The Economic Value of Trust

I was digging through some boxes and found an old calabash pipe and stand. It’s the sort of pipe that people think of Sherlock Holmes smoking even though in the books he didn’t (William Gillette added the calabash for a stage adaptation over a century ago and it stuck). pipe

Gourd pipes have gone out of style, being largely replaced by mahogany. That makes this calabash if not an antique at least a curio I could put in my office as a conversation piece. But the decades-old cork ring is eroded and the whole thing is smoke scarred and tobacco encrusted. What to do?

I talked to a local tobacconist who gave me the phone number of a pipe maven in Tennessee who might be able to help. I talked to said Tennessean on the telephone and he said he could probably restore the pipe, so I have mailed it to him.

What is striking about this relative to other business transactions is that this is all done on trust. I don’t know the pipe expert from Adam (not even his last name); he could keep my pipe and there would be nothing I could do about it. On his end, I didn’t send any money so he could do the work and not get paid. But I just had a feeling that I could trust him and I guess he felt the same as we didn’t even agree on the price — we will work that out later on the basis of reason and good faith, jointly applied.

No receipts, no travel to meet in person, no insurance, no contract — all of those costly things are not needed because we exist in an atmosphere of trust.

It reminded me that one of the early stamp collecting companies used to mail sets of valuable old stamps to collectors who were asked to take what they wanted, mail in a check to pay for it, and then mail the stamps directly to the next collector on a list. Anyone could have easily stolen stamps under this system, but apparently few people did because the company was highly profitable.

We spend so much money because of distrust, whether it’s locks on our doors, liability insurance, receipts in triplicate or certified mail. We accept that we can’t trust each other and endure much deadweight financial loss on that basis. We would reap enormous economic benefits if we were more trusting and trustworthy. We think of these things as virtues and they are, but they also have large economic consequences (Did you know that the Amish are so dutiful about paying back loans that banks give them extremely low interest rates?).

I could never prove it, but I think the decline in trust in the country reduces GDP as much as many other factors that are blamed for poor economic performance. Just one more reason why the coming years are not likely to be good ones for our country.

Author: Keith Humphreys

Keith Humphreys is the Esther Ting Memorial Professor of Psychiatry at Stanford University and an Honorary Professor of Psychiatry at Kings College Lonon. His research, teaching and writing have focused on addictive disorders, self-help organizations (e.g., breast cancer support groups, Alcoholics Anonymous), evaluation research methods, and public policy related to health care, mental illness, veterans, drugs, crime and correctional systems. Professor Humphreys' over 300 scholarly articles, monographs and books have been cited over ten thousand times by scientific colleagues. He is a regular contributor to Washington Post and has also written for the New York Times, Wall Street Journal, Washington Monthly, San Francisco Chronicle, The Guardian (UK), The Telegraph (UK), Times Higher Education (UK), Crossbow (UK) and other media outlets.

25 thoughts on “The Economic Value of Trust”

  1. Years ago, before the Internet, I bought a book (a Spinoza anthology from the 1890s) at a used bookstore for $1. In it, its former owner had signed his name (the famous federal judge, Learned Hand), which I suspected would give the book additional value. I wrote to a dealer in California who specialized in antiquarian law books. He said that I should mail it to him, and he'd pay me from $50 to $100 depending upon its condition. I sent it to him and he sent me a check for $75.

  2. I am continually reminded of Yul Brynner as the King of Siam saying:
    "Is a danger to be trusting one another,
    One will seldom want to do what other wishes.
    But unless some day somebody trusts somebody,
    There'll be nothing left on Earth excepting fishes."

  3. There is an economic literature on social capital.

    Financial markets rely on trust to a large extent. The Lloyds insurance market in London works like this, I'm told: a lead underwriter writes up a policy for a risk, say fire on an oil drilling platform. Say the total is $500m, with a premium of $5m. The underwriter signs for say $50m, with the corresponding share of the premium. A messenger takes round the policy round to other underwriters in their booths. Those interested enter the sum they are ready to assume – $10m, $25m, whatever – and initial it. IIRC these initials have always been honoured, every single time, since Lloyds was founded before 1700. Underwriters have gone bust meeting them. Contrast the laboriously adversarial process of buying and selling a house in England, predicated on the bad faith of the other party; and even worse, the adversarial process in divorce courts which manufactures distrust and conflict.

    1. I have a friend who is a member of Lloyds and he told me a relevant story. After the 1906 quake, many insurance companies (particularly German ones) worked hard not to pay up, citing technical reasons. But the head of Lloyds sent a telegram to his chief agent in San Francisco with three words on it "Pay all claims". And they did, a demonstration of trustworthiness for which they were handsomely rewarded in the coming years by a flood of American business. German insurers not so much.

    2. Social capital is one reason tightly knit minorities sometimes dominate certain businesses, notably finance. When your broader reputation and standing in the fairly small community is going to be damaged by business misconduct you are more likely to stick to agreements, and, conversely bad actors are more quickly identified. This helps account for Jewish prominence in European finance, and there are probably other historical examples.

      This also works with other communities where people want to maintain a reputation for integrity – like stamp collectors or antiquarian book dealers. We can think of it as what happens in repeated games, but it is in some cases a broader phenomenon.

  4. Nice. I wonder to what degree the trust was built upon the fact that the item was relatively singular. I'll bet there a sort of ratio you could develop of level of trust to degree of obscure cultural taste. For instance, I wouldn't place much trust in sending off my (common) iphone, but more so my (less common) ukelele.

    1. I resonate with your observation and would never have done the same with an iPhone or vacuum cleaner or something else more generic. The stamp collector example, the Amish example and my pipe example all are in a way about tribe — all specialized groupings with a common interest different from the rest of the population, a sense that the other party is "one of us" or "a guy/gal like me", which would seem to make trust building easier. I suppose also it's easier to rip off people who aren't in our tribe because we don't have to pay the long-term consequence of being known in "our circle" as a cheat.

      1. In other words, never hire a contractor whose business card reads, "We cheat the other guy and pass the savings to you."

  5. "Gourd pipes have gone out of style, being largely replaced by mahogany"

    Believe you meant to say "briar", not mahagony. Briar wood is actually from the root structure of shrubs in the Heath family.

  6. If you use Google Street View to look at residential areas in many parts of the world, you will find not gated communities, but gated homes. Each home a fort. The residents might find the open yards without fences in western countries a scary proposition.

  7. I am a very trusting person, lend money readily, don't snoop on girlfriends, go places with people I don't know, accept invitations from strangers, send valuable stuff in for repairs, let tenants slide on the rent, etc. About once every 6 or 8 years I get burnt. Not my life savings, but $1500 here, $2000 there, $175 here, $400 there, an unfaithful inamorata who convinces you to by her a $500 necklace the weekend before she breaks it off, a friend who crashes my car and doesn't pay back the deductible, muggings in Morocco and Thailand by supposed new friends, occasionally some missing valuables from my apartment, etc. Everyone of my generation probably remembers those college days where you'd pool money to buy drugs, and the guy who went downtown claimed he got mugged, but somehow disappeared for two days before reporting on this, and then when he was on Step 9 of AA 15 years later confesses that he spent it on hookers and snorted an eightball himself. Shit happens. If I estimate that between 1980 and the present I have lost $10-$15,000 on trust, and been very disappointed with a few close friends and lovers (but surprised and impressed by some losers who paid me back with interest), the upside is that I've met people and gone places and done things I never would have done otherwise, 95 percent of the time working out fabulously, and established myself as a person of integrity and trust in the eyes of others. At a cost of about $400 per year worth of betrayed trust. I think the bargain works in my favor.

  8. Huh. Interesting that nobody has thus far mentioned Coase? I would have thought (non-economist I) that his theory of the firm was relevant here? I mean, that the point of the firm, is to create shared interests, resulting in increased trust amongst employees, so intra-firm transactions aren't arms-length, and hence can be far more efficient?

    Am I barking up the wrong tree here?

    Guess I'm saying that Keith's "I could never prove it" was (well, not quantitatively) proven by Coase?

    Again, not an economist, so maybe I've misunderstood completely.

  9. Trust is not always good. 63 million American voters decided to trust Donald Trump with the keys to the White House: a habitual liar with a long record of cheating the customers, employees, contractors, and partners connected with his businesses, not to mention his serial wives. It's very hard for people like us to understand why these plain and documented facts failed to undermine trust generated by messages they wanted to hear, against elitism, rationalism, uppity/slutty women, trade, immigrants, welfare scroungers and blacks, and for manly militarism, isolationism, gut feelings, pickups, patriarchal families, the American Dream, well-paid factory jobs, and 1950s nostalgia. The black joke is that Trump will necessarily fail to deliver on his promises, partly because he's a conman who won't try, partly because he could not turn back the clock even if he wanted to.

    1. ".. It's very hard for people like us to understand why these plain.." One of your clues is right there, in 'people like us' – eloi disdain for the morlocks has never been so clearly on display than in this election, and the morlocks have noticed. Trump gave off a lot of non-gentry cues, despite his wealth and expensive education, and a great deal of his vote (I think, expensively educated and fifth generation college myself, and living in a 5 to 1 Clinton community) was glee at a chance to put a thumb in the eyes of the swells.
      I'm in the middle of a hugely interesting book The Secret of our Success by Joseph Henrich who talks in part about how newbies choose the people to emulate in a community, and about our genetic predisposition to acquire culture. Trump gave off a lot of signals which map, I think, to Henrich's.

      1. It's still peculiar. The Russian electorate of 1917 consisted largely of illiterate or semiliterate peasants, most of whom had never travelled further than the nearest town, unless to be forced to serve in the Tsar's conscript armies. The party they voted for was the Left SRs: a bunch of idealistic and incompetent romantics who were nevertheless on the side of the peasants. They did not vote for the Bolsheviks, who they correctly perceived as not on their side. It takes education to be taken in by snake oil, as Germans in 1933 and Americans in 2016.

        The bizarre view of voting as self-expression also has a purchase on the American left, with BernieBros refusing to turn out for Clinton because they could not like, lust for or admire her. It's like choosing your dentist because he tells jokes.

  10. There's a well-established literature going back at least to Norbert Elias' "The Civilizing Process" that argues trust was the necessary predicate for market structures to emerge, and with them, the rise in etiquette, gentility, and (at least if you follow Pinker's reading of Manuel Eisner's research), peacefulness.

    A book I'll never hesitate to plug, as it was written by a scholar I admire greatly, argues that the birth of capitalism itself depended on Islam's command to transact with people you ordinarily wouldn't have. This trans-religious commodity trading in the eighth century set all the foundation stones for what we now consider international finance and liberal market structures. And it all relied on trust.
    (More here: https://www.amazon.com/Early-Islam-Capitalism-Ben

    1. Sounds like an interesting book. Can you give the full title? The Amazon link got truncated and does not work. It is extremely important (and will be more important in the coming years) for Americans to get a few clues about the contributions of Islam to the cultural heritage we tend to attribute exclusively to People Like Us.

      1. "Early Islam and the Birth of Capitalism" by Benedikt Koehler.

        My comment of admiration was a little tongue-in-cheek, but I do happen to think Dad's book really is stupendously worthwhile.

      2. A friend who is a retired professor once told me about a class where, at one point, he was trying to point out something in the text to a student.

        He told the student to "look near the bottom of the page, where the Arabic numerals are."

        Came the response, "I don't know any Arabic."

        The Muslim contribution to mathematics, among other things, was enormous. Both the words "algebra" and "algorithm" are of Arabic origin, the latter coming from the name of the scholar Muḥammad ibn Mūsā al-Khwārizmī, who wrote what I think was the first algebra book.

        1. As the name indicates, the great mathematician was born in Khwarezm in Central Asia, in what is now Uzbekistan. He was culturally a Persian not a Arab. The first caliphs, the Umayyads, were Arabs and Arabs ran the show. The Abbasid revolution was one of despised Persian converts: and their victory changed Islam from a national religion of the Arabs to a universal one, with Arabic only as its religious language, not always its administrative one. The Ottoman empire used Turkish, and Persian was widely spoken too..

    2. In general support of what Johann Koehler is offering here, and the value of trust in general, it's worth looking at the path to wealth and prosperity for the Quaker merchants in England. Cadbury is the name I remember, but there were others, and many small merchants. They set a fixed price, which was based on their cost plus what they believed to be a reasonable recompense for their effort and risk. Before the Quakers merchants, no fixed price. You couldn't send your kid shopping, because s/he would get taken, nor your servant. Lot of time squandered on bargaining. Doing well by doing good.

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