The Public Trust
By Melvin J. Howard
Economics has a reputation by pretending to be an exact science
rather than what it really is global psychology. The truth is economics leaves
out the aggregate behavior of humans. It seeks to cloak its uncertainties and
shifting fashions with mathematical formulae and elaborate econometric
computerized models. This much is certain; people operate within markets, free
or regulated, patchy or organized. They attach numerical (and emotional) values
to their inputs (work, capital) and to their possessions (assets, natural endowments).
They communicate these values to each other by sending out signals
known as prices. The market is people many of them and there is no calculation
for how individuals will behave to an exact science. But scientists are working
on it but until that day comes we have to rely on good old fashion trust.
News of doom and gloom are everywhere its being broadcast 24 hours
a day printed every day in newsprint. The economy, the war on terrorism who is
saying what about whom in the U.S. presidential election, negative interest
rates (“Bad Idea”). This has got a lot of people globally worried about their
futures this is setting off a chain reaction of catastrophic proportions. If
the current thinking of doom and gloom is not curtailed and stopped forthwith
it will become a reality a reality that will become a major health and economic
issue worldwide.
You have to remember money is the physical representation of
value that rises and falls in ourselves. Not within ‘things’ outside of us, but
within us. For without people, what can the value of a thing, such as a car or
art be to us nothing. In other words, it is us the observers, that place value
in things, but this value is really value in us. We give value to the material
things. The material things have no ‘money’ value in themselves we give that to
them. So, money is the external physical representation of a particular section
of our internal value, within us. As we all know today that house and block of
shares you bought recently and valued at $1 million dollars. Can fall to a
valuation of half a million dollars tomorrow when fear is introduced into the
hearts of those involved.
The fear kills a portion of the internal values of
the participants and that is reflected by money, the ‘body’ of value. This is
what’s happening today you cannot pick up a newspaper or watch a 24-hour
newscast without fear running rampant. The
only reason our system does not collapse is that we all believe in it. The
last time people stopped believing in it in a large enough extent was just
before the Great Depression when large numbers of people rushed to their banks
to withdraw their money and found that they could not all get it. This is not
what caused the Great Depression, but in a large way accelerated it.
Yet, this entire edifice the market and its price mechanism
critically depends on trust. If people do not trust each other, or the economic
"envelope" within which they interact economic activity gradually
grinds to a halt like the credit markets. Banks will not lend to Banks or
corporations or the retail section. There is a strong correlation between the
general level of trust and the extent and intensity of economic activity.
Francis Fukuyama, the political scientist, distinguishes between high-trust and
prosperous societies and low-trust and, therefore, impoverished collectives.
Trust underlies economic success, he argued in a 1995 tome. Trust is not a
monolithic quantity. There are a few categories of economic trust. Some forms
of trust are akin to a public good and are closely related to governmental
action or inaction, the reputation of the state and its institutions, and its
pronounced agenda. Other types of trust are the outcomes of kinship, ethnic
origin, personal standing and goodwill, corporate brands and other data
generated by individuals, households, and firms.
Trust in the market
To transact, people have to maintain faith in a relevant economic
horizon and in the immutability of the economic playing field or
"envelope". Put less obscurely, a few hidden assumptions underlie the
continued economic activity of market players. They assume, for instance, that
the market will continue to exist for the foreseeable future in its current
form. That it will remain inert unhindered by externalities like government
intervention, geopolitical upheavals, crises, abrupt changes in accounting
policies and tax laws, hyperinflation, institutional and structural reform and
other market-deflecting events and processes.
They further assume that their
price signals will not be distorted or thwarted on a consistent basis thus
skewing the efficient and rational allocation of risks and rewards. Insider
trading, stock manipulation, monopolies, hoarding and corruption all tend to
consistently but unpredictably distort price signals and, thus, deter market
participation.
Market players take for granted the existence and continuous
operation of institutions financial intermediaries, law enforcement agencies,
courts. It is important to note that market players prefer continuity and
certainty to evolution, however gradual and ultimately beneficial. A venal
bureaucrat is a known quantity and can be tackled effectively. A period of
transition to good and equitable governance can be more stifling than any level
of corruption and malfeasance. This is
why economic activity drops sharply whenever institutions are reformed.
Trust in other players most important
Market players assume that other players are (generally) rational,
that they have intentions, that they intend to maximize their benefits and that
they are likely to act on their intentions in a legal (or rule-based), rational
manner.
Trust in market liquidity
Market players assume that other players possess or have access to
the liquid means they need in order to act on their intentions and obligations.
They know, from personal experience, that idle capital tends to dwindle and
that the only way to, perhaps, maintain or increase it is to transact with
others, directly or through intermediaries, such as banks.
Trust in others' knowledge and ability
Market players assume that other players possess or have access to
the intellectual property, technology, and knowledge they need in order to
realize their intentions and obligations. This implicitly presupposes that all
other market players are physically, mentally, legally and financially able and
willing to act their parts as stipulated, for instance, in contracts they sign.
The emotional dimensions of contracting are often neglected in economics.
Players assume that their counterparts maintain a realistic and stable sense of
self-worth based on intimate knowledge of their own strengths and weaknesses.
Market participants are presumed to harbor realistic expectations, commensurate
with their skills and accomplishments. Allowance is made for exaggeration, disinformation,
even outright deception but these are supposed to be marginal phenomena.
When trust breaks down like now it is often the result of an
external or internal systemic shock - people react expectedly. The number of
voluntary interactions and transactions decreases sharply. With a collapsed
investment horizon, individuals and firms become corrupt in an effort to
shortcut their way into economic benefits, not knowing how long will the system
survive. Criminal activity increases.
People compensate with fantasies and grandiose delusions for their
growing sense of uncertainty, helplessness, and fears. This is a
self-reinforcing mechanism, a vicious cycle which results in under-confidence
and a fluctuating self-esteem. They develop psychological defense mechanisms.
Cognitive dissonance ("I really choose to be poor rather than
heartless"), pathological envy i.e mass shootings (seeks to deprive others
and thus gain emotional reward), rigidity ("I am like that, my family or
ethnic group has been like that for generations, there is nothing I can
do"), passive-aggressive behavior (obstructing the work flow, absenteeism,
stealing from the employer, adhering strictly to arcane regulations) - are all
reactions to a breakdown in one or more of the four aforementioned types of
trust. Furthermore, people in a trust crisis are unable to postpone
gratification.
They often become frustrated, aggressive, and deceitful if
denied. They resort to reckless behavior and stopgap economic activities. In
economic environments with compromised and impaired trust, loyalty decreases
and mobility increases. People switch jobs, renege on obligations, fail to
repay debts, relocate often. Concepts like exclusivity, the sanctity of
contracts, workplace loyalty, or a career path all get eroded. As a
result, little is invested in the future, in the acquisition of skills, in long
term savings. Short-termism and bottom line mentality rule. The outcomes of a
crisis of trust are, usually, catastrophic. Economic activity is much reduced,
human capital is corroded and wasted, brain drain increases, illegal and
extra-legal activities rise, society is polarized between haves and haves-not,
interethnic and inter-racial tensions increase. To rebuild trust in such
circumstances is a daunting task.
The loss of trust is contagious and, finally,
it infects every institution and profession in the land. It is what brings down
great empires. It is my summation no matter what government is in power, nor
matter new rules, new people and procedures. Trust is the key ingredient for
stability in the future. Before I go I want to make something very clear. Money
represents an aspect of a person’s internal value, but that does not mean that
it represents a person’s entire internal value. It is not about self-worth.
Money only represents an aspect of that internal value that pertains to wealth.
You cannot therefore say that a wealthy person has a higher self-worth and
value than a poor person.
