The cost of mistrust

 

Trust is at the heart of today’s complex global economy. But, paradoxically, trust is also in increasingly short supply in many of our societies, especially in our attitudes towards big business, parliaments and governments. This decline threatens our capacity to tackle some of today’s key challenges.

Imagine the scene: Checkpoint Charlie, Berlin, sometime in the 1960s. An exchange of spies is taking place. The two figures walk towards each other across the no-man’s land separating west and east. They meet in the middle, pause, and then each crosses over to the other side.

In the absence of any trust, all economic transactions would be as fraught as these Cold War handovers–a simultaneous transfer of the items being exchanged by people eyeing each other with suspicion. Trust is fundamental to any economy involving market exchanges, with the parties to transactions separated in space and time, and using money as a means of exchange.

In today’s advanced economies, though, the degree of trust involved is extraordinary. Manufactured items typically involve complex supply chains of many links that extend over continents, with demanding requirements for quality or timeliness. Globalisation has linked many more people than ever before, from different legal frameworks and different cultures. Digital technologies have brought together new communities of people participating in all kinds of social and economic innovations, often inspired by a remarkable idealism.

Perhaps even more demanding in terms of trust is that more than two-thirds of economic activity in OECD countries consists of services, the quality of which is often unknowable until purchased and consumed. In contrast to the 1960s assembly-line economy of standardised products, it has become difficult in the modern economy to monitor the effort of individual workers or the quality of their work. For example, the manager of computer programmers will not know how good their software code is until the project is finished and the software either functions or not. The manager of care workers cannot monitor how well they look after the pensioners in their charge, or how kind they are to the people in their care, short of doing the job alongside them.

Very many jobs involve a great deal of tacit knowledge, are hard to monitor, and depend on the personal commitment and experience of the individual. The importance of trust to so much economic activity explains why reputation has become all-important to businesses. Most of their value is intangible and can evaporate almost overnight in a corporate scandal.

The high level of trust required now spills over from the economy and world of work into wider society. Most of us in OECD countries live in large urban areas with a significant proportion of first or second-generation immigrants from a wide range of different cultures. While there are certainly tensions that sometimes spill over into violence or crime, the surprise is probably how calm and harmonious so many major cities prove to be. Responses to international social surveys asking questions such as: “Would you say that, generally speaking, you can trust people?” indicate that general levels of trust have been rising over time, or at least they were before the financial crisis.

Despite the crisis, the fact remains that there is, by necessity, a high level of trust in the globalised economy of intangibles, services and complex production networks.

 

©Reuters / Danish Siddiqui


Paradoxically, however, in many countries reported levels of trust in a range of institutions have been declining over many years. This is true of trust in national governments and parliaments. Big business never ranked highly in trust league tables, and has increasingly come to be mistrusted. In some countries the decline in trust has characterised other institutions  such as trade unions and–unsurprisingly–banks. So although in our personal experiences at work or managing a business, we demonstrate a high level of trust, many of us increasingly distrust the institutions with the formal responsibility for shaping and regulating the general economic and political environment. 

Does this matter? Yes, for two reasons. One is that the evaporation of trust in some key institutions is directly damaging for economic growth. The general distrust of business, not only banks but also spreading to energy companies, e-retailers, food producers and others, will tend to encourage unnecessary (as well as necessary) regulation and contribute to the climate of uncertainty holding back investment.

Perhaps even more important is the urgent need for a longer-term perspective in order to address the challenges of sustainability. Whether the issue is reducing emissions to tackle climate change or introducing structural reforms of pensions and welfare to tackle demographic trends and fiscal unsustainability, western societies will only be able to make the necessary difficult decisions if there is enough trust in those whose job it is to lead us. These may be politicians, civil servants, business leaders or technocrats. Whoever they are, they will only persuade a majority of citizens to accept short-term sacrifices for the sake of long-term sustainability if they are trusted.

Given current low levels of trust in so many institutions, it is hard to see who is in this position at the moment. This means that economic and social sustainability will not be feasible without significant effort, particularly in three areas. One is the need to educate citizens about the scale of the challenges we face through the creation of appropriate indicators of long-term outcomes, such as generational accounts or natural assets. A second is the building of trusted institutions, or re-engagement of trust in existing institutions, which is likely to involve genuine transparency and experiments in digital participation, among other things. And the third is leadership, focused on the long-term welfare of our societies and willing to stand against populist pressure in order to build on the extraordinary reserves of trust manifest elsewhere in today’s societies. Each of these is simple to state but extraordinarily difficult to implement–all the more reason to start at once.

 

References and recommended sources

Enlightenment Economics

OECD work on Economy

OECD Forum 2013 Issues

More OECD Observer articles on governance

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©DR 

 

By Diane Coyle, Director of Enlightenment Economics; Visiting Research Associate, Smith School for Enterprise and the Environment, University of Oxford

 

©OECD Yearbook 2013