Trust, like reputation, is hard to earn, but easy to lose

|Peter Boettke|

As a parent, and also as a coach working with young men for the past few decades, I have tried to always preach the values taught to me by my parents and the coaches/teachers that I admired growing up and in college.  One of the wisdoms they taught me was that reputation is a vital asset you build up over time, but it is fragile and you can lose it in a single instance of a bad choice.  Don't make bad choices. Work hard to build up your reputation as a good and honest person, a reliable person, a person others can count on in tough situations, and then guard that reputation with making right choices.  That is an old school lesson about responsibility and accountability.  It is a message opposite of the protected, pampered and privileged jock that one reads about in the headlines.  But the best of sports preaches these basic lessons of hard work, responsibility, accountability, goal-setting, etc.  In short, life lessons.  But as John Wooden often stressed, we must remember sports do not build character, they reveal it.  The character is built off the court (field, etc.).  Building a reputation is a long and onerous project, but once built its maintenance also requires careful attention and concentration.  It takes a lifetime to build a reputation, but it can be lost in an instant due to a bad choice.

Trust is similar in its fragility.  At the individual level, of course, these two concepts (reputation and trust) are inter-related.  We trust those who have a trustworthy reputation, and we don't trust those who are known to be untrustworthy.  Once bitten, twice shy, or fool me one time shame on you, fool me again shame on me.  But trust is also elusive and fragile once found at the system level as well.

Yet the modern economy is built on the precarious foundation of trust, and in particular the concept of impersonal exchange.  Social cooperation under the division of labor requires that a multitude of anonymous actors trust the exchange system and benefit from participating in it.  It is not from the benevolence of the baker, the brewer and the butcher that we expect our dinner, but with regard to their self-love, right?  But it is also the case, that scarce is our lifetime are we able to form but a few good friendships, yet our survival depends critically on the cooperation of hundreds, perhaps thousands, of strangers.

Such an impersonal and complex system is easy to misunderstand and thus to critique and disregard.  Classic literature that is critical of the market economy, such as Dickens or Steinbeck, attempts to personalize the impersonal and to invoke emotion where logic and evidence would do much better at putting things in perspective.  Hayek argues that our inability to appreciate the intricate mix of institutions and mores that make up the "Great Society" is a function of our evolutionary past --- we are hard-wired to interact in intimate groups, and yet our modern day existence is dependent on the extended order of the market.  In short, the modern international order relies on social cooperation under the division of labor that requires the coordination of the plans of millions of strangers dispersed throughout the world.  The impersonal and extended order of the market system.

But not only does this system cause anxiety among intellectuals, it is a most uncomfortable fact of the world for political elites.  As Hayek once put it: "The curious task of economics is to demonstrate to men how little they know about what they imagine they can design."  This discomfort leads political elites to act to intervene in markets, especially so in times of crisis.

In a beautifully written essay on the Great Depression, my colleague John Nye explores politics, truth and trust during the 1930s.  It is a highly recommended read.  In an earlier version, Nye made (as I would read it) a brilliant point about the 'nestedness' of institutions with respect to the operation of the Gold Standard*.  In short, the reason why the Gold Standard had the problems it did in the 1920s was precisely because the subsidiary and supporting institutions had already faded into history.  Thus, we didn't really have a classical gold standard, we had something else and that caused the problems someone like Barry Eichengreen highlights in his work.  But in this version of the essay, Nye goes even beyond this point of nested institutions, and focuses on the intellectual tension and incentive incompatibility that the political elite face in dealing with market fluctuations.

It would be great for us to discuss the fine points of Nye's essay.  The Great Depression may indeed have a monetary cause, but it has many non-monetary reasons for its depth and length (see Bob Higgs).  What lessons are we to draw from this historical episode, given the realities of political elites (their beliefs and their incentives) that Nye identifies?  What is the role of the economist in this context? 

------------------------

*I have been particularly intrigued by this notion of nestedness since I simultaneously had my office and my apartment next door to George Tsebelis out at Stanford during the 1992-1993 academic year.  Tsebelis had published his book Nested Games: Rational Choice in Comparative Politics in 1991 and was working on his books dealing with Bicameralism and Veto Players.  I was working on the post-Soviet transition in politics and economics and George taught me much about the rational choice analysis of political institutions during our conversations over coffee, pizza and ice-cream (that is to convey that our discussions were morning, noon, and night).  The notion of nestedness is also critical to Lin Ostrom, et. al., analysis of the political economy of development assistance, and also Chris Coyne's work on after-war reconstruction efforts.

Comments

[Juan Carlos]

http://www.dilbert.com/strips/comic/2009-05-10/

[Jerry O'Driscoll]

Thanks, Pete, for the link. Nye's article is thoughtful and well-worth reading. I agree the analysis of trust is important.

The article is stronger on philosophy than on history. Like most economists, he treats the history of capitalism as beginning in the 18th century (though he criticizes Karl Polanyi for making just that mistake).

Nye also skips quickly over the downturn of 1920-21 w/o explaining why that downturn did not turn out to be the Great Depression (as it appeared it would be at the outset). Without a theory of 1920-21, we can have no adequate theory of 1929-33.

I also think we must go back to Wilson and the Progressives to understand the bad ideas of the New Deal and its counterparts in Europe. The experience of wartime communism during the Great War inspired much that came later.

[topills.com review]

The experience of wartime communism during the Great War inspired much that came later.