Tuesday, November 10, 2009

Interesting article on the importance of trust

Tim Harford writes about The Economics Of Trust:

Imagine going to the corner store to buy a carton of milk, only to find that the refrigerator is locked. When you've persuaded the shopkeeper to retrieve the milk, you then end up arguing over whether you're going to hand the money over first, or whether he is going to hand over the milk. Finally you manage to arrange an elaborate simultaneous exchange. A little taste of life in a world without trust--now imagine trying to arrange a mortgage.
Being able to trust people might seem like a pleasant luxury, but economists are starting to believe that it's rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.
"If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia," ventures Steve Knack, a senior economist at the World Bank who has been studying the economics of trust for over a decade. That suggests that trust is worth $12.4 trillion dollars a year to the U.S., which, in case you are wondering, is 99.5% of this country's income. If you make $40,000 a year, then $200 is down to hard work and $39,800 is down to trust.


I remember hearing that one of the reasons England's economy did so well about two hundred years ago was that the Quakers or Methodists developed a network of trust, and were able to create larger businesses and take riskier ventures.

Trust shouldn't be blind. I like the line of "Trust, but verify."

Technorati tags: trust, economy


Mrs. C said...

Um... I read this post and totally thought you were talking about something else for a while. See, I thought it was about public education. We get taxed for ten gallons of milk per family. Suppose some families need three gallons, and other families twenty or none at all.

You need an elaborate system to figure out who needs how many gallons... and then you need to fight the system with YOUR OWN MONEY (usually more than the ten gallons are worth!)

Then the schools go crying about the spilled milk and how they need MORE money so they can buy more milk "for the children."

Meh. I've had a hard time recently and am feeling cynical. I just got a draft IEP with ANOTHER CHILD's info all over it. :[

Jean said...

It's my belief that a free and prosperous society operates on trust and honesty. The system can tolerate a certain amount of cheating, but only to a point--after that, everything gets difficult.

Mexico is an example--Mexico ought to be a wealthy country. It has tons of natural resources, a hard-working population with many strong families---but endemic corruption in the gov't and business makes it impossible for most people to get a decent education and earn a good living.

If you can't trust your accountant with your money, it will be hard to run a business. If you can't trust your bank teller to put your money in your account, you'll keep your money at home under the mattress. And so on and so forth.

Americans have a workable society because we are largely honest. As cheating becomes more common, we all suffer, and if we pass a tipping point, we'll be in big trouble.