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Trust: without agreement no economy

December 22, 2013

There is an asymmetry between the different sides of contracts where economic exchange happens. There is often tension, marketplace noise and haggling, but the fundamental requirement for the exchange is agreement; remove that and there is no contract, no exchange, no price, no market. Remove the noise and you can still keep the agreement and its economy. Joseph Stiglitz makes these connections in the NYT article, In No One We Trust, in the context of the gigantic inequality that is burdening our democracy and its people, including, ultimately, the most monied who have the power to trash the foundations of wealth.

When 1 percent of the population takes home more than 22 percent of the country’s income — and 95 percent of the increase in income in the post-crisis recovery — some pretty basic things are at stake. Reasonable people, even those ignorant of the maze of unfair policies that created this reality, can look at this absurd distribution and be pretty certain that the game is rigged. But for our economy and society to function, participants must trust that the system is reasonably fair. Trust between individuals is usually reciprocal.

But if I think that you are cheating me, it is more likely that I will retaliate, and try to cheat you. (These notions have been well developed in a branch of economics called the “theory of repeated games.”) When Americans see a tax system that taxes the wealthiest at a fraction of what they pay, they feel that they are fools to play along. All the more so when the wealthiest are able to move profits off shore. The fact that this can be done without breaking the law simply shows Americans that the financial and legal systems are designed by and for the rich.

As the trust deficit persists, a deeper rot takes hold: Attitudes and norms begin to change. When no one is trustworthy, it will be only fools who trust. The concept of fairness itself is eroded. A study published last year by the National Academy of Sciences suggests that the upper classes are more likely to engage in what has traditionally been considered unethical behavior. Perhaps this is the only way for some to reconcile their worldview with their outlandish financial success, often achieved through actions that reveal a kind of moral deprivation.

It’s hard to know just how far we’ve gone down the path toward complete trust disintegration, but the evidence is not encouraging.

Economic inequality, political inequality, and an inequality-promoting legal system all mutually reinforce one another. We get a legal system that provides privileges to the rich and powerful. Occasionally, individual egregious behavior is punished (Bernard L. Madoff comes to mind); but none of those who headed our mighty banks are held accountable.

As always, it is the poor and the unconnected who suffer most from this, and who are the most repeatedly deceived. Nowhere was this more evident than in the foreclosure crisis.

The study published by the National Academy of Sciences is described as follows.

Higher social class predicts increased unethical behavior:

Seven studies using experimental and naturalistic methods reveal that upper-class individuals behave more unethically than lower-class individuals. In studies 1 and 2, upper-class individuals were more likely to break the law while driving, relative to lower-class individuals. In follow-up laboratory studies, upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals. Mediator and moderator data demonstrated that upper-class individuals’ unethical tendencies are accounted for, in part, by their more favorable attitudes toward greed.

Joseph Stiglitz concludes:

We need higher norms for what constitutes acceptable behavior, like those embodied in the United Nations’ Guiding Principles on Business and Human Rights. But we also need regulations to enforce these norms — a new version of trust but verify. No rules will be strong enough to prevent every abuse, yet good, strong regulations can stop the worst of it.

Strong values enable us to live in harmony with one another. Without trust, there can be no harmony, nor can there be a strong economy. Inequality in America is degrading our trust. For our own sake, and for the sake of future generations, it’s time to start rebuilding it. That this even requires pointing out shows how far we have to go.

And how much ground we have lost. I remember when “greed” was not good, but we had heard of what I thought (wrongly) was a fringe philosophy of the goodness of greed. My research into nature’s asymmetry has yielded a couple of results here. One is the curious conclusion that pure symmetry in a contract is impossible and would entirely mitigate any agreement. There must be asymmetry of sides for an agreement to happen. The other is that pure symmetry of equality in social relationships is likewise not only impossible but undesirable; there is such a thing as a healthy inequality in the marketplace and in socioeconomic connections. But oppression happens when one side tries to misuse this social asymmetry. In the language of asymmetry, “oppression is the attempt to impose the absolutes of one self-centered symmetry,” unbalancing and stultifying the natural varieties of experience and opportunity. Here’s to the New Year and a return of the light in more ways than one!

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