government and trustEconomics

On trust, money and the individual

Without embracing randomness, chance, chaos, we will always have a gap in our understanding of how things work in general or in more specific areas, such as that of economics or finance. As as Hesiod observed 2700 years ago, in his Theogony, “ΗΤΟΙ ΜΕΝ ΠΡΩΤΙΣΤΑ ΧΑΟΣ ΓΕΝΕΤΟ”, which translates vaguely into “In the beginning, there was chaos”.

In this paper, I am looking at a qualitative element that matters a great deal to our socio-economic system. We try to measure this element through polls, studies and various statistics that act as proxies for some kind of “key activity” which should tell us something about it.

In the end however, this thing is not quantitative. This alchemical element I am speaking of is the relationship of trust between socio-economic actors – we can call it social trust.

It is the bond that keeps markets alive and economic activity ticking further. It is the essence that gives politicians, the police and other authority figures and institutions a (varying) degree of influence over individuals’ lives.

“Trust is a fundamental element of social capital – a key contributor to sustaining well-being outcomes, including economic development.” – Esteban Ortiz-Ospina and Max Roser

the origins of social trust

Social trust is a more complex concept than trust in oneself, or confidence. The former involves trusting people who are profoundly different than ourselves and yet so similar to us: our deepest, darkest and most noble desires are common to all men and women but how they come to life differs.

It is from this apparent contradiction – that we are all different and yet, at our cores, very similar – that confusion as to how social trust is built, maintained and shattered typically arises.

In my view, this confusion can be seen primarily in the desire to empirically measure social trust – we are not comfortable with something so esoteric and intangible, something that is subject to the whims of our psychic to be the basis of our socio-economic order. And yet, it is.

How do we define such trust? As you can imagine, there are many definitions out there. As a Forbes article put it: “trust is hard to define, but we know when it’s lost”. Even if we do not express it through words, our actions will speak volumes about whom and what we trust.

Definition of Social Trust

The definition of social trust that I give is built on the idea of growing with the community, not off the community.

As such, social trust is the belief shared between members of a group that each one of them will act in a manner that not only benefits themselves but also benefits the rest of the group.

To give an example from the field of economics: before I commit to purchase something, I must trust the vendor; that is, before I decide to buy a good or a service, I must believe that the person who is selling something to me is not solely acting in his / her self-interest of making a profit but they are also acting in my interest in delivering a good or a service which was initially described or presented to me with all the benefits and defects disclosed1.

However, the nature and magnitude of these benefits will depend from case to case but, importantly, regardless of whether they are tangible or intangible, short-term or long-term lasting, delivered now or at some point in the future or even if they are proportionate with the benefit that one gains for oneself, the members of the group must believe that the actions of others are based, in part or entirely, on such intention to benefit, in one way or another, the whole group.

The origins of Social Trust

Anthropologically speaking, “the psychological mechanism underlying attitudes of trust and the most common cooperative behaviour requires direct or close relationships to create emotional bonds between individuals”, especially those developed based on culture and linage. This mechanism is very old, with some studies suggesting that these bonds were a core reason for why humans started to migrate 100,000 years ago.

As I understand it, this evolutionary perspective suggests that emotional commitments developed through strategic and economic considerations, with emotions acting as a binding contracts upon which social trust then flourished. The vast literature on this subject identifies a number of psychological building blocks of trust including reciprocity, moral obligation, trustworthiness, social relations, cooperation and familiarity.

It is however crucial to understand whether trust develops as a result of consciously taken decisions, be them more or less emotional or rational, or whether it comes from what psychologist Carl Jung calls the collective unconscious.

In his book, The Archetypes and the Collective Unconscious, Jung explained that the collective unconscious is the part of the psyche that is common to all of us and which consists of psychological elements that come from heredity. This is the realm of archetypes (manifestations of the psyche common to all humans). Meanwhile, the personal unconscious is constructed through personal experiences that have once been conscious and which, in time, have been forgotten or repressed, forming for the most part a realm of complexes.

The importance of this is as follows:

If trust is built on emotional bonds that are the result of conscious decisions (more or less calculated or impulsive), then we are not naturally wired towards trusting each other. Rather, we require conscious cognitive effort to look in someone else’s eyes and believe that they will act in a way which will not be completely to their benefit while entirely to our detriment.In this case, social trust can be to a large extent, if not entirely, manufactured.

If trust comes from the realm of archetypes, i.e. the collective unconscious, it means that to believe that others will act in a way that also considers us is deeply wired into us – or we can say that social trust is part of “human nature”. In other words, it comes from within us and we are not people without it; it cannot be manufactured for it is part of our humanity.

My take on how social trust develops is slightly more philosophical.

I take that social trust develops through a cognitive process which requires both our conscious decisions and our hereditary, common psychic ground that lead us to bond with others, believe their intentions, forgive their mistakes, understand their nature (for it is our nature as well) and carry the banner of human civilisation forward.

This approach to social is based on two observations.

First one comes from the realm of children development. When we were kids, we would play with others upon agreed rules between ourselves, trusting that the other children will abide by them as long as we did too. Once in a while, someone, perhaps ourselves, performed an action that was outside the rules, either prohibited or not covered. In such instances, we would initially banish that youngster from our game, maybe for quite a while.

However, more often than not, especially if we changed the game, we would forgive (or even forget on purpose) what happened and we would all play again. This to me suggests that trusting others is, to some unknown extent, part of who we are as people.

The second observation consists in the role of a legal system in society: to uphold and enforce rues. From this perspective, it could be argued that we make conscious decisions not to betray another’s trust, especially in situations in which we’ve led the other person to rely on this bond, because we are concerned with the consequences. In other words, in the presence of legal institutions trust can develop due to a source external to us.

Therefore, we can conclude that social trust is the byproduct of a mix of elements: evolutionary adaptations, conscious decisions, institutional actions and our own nature as human beings. None of these things are quantifiable.

The economics and politics of social trust

Trusting other people enables us to feel part of a larger group, share a common purpose and be willing to depend on one another (i.e. feeling safe when vulnerable). When trust between people exists, those bonded by it will actually “do their part” rather than just be present.

Therefore, social trust can be the fuel that rebuilds struggling communities or promotes further growth within communities that are already doing well. Indeed, from a purely sociological perspective, trusting each other is akin to laying the foundations for the necessary social order that enables human interactions, such as transactions, to continue.

The totality of transactions, or exchanges, form a market and the aggregation of all markets forms the economy. The literature discussing the role of trust within an economic context is vast, with some authors see social trust as a symbolic commodity. You can read the works of Hardin and Misztal listed in the Sources section if you are further interested. The key idea however is that trust enables economic activity and financial transactions.

Trusting each other (as well as ourselves) fosters economic development; for example, through innovation: those that take risks in pursuing new paths, venturing into the unknown and dedicating their time and effort to create and bring to market novelties in any shape or form are more likely to do so if they trust that “society” (i.e. the community to which they believe they are part of) appreciates, values and acknowledges their creations as belonging to them first and fore most.

In the day-to-day economic activity, social trust ensures, at a minimum, that we get what we pay for – based on such trust, resources move within and between borders, things are created, goods are consumed, and services are provided. Of fundamental importance for this network of markets is money.

There are number of theories about how something becomes money or what “kind” of money ought to be the right form (commodities, credit, fiat and anything in between). Peering into the fog of history is, from a point onwards, an exercise of imagination. The genesis of money is such an exercise. Summarily, the two main views around the creation of money are that it either emerged out of a free economy (i.e. organically as a result of free trade) or, as the other perspective has it, it was eventually imposed by ruling authorities (e.g. the state) in order to standardise barter and make it easier to rule.

However, we are not concerned with the details of this debate here: the importance of money in our discussion comes chiefly from its functions which are widely seen as a medium of exchange, a store of value and a unit of account.

But money has two further functions: an enabler of resources and a social institution. These functions do not exist if trust in whatever takes the role of money is absent.

In a fiat currency system, trust in money trickles down from trusting the authorities that are in charge of declaring that something is money (legla tender), for providing that money (e.g. the central bank meets demand of banknotes and coins) and for legislating where money goes, namely the central bank and the government (which for this paper we assume it is democratically elected).

Social trust is built like a net: both horizontally and vertically, from the bottom up: the individual needs to trust his / her neighbours and colleagues (horizontally) and also needs to trust politicians to represent their views, judges to design fair rules and uphold them, the police to maintain a civilised order, the teachers, lecturers and preachers to truthfully guide them through the realm of knowledge and wisdom and so on.

These institutions are gatherers and guardians of trust in a particular socio-economic order – it is however important to recognise that it is the individual who builds or collapses society.

Once authority is backed by social trust, the actions of that authority are also benefiting from the blessing of the people who believe that its actions have been taken at least in part mindful of their interests as well.

Authorities, of all kinds not just political or monetary, have at their disposal two major tools to manage and maintain the social trust in them: their actions and a range of means of communication.

Obviously, actions speak louder than words. Quite simply, people trust authorities based on their achievements, skills and character.

However, communication can build or shatter social trust. Its power in this respect can be overlooked by analysis that pays attention only to data – which is but the trace of actions and misses the context within which these actions have been performed: through communication mediums (words, imagery and sound), narratives are built which contextualise data.  

Truthful communication, which is straightforward and highlights the facts and how one got to the facts is usually desirable for social trust to be maintained.

When things start to deteriorate usually due to economic conditions becoming more difficile (or, sometimes, and even more grave, cultural changes that do not happen organically), untruthful communication – that is, communication which was used to cover in part or entirely the actions taken by those in authority positions and which have since come to light, rendering the communication in part or entirely contradictory – begins to erode social trust, creating doubt.

It is this doubt, which certainly over the past year has grown hugely across the world, that prompts me to ask the following questions:

“What is my worth as an individual to those in authority?”

“What is my money worth?” In answering this question, it might be worth to consider how much light you can buy with $ 1 billion.

“Who holds authorities to account if their actions erode social trust?”

“How can we rebuild social trust?”

These questions will only get louder from here.

Sources:

Nesse, R M (2001) Evolution and the Capacity for Commitment (Vol. 3). New York: Russell Sage Foundation, pp. 1–44

Against the current: Essays in the History of Ideas, Isaiah Berlin

Misztal, B. (1996), Trust in Modern Societies

Hardin, R. 2001. “Conceptions and Explanations of Trust” in K.S. Cook (Series Ed. &  Vol. Ed.), Trust in Society: Vol. 2. The Russell Sage Foundation Series on Trust  (1st ed., pp. 3-39). New York: Russell Sage Foundation

Innovation – the role of trust Kornélia lazányi, Obuda University,  Keleti Faculty of Business and Management, 1084, Budapest, Tavaszmező st 15-17, Hungary, June 2017

Origins of Money, Charles Menger

Authority: A social history, Frank Furedi

  1. One can see that providing a benefit larger than expected can strengthen trust in each other, especially in a consumer – vendor scenario.

Categories: Economics

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