Ryan Greenaway-McGrevy on benefits of interpersonal trust, macro-political benefits, who do we trust, the wallet drop experiment and how policy can enhance trust

Today's Top 5 is a guest post from Ryan Greenaway-McGrevy, a Senior Lecturer in Economics and the Director of the Centre for Applied Research in Economics at the University of Auckland. 

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz.

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See all previous Top 5s here.

Trust is integral to our well-being and prosperity. Stephen Knack, a Lead Economist at the World Bank until his recent passing, argued that all of the disparity in living standards between Somalia and the United States can be explained by the different levels of trust within the two countries.

That’s a big call. But it would be foolish to discount the importance of trust to a well-functioning society. What are the economic benefits of trust? And how do we know if we live in a trustworthy society?

1. The micro-economic benefits of interpersonal trust.

At the micro level, interpersonal trust can reduce transactions costs and help enforce contracts. According to Nobel Laureate Kenneth Arrow (1972), “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time. It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.”

Trust also reduces monitoring costs when outcomes are difficult to monitor or measure. If you implicitly trust your direct report, employee or contractor to get the job done, you don’t have to spend valuable time constantly looking over their shoulder.

2. The macro-political benefits of trust.

Trust can also assist in overcoming large-scale collective action and principal-agent problems, such as those encountered when building and running a nation state.

Trust is particularly important for the effective functioning of government in a free and democratic society: Democracy works best when voters can trust leaders not to act in their own interests by using their bestowed powers to feather their own nest.

This is where the liberal democratic West faces a problem. A resurgence of populism in many democracies reflects a deepening distrust of the old guard. The Pew Research Centre shows that many people around the globe are unhappy with how democracy is working. Meanwhile, the Economist Intelligence Unit’s democracy index has been in retreat since 2015, as the renewed democracies that emerged from behind the former iron curtain increasingly curtail civil liberties, and the US succumbs to gerrymandering and voter suppression.

Perhaps a reinvigorated appreciation of the separation of powers is in order. If power corrupts, and absolute power corrupts absolutely, then a devolution of power to a more local level might restore faith in government. Conservative columnist David Brooks believes cities are sensibly-managed – in contrast to the dumpster fire in Washington D.C. – and undergoing a renaissance in the US. Others agree.

3. But trust in whom?

We can have high levels of trust within our own group, but that does not mean we trust others from outside our group.

Olson (1982) takes a dim view of high levels of this so-called “low-radius” trust, as the group can be a means to extract wealth from non-members. Things can get pretty dire if we have two or more equally-matched groups competing for the wealth of the realm. See: Game of Thrones.

Putnam (1993), on the other hand, views private associations as a means to instil the virtues of cooperation and public service in its members, thereby generating positive spillovers for non-members. Low-radius trust cultivates high-radius trust in others from outside the group, enhancing well-being and economic performance.

Whether the Olson or the Putnam effect dominates in practice depends of the nature and purpose of the group. Many associations are more-or-less explicit in their goals of advancing the interested of their group members (such as political parties, trade unions or employer’s associations). Meanwhile, many religious, cultural and charitable organisations profess to serve others and the greater good.  

4. Measuring trust.  

So how do we know whether we live in a society with high or low levels of trust? Many social scientists point to the world values survey, a representative survey spanning over 100 countries first conducted in 1981. The key question:

“Generally speaking, would you say that most people can be trusted, or that you can't be too careful in dealing with people?”

Such questions tell us something about perceived levels of trust. But as the old Russian maxim advises: trust, but verify. When it comes to measuring virtues, we should verify opinions with evidence.

This is where the so-called ‘wallet drop’ experiments have some interesting insights. The basic idea: researchers leave a wallet in a public place, and then see whether it gets handed in. Rinse and repeat in different locations around the globe, and you begin to get a picture of the levels of civic honesty.

Here’s a recent example of such research looking at return rates for empty wallets versus those with cash. Or have a look at the summary here. The findings may surprise. Happily, New Zealand does well in these experiments.

5. How can policy enhance trust?

There is evidence to suggest that some forms of formal institutions are associated with higher levels of trust.  Knack and Keefer (1997) show that governmental mechanisms for the effective enforcement of contracts and property rights are associated with higher levels of trust cross countries.

This does not disentangle causation from correlation, but it seems intuitive that institutions that can punish transgressors when things go awry would incentivize trustworthy behaviour. Although we may not pay attention to those food safety ratings, their existence gives us the confidence to sit down and eat at a restaurant, trusting that we will not wake up with food poisoning in the early hours of the morning.

Yet we should not rely solely on policies and institutions to enhance trust. We can all play a part in further cultivating trust by being good citizens. When asking what we can do for our country and for our communities, being trustworthy is a good start.

References

Arrow, Kenneth (1972) "Gifts and Exchanges" Philosophy and Public Affairs 1(4): 343-362.

Knack, Stephen, and Philip Keefer (1997) "Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Measures" Economics and Politics 7(3): 207-227.

Olson, Mancur (1982) The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities (New Haven: Yale University Press).

Putnam, Robert D., with R. Leonardi, and R. Nanetti (1993) Making Democracy Work: Civic Traditions in Modern Italy (Princeton: Princeton University Press).