Trust And The Economy

Jennifer Roback Morse writes in her Love & Economics: It Takes a Family to Raise a Village:

Contract law cannot be enough to protect people from “efficient” breaches of contract. The world could not do the amount and kind of business it does if literally everybody acted opportunistically on every occasion.

The banking system provides a specific example of the economic significance of trust. The banking system is based on trust: trust that your money will be there when you go to withdraw it, trust that your loan will not be called in ahead of schedule. Without trust of this kind, the banking system would collapse, no matter how it was regulated and no matter how much deposit insurance was pumped into it. The banking system of Europe has its foundations in the activities of trading families and religious orders during the eleventh, twelfth, and thirteenth centuries. One of the marvelous phenomena of economic development is the extensions of those networks of trust, based on personal contact or highly developed reputations, into networks available even to strangers. Hayek described that system of trust among strangers as the “Great Society.”

In the decade since the collapse of the Soviet Union, well-meaning Western economists have tried to graft a Western-style banking system onto that country. But the Russian people have been informing on one another, lying to the government, and generally doing what they could get away with for seventy years. Many of the economic and political leaders of Russia have had no scruples at all about lining their pockets with the money entrusted to them for the development of the country. No amount of formal regulation would be enough to overcome this fundamental lack of trustworthiness, especially in the short term. [52-53]