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The importance of ‘Trust’

Simon Bridge

Simon Bridge from Northern Ireland reminds us why ‘trust’ is so important to business, economic success and societies.

In his book appropriately named Trust,[1] Francis Fukuyama showed that trust is good for business. He described how it was in relatively high-trust societies, such as those in Germany, the USA and Japan, that large scale business had most easily evolved. As an example he contrasts Northern Italy, where trust had evolved between citizens of city-states and Italian industry had later grown, with Southern Italy which lacked such industry and when trust did not extent beyond the extended family - as typified by Mafia society. His conclusion is clear: for business to thrive trust between partners to a transaction is necessary because otherwise the necessary protection costs make transactions between strangers too costly.

A non-business example where trust helps is hospitals. Most people would agree that addressing the medical needs of patients should be the priority, which will be hindered if hospital staff also have to worry about protecting patients and institutions from harm from other humans – whether from theft, malicious damage or physical harm. Thus even the conventions of war provide protection for buildings, vehicles and vessels displaying the red cross or red crescent – so that the doctors and nurses concerned can concentrate on their medical duties instead of always also having to worry about their and their patients’ physical security – with a consequence reduction in efficiency.

But building, and maintaining, trust is a long-term strategy which provides long-term gain. Trust can often be broken from short-term benefit. When people don’t think there is a long term-gain, then they have an incentive to maximise any short–term benefit. If fishermen in an area agree to limit the numbers of lobsters they catch, them they will be able to continue to fish for lobsters for the foreseeable future. But if they don’t think that such restraint will work and the lobsters will be fished out, then it is in each fisherman’s interest to take as many lobsters as possible while they are there to take. Such co-operation can even evolve in nature: for instance on reefs when bigger fish allow cleaner fish into their mouths to clean their teeth. The bigger fish benefit from having clean teeth and the cleaner fish benefit from eating the food stuck on the teeth of the bigger fish. But this depends on trust: a bigger fish could gain a short term benefit by eating a cleaner fish - but for the fish being cleaned, as for the lobster fisherman, going for excessive short-term benefit will compromise the longer term future for everyone.

Trust is beneficial to business because it reduces transaction costs, in both money and time. A banking friend of mine told me that his bank had placed a significant sum of money short-term with a New York bank just before the 11th September attach on the World Trade Centre. After the attack, when the New York financial system suddenly closed, there was no trace of the money and no paper records. Nevertheless my friend’s bank was able to trust that it would reappear and it did. However he doubts if things would happen like that now. The revelations of things like sub-prime mortgages have led to banks ceasing to trust one another. Transferring money now requires many more checks and balances and consequently more time and cost. Thus the availability of finance for business suffers because trust has broken down.

The increased cost of protecting transactions is proportionally higher for smaller transactions, and thus trust is particularly important for smaller businesses. But it cannot be established or protected only in certain areas. High levels of trust are in many people’s long-term interest but do we properly value it – and understand where, and how, it needs to be maintained? It may be unrealistic to expect perfect compliance but surely, as small businesses, we want to be able to expect that when we supply orders in good faith, we will be paid. And along with that we want banks to be able transfer money quickly and easily without having to complete and check excessive paperwork first and we want doctors to be able to get on with their medical duties without having to worrying about other threats. Fukuyama made the point that it was a general level of trust in society which facilitated business, not a business-only trust. Thus, for both big and small organisations, it is our interests to try to maintain trust generally and to consider, even in non-business situations, whether we are doing enough to preserve it, or whether we failing to recognise when we are in danger of sacrificing it for short-term gain.

1. Francis Fukuyama, Trust, (New York: Simon & Schuster, 1995)

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