Trust as Capital

When I say that, I mean real capital (you know… that “K” stuff) not this new idea of social or “soft” capital. Last December, I was at Oxford for my interviews. On the last day, before my coach back to Heathrow, I stopped by this little market place. I don’t know what it’s called but it was a cute amalgam of a farmer’s market, a yard sale, and a used book sale.

The books were being sold on an honor code: please put in the box the noted amount for the books you take, we trust that you will not cheat us. I didn’t sit and observe, but I think we can all be sure that most, if not all, people did pay up. (I did, and I don’t think I’m that much more moral than anyone else who was there).

I’ve seen this kind of a set up so many times before – in the United States and Europe, at least. But maybe because this overlapped with those PPE interviews I actually started thinking about the whole system. The transaction between the buyer and the box is predicated on one assumption – trust (or at least a reasonably sufficient amount). If the bookseller did not expect to trust the consumers, he certainly would not have entertained such a exploitable set up.

Maybe this is a naiveté of experiencing a Western upbringing (I’ve never seen anything of the sort in India, where I live today… more on that later), but I venture to say that this degree of trust is not even significant by any means. In modern discourse we may disagree with one another about big things – god, the economy, Donald Trump’s hair – but we run our lives on the assumption that we can trust most people (high school girls don’t count).

We take this so for granted, but the economic payoff of this trust must be incredible (I haven’t done any real reading on this so I won’t say that it is). Because the bookseller can trust his friends, he does not himself have to sell the books or hire someone to do it for him. If his enterprise was full-time, just that he could trust his friends saves him a salary (implicitly his or explicitly his worker’s ) of maybe 30,000 pounds!

Modern supermarkets are more and more equipped with advanced physical capital that allows people to check out their own goods, lest a loud alarm sound. In the end, it achieves (for a much greater cost) nothing more than what simple trust would achieve. Forget “perfect competition” and “perfect information”. Imagine if we had “perfect trust”. The cost of every retailer (which is a huge component of many modern economies). All the structurally unemployed could then work on something of actual use, building something physical, something intellectual. Although their services were one day necessary the modern social structure should no longer demand a guarantor of fair transaction, the cultural capital that we have built should overcome such a need.

The trust of which I speak is not purely of benign intention, and that’s fine. Part of it, of course, is that we are all today part of a panopticon, each of us a guard and a prisoner. Perhaps in more isolated markets we would be more comfortable stealing (I know I would be). However, the gripping anxiety within us should ensure security.

The standard game-theoretic outcome of this all would be chaos. Because regardless of what “you” do, I’m better off if I steal. Then the dominant strategy for both of us would be to steal, and we’d all be a bunch of thieves – set the clock back to early 19th century New York. But I think we cooperate more than we compete, one of the many reasons some Western societies today are richer than the rest. An interesting example, especially pertinent to India, is the new idea of “kakonomics” , or the actual preference for bad outcomes! That’s completely irrational you would think, but the logic goes as such: “I don’t think you’ll do a good job, so I don’t want to do you a good job, but I also don’t want you to do a good job because if you do then I’ll feel bad that I didn’t!”

Madness, you might say, but it’s real. Though the Indian economy has a lot to look forward to, I feel a lot of its economic frailty is due to the fundamental lack of trust, especially among the service organizations. Kakonomics is the  diametrical opposite of trust-based economics, and its results are as such. Instead of hiring one person, we hire five to do the same thing (in the formal sector, at least).

This same thinking can be extended to explain the littered streets and wretched public toilets. However, I don’t at all suggest that this is a cultural flaw. It is more a flaw of the situations in which people have been put (you give them a dirty street, they have no incentive to keep it clean). When there is a positive exogenous shock, people react well. For example, the new Delhi Metro. The same people who spit and litter on the road right outside the metro walk into the metro and guard it as if it’s their greatest creation (there is probably a panoptical force at work, too: you don’t want to be seen littering on clean ground in the presence of so many others). Because it was given to them as a clean, extremely well-built system, people acted as such.

If we could find ways not just to increase trust in the sociological way, but to put that trust to use in daily economic transactions, I think the outcome could be great. I think we have the cultural capital today to revolutionize the way we engage in transaction. Technologists, I’m sure, will find a way to overcome that with complex algorithms and cameras not too far in the future. But there is a fundamentally more human (and therefore better) way of doing it. With this great mutual trust we’ve built over the past many years, the structure of the economy could change as much, if not more, as it did with the advent of the internet.

Would the jobs of many be lost, especially in service-oriented countries like the United States? Certainly so. But the economic development would be tremendous, and this unemployment is only structural in nature. We could then with the great influx of financial capital incident upon us, educate the retailers and salesman for a fraction of the price. Some would become mechanics, some poets, some scientists, some businessmen, some academics, but all more gainfully employed.

———-

As an addendum, before we can look forward to a truly trust-based economy, there are still many instances of cultural erosion. Cultural erosion is markedly different from immorality because it is largely accepted by society, and therefore the human panopticon cannot ensure fair practice. The best example to this effect is the incredible amount of pirating and torrenting on a daily basis.

And the prevalence of such activities doesn’t have to do with wealth, either. I went to an incredibly rich high school, and most of my friends (admittedly including myself, for a while) used to torrent all kinds of software, movies, and games (that they could easily afford). It is, unfortunately, not socially unacceptable. People today still get bootlegged Bollywood/Hollywood movies and shows for a fraction of the price.

This is cultural erosion. You can go to a classy party and talk about some expensive software you just bootlegged. You can’t talk about the Armani suit that you might have stolen. However, the lack of trust in this kind of a situation is also structurally different. At an online store, you don’t need an unskilled-yet-expensive cashier process your orders, the system does that for you. So a “download and I trust you to pay” system isn’t economically necessary to begin with.

I don’t want to discuss the economics of piracy. A lot of people defend it with ridiculous logic such as “I wouldn’t have bought it anyway, so what’s the harm?”  Or, even worse, “These guys are already so rich!”  These people are clearly the idiots who will never come up with anything brilliant themselves. More importantly, by pirating/stealing, one is just driving up the price of those who are rightfully paying, further dis-incentivizing morality.

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3 comments
  1. Gpr said:

    Panera is trying a pretty interesting experience in some places where they are running not-for-profit restaurants. They see some interesting side benefits. http://www.panerabread.com/pdf/pr-20120621.pdf
    But, this translates well into other “community” responsibilities as well, which is quite interesting.

  2. The Thinker said:

    One of the most compelling arguments I’ve read in a while

    • arra95 said:

      glad you feel that way, I’ll try to keep it up.

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