The reason why the U.S. is richer than Somalia is mostly not because of culture. The great thing about formal systems, when well designed, is that they make a little bit of public spirit, altruism or professionalism go a long way

Being able to trust people might seem like a pleasant luxury, but economists are starting to believe that it’s rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.

Trust operates in all sorts of ways, from saving money that would have to be spent on security to improving the functioning of the political system. But above all, trust enables people to do business with each other. Doing business is what creates wealth. Economists distinguish between the personal, informal trust that comes from being friendly with your neighbors and the impersonal, institutionalized trust that lets you give your credit card number out over the Internet. The two types of trust are correlated with each other, because we are more willing to trust people if we feel that, ultimately, we can call the police or get a fair hearing in court.

Adam Smith, the father of modern economics, argued that wealth was built on the division of labor. He gave the famous example of the pin factory in which one worker drew out the pin wire, another cut the wire, a third added the pin head, a fourth sharpened the pin to a point and so on. But the pin factory achieves nothing if the workers can’t trust each other, and a modern global economy relies on a division of labor and the accompanying trust that spans the continents many times.

Economists Kerwin Charles and Patrick Kline have tried to put their fingers on the arbitrariness of personalized trust by looking at car pooling and race. They argue that car pooling is a good measure of trust: can you trust your fellow travelers not to be late, drive badly or murder you and leave your body in a ditch? Charles and Kline predict that, for example, African-Americans will find it easier to car pool if they live in an area with lots of other African-Americans. The statistics seem to bear them out. Trust matters, and if you live in an area full of people who look like you, you will enjoy more of it. Perhaps the institutionalized version of trust is not so bad after all.

This entry was posted on Thursday, October 19th, 2006 at 9:02 pm and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.