SEMA NISEME

It would be really ‘unproductive’ if I didn’t share this with you guys. It’s an excerpt from a paper by Robert Halls and Charles Jones on reasons behind differences in economic development across different societies. I particularly love the blatancy and wider application of the second paragraph here but I included one the one above and one below to give it the proper context intended by the authors. It goes like this:

The fundamental determinant of a country’s
long-run economic performance is its social infrastructure. By
social infrastructure we mean the institutions and government
policies that provide the incentives for individuals and firms in an
economy. Those incentives can encourage productive activities
such as the accumulation of skills or the development of new
goods and production techniques, or those incentives can encourage
predatory behavior such as corruption and
theft. (Diversion).

Productive activities are vulnerable to predation. If a farm
cannot be protected from theft, then thievery will be an attractive
alternative to farming. A fraction of the labor force will be
employed as thieves, making no contribution to output. Farmers
will spend more of their time protecting their farms from thieves
and consequently grow fewer crops per hour of effort.

Social control of diversion has two benefits. First, in a society
free of diversion, productive units are rewarded by the full
amount of their production: where there is diversion, on the other
hand, it acts like a tax on output. Second, where social control of
diversion is effective, individual units do not need to invest
resources in avoiding diversion. In many cases, social control is
much cheaper than private avoidance. Where there is no effective
social control of burglary, for example, property owners must hire
guards and put up fences. Social control of burglary involves two
elements. First is the teaching that stealing is wrong. Second is
the threat of punishment. The threat itself is free: the only
resources required are those needed to make the threat credible.
The value of social infrastructure goes far beyond the notion that
collective action can take advantage of returns to scale in avoidance.
It is not that the city can put up fences more cheaply than
can individuals: in a city run well, no fences are needed at all.

Reference: Halls and Jones, ‘Why Do Some Countries Produce So Much More Output Per Worker Than Others?’ Quarterly Journal of Economics , February 1999, Vol. 114, No. 1, Pages 83-116

Trust is perhaps one of the most interesting words and concepts I have ever come across. Its mundane usage and analogies are quite insightful as well. For example, trust is like virginity, once broken, that’s it! But we also hear of secondary virginity today, so there perhaps is also such a thing as secondary trust?

In business and economics, trust has been argued to be a major factor in determining business organisation and economic development. Trust in this context is viewed for example in terms of delivering things on time and in the right quality, paying the due dues and doing it promptly, and basically doing everything as agreed and in good faith. Here, it is argued for example that the American type humongous corporation emerges as low trust between small and medium businesses doing different but interdependent economic activities would make it impossibly costly to do business between themselves. Examples include, components not delivered on time or in the right quality harming the business of the other business, late or non-payment jeopardising the very existence of the partner firm, huge legal costs of taking contractors to court for breaching agreements, etc. As such, to avoid these sorts of problems, a business sees it safest to bring most of these production stages in-house if it can obtain enough capital to increase its size, or to do business only within a small cartel-like circle of a select few businesses popularly known as, you bet, a ‘trust’!

This of course means that people who would have been entrepreneurs making the different components in their own independent small businesses become employees now doing as instructed and supervised in their highly specialised narrow job roles with little information on what’s going on in the rest of the business and with little involvement in the decision-making processes lest they get to know too much and use this to undercut the business by starting their own or selling information to the competitors. Low trust. High trust on the other hand would yield co-operative entrepreneurs or small economic producers with high expertise in their respective areas and trusting each other to do their best in the different stages/parts of production they undertake and sharing ideas and knowledge in co-ordinated decision-making and helping each other out for the good of the whole system. Am I being too utopian here? I don’t think so. That’s how Swiss watches were made for many years and that’s how most designer Italian suits and furniture and shoes and industrial machines get manufactured and those areas have sustained high levels of innovation and economic development and equality of incomes and socio-economic statii.

Obviously, cynics (masquerading as pragmatists!) will argue that those are exceptions and that big business means economies of scale, low costs, and other monopolistic benefits hence higher profits, ‘higher’ wages for workers, more innovation, economic development. But alas, the spoils are skewed towards the top management and owners rather than somewhat equitably amongst the various producers. No surprises there. Now, also, it is unlikely that these decision-making rewards-raking top management people who preside over a very wide array of activities within the business are experts in all these activities. Thus, they will make some unwise decisions that will lead to inefficiencies. These inefficiencies will in turn make the whole business shaky and unsustainable, and this will eventually slow the wider economy down. General Motors, anyone? The larger the size of the business, the harder it will fall, and the severer the consequences to everybody in terms of for example, the number of jobs that will be lost when the colossus collapses. Thus, the few advantages of low trust advantage only a few, the massive disadvantages disadvantage the entire mass.

Of course, in the absence of the large businesses, with low trust you will have a zillion micro-businesses attempting to do everything in-house and thus, the zillion jacks of all trades unable to master any trade will not advance in anything and the scattered individuals will collectively suffer from economic misery and even more distrust! More distrust will yield ill will, sadism, sabotage, malice and craftiness even in the pettiest of petty cash dealings. Thus, the disadvantages of low trust will yet further disadvantage the already disadvantaged!

Away from my business and economic obsessions, trust and/or lack of it has huge implications in any area you could think of! In love and relationships, politics and dictatorships, wolves and the skins of sheep, pirates and Indian Ocean ships, families and inheritance, colleagues and promotion hunts, tribes and election stunts, governments and the use of tax. The list is endless! Trust is needed in huge quotients everywhere! Trust is primary. But if you are trusting, you are naive. If trustworthy, use and abuse-worthy. Is there such thing as secondary virginity? If there is, is there a chance for trust too?