What's up with that?

4) Pregnancy and childbirth are disabilities. Seriously, women have to take a leave of absence if they want to spend more than their accumulated vacation time with their child. Again, what's up with that? In some parts of Canada women can take up to 2 years maternity leave. Fathers get paternity leave too. In the US, if both parents need to work, your kid is in daycare or with a nanny after 2-4 months.

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Mike B

I don't know if I would necessarily agree with that. I would say that America is about as trusting as it always has been. Crime is at its lowest point in decades with most crimes that do take place being drug related. People can purchase any consumer good without the expectation that it till be counterfeit or harmful. Banks and financial institutions are no more of a scan today than they always had been.

I would say actually that because so much more information is now within our reach, people can be more trusting because Google allows for verification. It is far harder to manufacture an identity today that it was just 20 years ago. In the recent past you either had to know people to trust them or be in their ethnic/religious/geographic group. Today with verification so simple I can trust a complete stranger with a reasonable amount of online vetting.

Mike

We may suffer from the consequences of abuses of positions of trust. We trust doctors with our bodies and computer programmers with our personal and financial information. Those of us who have children trust teachers and nannies with our children. Those of us who live in condominiums or rented apartments trust maintenance engineers and building managers with access to our homes and our possessions. We trust police with the authority to arrest people and to use guns to enforce the rule of law. When persons in these positions of exceptional trust abuse the positions to injure us, the personal injury shakes our trust in everyone, and in our own ability to judge whom to trust. If many people encounter abuse of these positions of trust, the social fabric of trust starts to tear. I live in Chicago, where in many areas and for many citizens, police evoke more fear than trust.
To counteract abuse, and restore social trust, all who make themselves vulnerable to the person who has abused a position of trust need to know about the abuse. The society goes furthest towards destroying itself when it suppresses evidence of abuse. A department invested with authority to investigate allegations of police misconduct, and the abuse of the police power, does a severe disservice to society if it rubber stamps all of the reports of misconduct as unfounded, especially if the department bases its conclusions solely on an untested belief in the word of the accused officers and their friends. To restore social trust, we need effective mechanisms for ensuring that we will discover abuses of positions of exceptional trust, and rectify the damage done by the abuser. We have a social duty to expose evidence of abuse of positions of trust, to help ensure that only person who will act in ways that validate the decision to accord them great trust remain in those positions of trust.

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