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Bulletin of the ERI, 2008/09 no. 2

Contents: March 2009

Trust and prosperity

Trust matters. It does so in almost any scenario that involves two or more people. For example, as economists (should) know, markets cannot exist or function effectively without some minimal degree of trust. Governments are attempting to deal with the current economic crisis by pursuing a Keynesian solution, namely, to inject large amounts of money into the economic system. What they (should) know is that the fundamentals of the economic system are by and large relatively strong, but what has happened is that some key sectors of the economic system are engulfed in a significant crisis of confidence. Trust has broken down, big time. Governments are trying indirectly to find ways to restore it. The recent, dramatic rate cuts by the Bank of England are perhaps best interpreted as attempts to restore some degree of confidence and trust.

Trust is the glue that holds relationships together. Once it is lost, a relationship is almost doomed to fail. Similarly, without some minimal degree of trust, organizations, communities and societies could not exist. Trust is a critical ingredient for successful cooperation. The greater is the degree of trust, the more productive will people be. Trust and prosperity, economic or non-economic, are intimately connected. In relatively prosperous nations, its presence is often taken for granted. That is not the case in relatively poor nations, where there is often insufficient trust in a wide range of situations.

Trust is an important part of what is known as social capital. The role that this intangible form of capital plays in the performance of any organization or society has not been adequately emphasized by policy-makers and economists. And yet it is a critical determinant of productivity and success.

In order to build and maintain trust amongst people in organizations and societies, they need to get together, do things together, and interact face-to-face. In various ways, the Internet does not help in that respect, as people spend more time on their own. Weekly get-togethers in the evening in the bar, however, can help. Policy makers should recognize that investing in activities that bring people together helps develop and maintain trust and social capital. This, in turn, contributes to productivity, good working relationships, and citizenship. It is a crucial ingredient for successful cooperation and prosperity.

Trust is a subject that desperately needs more study and analyses from more than one discipline. It needs more attention and focus from policy makers, at all levels and in all organizations and communities. Without it, prosperity is threatened.

Abhinay Muthoo

Abhinay Muthoo is director of the Economic Research Institute and chair of the Department of Economics.