Is trust really all that important?

Point and counterpoint.

Point: Trust is economically important

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.

Counterpoint: Trust may not be all that economically important

How would busy people in bustling cities react when confronted with seemingly abandoned cell phones? Would their instinct be to help, to ignore -- or to play finders, keepers.

To get the answer, reporters in 32 countries where Reader's Digest is published "lost" 30 phones apiece in those countries' most populous cities.

[...]

The highest-ranking city happened to be the smallest: Ljubljana, Slovenia. Twenty-nine of 30 phones were returned in this picture-postcard city in the foothills of the Alps, home to just 267,000 people

[...]

On the low end of the spectrum, Malaysia's capital, Kuala Lumpur, and Hong Kong tied for the worst performance.

Going by this result, which is admittedly highly specific but nevertheless suggestive of a low general level of trustworthiness, Hong Kong seems to be a pretty rotten performer in the trust department. If trust were all that important, I would have imagined that Hong Kong would not be the symbol of economic success that it is. Furthermore, re-examining the Forbes excerpt, the level of distrust described in the example seems to be extreme. It makes the point of course: if there is no trust at all then transaction costs can be insurmountable. But what if there is some trust? What is the difference between a typical "highly distrusting/untrustworthy" society and a typical "highly trusting/trustworthy" society? How are transaction costs impacted by typical variations in the level of trust between societies? Hong Kong seems to manage to avoid being an economic basket case despite so miserably failing the cell phone test.

 

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I don't have to trust the

I don't have to trust the milk vendor and he doesn't have to trust me. He simply knows very few customers will risk being caught for a pack of milk. He has a low probability of losing a low value item. If the exact same people were in a jewelry store, it would be quite different. The jewels would be locked and the transaction would happend in predefined steps, yet the "trust" remains the same.

Actually "trust" as a value may be economically negative as opposed to honesty. Con artists usually rely on guilt by implying that lack of trust is a form of disrespect.

Trust is Specific

I think there are a finite and small number of things that can go wrong with any particular deal. If either general trust or specific financial/logistical instruments are in place to guard against these problems, such deals can proceed. For example, businesses with little knowledge of each other located in different countries can organize letters of credit through intermediary banks.

Intermediaries need to be compensated, so the lack of trust adds to the transaction costs. I think this makes the cost of a particular type of distrust ("Will a customer pay me after I fulfill my side of the bargain?") easy to measure.

As an example, the chance of theft is so low where I live now that farming supply stores leave their goods outside and accessible to the public. Customers can collect goods at any time and phone the merchant during office hours to have the goods added to their account for next month's bill. Similarly, some grocers leave their stores unlocked with a blank sales slips for customers to fill in and drop in a cash box with payment. This effectively gives the merchants round the clock sales for the cost of many less hours of staff (or owner) employment.

If the specific trust that goods wouldn't be stolen were not available, sellers would have to find another way to solve the problem of "How do I let customers shop around the clock?" A website catalog with shopping cart might do the trick, albeit for a little additional cost.

It seems to me that what

It seems to me that what reduces transaction costs in the example you give is honesty not trust. Trust here is merely a consequence of honesty... you cannot decrease transaction cost by increasing trust... trust correlates to low transaction cost only because it follows honesty.

Trust and honesty

 

If most customers where honest but not trusted, you would still have the extra tranaction costs.

Its the trust that lowers the tranaction costs, but the trust will only be beneficial if most people are honest. If they are not the trust will go away.

 

I think that sums it up

I think that sums it up nicely. It means any attempt to lower transaction cost simply by promoting "trust" is doomed to fail.

Honesty vs. Trust

Trust (on your part as a merchant) keeps you from incurring insurance or security costs to protect against loss due to theft. Honesty (on the part of others) reduces the risk that the loss would ever be actual.

You can't control the honesty of others. Your trust is a perception of their honesty and that drives your decision on whether the risk of loss is acceptable for you to bear yourself.

I can open a shop in my very honest town. I can have such an aversion to risk that I don't trust anyone. If I install burglar bars, fences and security cameras to protect my goods, I have incurred the cost. Either my prices must be higher or my profits lower (assuming cost-of-goods-sold and other overheads are equal). Some objective measure of honesty in town is the same for me and the merchant that doesn't lock up his goods. But because we have different levels of trust, our transaction costs are different.

Darn

Stopped to do some work while I left my comment in preview and got pwned by Tim.

Markets develop trust metrics

If I send $100 to some vendor on ebay he can keep it and it probably won't be profitable to me to try to recover the money. But if I see he has a 97% approval rating on his last 30,000 transactions I really don't have qualms about sending him $100.

If another vendor has an 87% approval rating, or only 87 transactions then he better offer a very deep discount relative to the first vendor if he wants any chance of getting my business.