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Business and the Web of Trust

I recently bought at my local supermarket some Pinata apples. Even though I’d never heard of them before I bought a couple for, as I told the checkout clerk, I trust Safeway. The clerk looked surprised. It’s unusual to express trust in our economic system these days, and especially to express trust in big corporations. Women converse with their friends about the products they have had to return. Liberals talk comfortably about reining in the “captains of industry.” Politicians rail against “price gouging” oil companies, and everyone piles on when the subject is greedy bankers.

But if you watch what people do, you get another story. People trust their money to the bank, they save with Fidelity and Vanguard, they fill up their cars at the gas station using a debit card from the bank and have complete confidence that the oil company will not steal their money. People line up to work for big corporations and they loyally buy from their favorite brands. Our liberal friends, of course, like to look different. They put their trust in cooperative grocery stores, sports equipment stores, health cooperatives, and TIAA-CREF and look the other way as their favorite cooperative ventures slowly reinvent themselves as the cooperative equivalent of corporate brands.

This chasm between walk and talk is telling, for the reality is that the economic sector is drenched in trust.

Three stories illustrate why this is so. The first story, from the 19th century, involves John D. Rockefeller’s daughter Bessie. On a expedition with college friends in New York City shopping for a present she found herself short of cash.

At a Manhattan store they found the perfect gift: a $100 desk. Since Bessie and her companions had only $75, they asked the merchant if he could wait a few days for the remaining $25. He agreed to do so if a New York businessman would vouch for them. “My father is in business,” Bessie offered meekly. “He will vouch for us.” Who is you father? Asked the man. “His name is Mr. Rockefeller,” she said. “John D. Rockefeller: he is in the oil business.”ⁱ

The merchant knew who Bessie’s father was. But if Bessie’s father hadn’t been John D. Rockefeller then the merchant could have checked the business directory to determine his trustworthiness as a New York businessman.

The second story is about J.P. Morgan, American financier, the man that saved the financial system after the Crash of 1907. At the Pujo Committee hearings into the “money trust” in 1913, J.P. Morgan testified before the House of Representatives. Morgan and committee counsel Samuel Untermyer tussled over the question of money and credit.

Mr. UNTERMYER. Is not commercial credit based primarily upon money or property?

Mr. MORGAN. No, sir; the first thing is character.

Mr. UNTERMYER. Before money or property?

Mr. MORGAN. Before money or anything else. Money cannot buy it.

Mr. UNTERMYER. So that a man with character, without anything at all behind it, can get all the credit he wants, and a man with the property can not get it?

Mr. MORGAN. That is very often the case.

Mr. UNTERMYER. But that is the rule of business?

Mr. MORGAN. That is the rule of business, sir.

Mr. UNTERMYER. If that is the rule of business, Mr. Morgan, why do the banks demand, the first thing they ask, a statement of what the man has got, before they extend him credit?

Mr. MORGAN. That is what they go into; but the first thing they say is, “We want to see your record.”

Mr. UNTERMYER. Yes; and if his record is a blank, the next thing is how much has he got?

Mr. MORGAN. People do not care, then.

Mr. UNTERMYER. For instance, if he has got Government bond or railroad bonds, and goes into get credit, he gets it, and on the security of those bonds, does he not?

Mr. MORGAN. Yes.

Mr. UNTERMYER. He does not get it on his face or his character, does he?

Mr. MORGAN. Yes; he gets it on his character.

Mr. UNTERMYER. I see; then he might as well take the bonds home, had he not?

Mr. MORGAN. Because a man I do not trust could not get money from me on all the bonds in Christendom.

Mr. UNTERMYER. That is the rule all over, the world?

Mr. MORGAN. I think that is the fundamental basis of business.ⁱⁱ

Notice the difference between the understanding of Untermeyer and Morgan. To Morgan, business is a question of trust and relationship. To a political lawyer it is a question of conspiracy and under-the-table deals.

A young salesman once told me the story of his first big contract. He was sitting in the client’s office after the deal had been struck, and watched his client put the contract in his desk drawer. If he ever had to take that contract out of the drawer, his client told him, then their business relationship would have failed. He meant, of course, that in future their business dealings would be done on the basis on mutual trust and a spirit of give and take. The contract was there in case their mutual trust failed.

Business dealings are drenched in words of trust, words like bond, trust, equity, redeem, company, partner, credit, and grace.ⁱⁱⁱ That’s the argument of Frederick Turner in Shakespeare’s Twenty-first-Century Economics when he analyzes the contract for a “pound of flesh” in The Merchant of Venice.

A contract, though it contains a necessary orientation towards an eternal and unchanging perfection of clarity and justice, and implicitly stipulates the most unambiguous construction of its words at the moment of their composition and signing, is always an ongoing relationship of persons. It can work only so long as it contains enough free play, enough lubricant of inexactness, so that it does not seize up.^iv

The certainties of a written contract are an illusion, for the real business relationship features contingencies never imagined in the contract. The real business relationship enacts the age-old exchange of gifts and the rough-and-ready give-and-take that renews and confirms the trust between two friends.

The importance of trust as a basis for a prosperous and peaceful society is argued by Francis Fukuyama in Trust: The Social Virtues and the Creation of Prosperity.

Thus, economic activity represents a crucial part of social life and is knit together by a wide variety of norms, rules, moral obligations, and other habits that together shape the society... [O]ne of the most important lessons we can learn from an examination of economic life is that a nation’s well-being, as well as its ability to compete, is conditioned by a single, pervasive cultural characteristic: the level of trust inherent in a society.^v

Fukuyama investigates the trust question on a national and regional level, the difference between “high-trust” societies like the United States, United Kingdom, and Germany versus “low-trust” like China, Italy, and France. The difference lies mainly in the ability of people to extend trust beyond their families, their blood kin. The high-trust societies have in recent times included a wealth of voluntary associations in the space between the family and government, and it is the high-trust societies that led the way from agricultural to commercial and industrial society. Trust, argues Fukuyama, is the key marker of social well-being.

The Prisoners Dilemma shines a helpful light on the question of trust. It’s a notion developed by two analysts at the RAND Corporation in 1950 and given its name by Albert W. Tucker. In the classic situation, two prisoners are confined in separate cells. The question is: should a prisoner inform on the other prisoner and get a light sentence, or what? Generalized, the Prisoner’s Dilemma attempts to answer the question: Why or when should people trust each other? When does it pay to be trustworthy, and when does it pay to cheat? The short answer is that it pays to be trustworthy in a long-term relationship, and it pays to cheat another person on the last transaction with them. The best way to avoid the cheat situation is to have a long-term relationship in which the termination of the relationship is unthinkable. It doesn’t take too much to understand why businesses employ strategies to encourage their customers to trust them, using an array of inducements ranging from branding to unlimited return policies.

Trust is important not just between business and consumers, but business to business as well, and the reason is that it saves money. Here is an example of trust in the shipping business from the 1960s. A shipowner gets a call from his ship captain late on a Friday. His ship, in Amsterdam for repairs, is ready for sea, but for one problem. The shipyard won’t release the ship without payment of 200,000 pounds sterling. Unless payment can be arranged immediately the ship will be stuck in the shipyard all weekend and that will cost 20,000 pounds. The shipowner calls his merchant banker in London and the banker calls a bank in Amsterdam to pay the shipyard so the ship can sail on Friday night.^vi It is easy to see what is going on here. The shipyard does not trust the shipowner, for once the ship sails the shipyard might have to work hard to get payment. But the merchant banker trusts the shipowner and the bank in Amsterdam trusts the merchant bankers, for each of the parties has a long-term business relationship with the other; they trust each other.

It’s all very well for rich shipowners and merchant bankers to trust each other. It’s all very well for Wall Street titan J.P. Morgan to tell a young Jewish lawyer that he wouldn’t do business with a man he did not trust—even for all the bonds in Christendom. But most people do not do business at such rarefied altitudes. They do not have powerful friends in high places to force back the jungle and the ravenous beasts of capitalism. What about business down in the swamp? How does business survive in the informal sector of the Third World or in the inner city of the United States where the arm of the law is held against you? Fortunately we know how business works in such an inhospitable climate. From Hernando De Soto Polar, a Peruvian businessman, we know about the informal economic sector of Lima, Peru, researched by his Instituto Libertad Y Democracia and described in The Other Path. From Sudhir Alladi Venkatesh and Off the Books we know how informal business works on the south side of Chicago. And from James Tooley in The Beautiful Tree we know how illegal private schooling works in the slums of Third World cities. These stories tell us what capitalism looks like when it operates outside the law, when virtue loses all her loveliness. They tell us how capitalism operates without the institutional benefit of the legislation that, the ruling class insists, is essential to prevent a world of cruelty and oppression.

De Soto’s The Other Path: The Invisible Revolution in the Third World is the product of detailed research into the informal economy in Lima, Peru conducted originally in the late 1980s. It focused on three areas where informality--extralegal activity--had become a significant factor in the Peruvian economy: housing, street vending, and mass transit. In each of these areas, the poor immigrants arriving in Lima from the altiplano had developed a stylized act of violence, an “invasion,” to create a social space in which they could claim and win from the state private property rights. Resort to violence was necessary, according to De Soto’s research, because the new immigrants from the countryside could not obtain the necessaries of life from the formal economy. Peru’s economy was mercantilist, in the sense that the political system had politicized everything.

[The] politicization of Peruvian society means that all problems are handled primarily according to the procedures established by the government, rather than according to other standards such as economic efficiency, morality, or justice. Everything is left in the state’s hands, and society inevitably becomes bureaucratized and centralized. Politicization, centralization, and bureaucratization call all be traced to the same source: redistributive laws.^vii

In the political system, of course, the “emphasis is on reconciling different special interests, favoring those which are considered appropriate and redirecting resources to them through legal channels.”^viii “Appropriate” inevitably means powerful and established “redistributive combines.” When the peasants from the altiplano, the fertile farmland in the Andes, started appearing in strength in Lima in the mid 20th century, the political system didn’t know what to do with them, for after all, they represented a new interest that, if acknowledged, would demand a share in the distribution of political spoils. The peasants solved their problem in a profoundly impressive way. They developed the tactic of “invasion,” a stylized act of collective violence, to create a beachhead into the city’s economy that the political system would be reluctant to challenge. In housing, this invasion would involve a group of people invading a piece of unused state land and immediately occupying it and setting up temporary shelters of woven matting according to a prearranged street plan. The members of the informal settlement would already have organized a democratic government competent to government the settlement and perform the functions of criminal and civil law. In street vending, itinerant peddlers “invade” an area of sidewalk to set up stalls and sell prepared food, groceries, and common consumer durables. Eventually, the street vendors combine to build permanent markets and move off the street. In bus transportation, drivers “invade” bus routes and deliver bus service to the city. About 90 percent of Lima’s bus service is informal.

In Off the Books: The Underground Economy of the Urban Poor, Sudhir Alladi Venkatesh describes the result of his sociological research into work on the South Side of Chicago. Here the problem is mainly that unskilled workers supplement their government benefits with income doing work that pays less than minimum wage and that doesn’t get reported by to the state welfare bureaucracies. Informal workers must square with a variety of interests to be able to trade without harassment. They must square with police, with formal store managers, with the people living close to their business “pitch” and find a way to store their business equipment safely when they are not working.

So it turns out that the poor are perfectly able to form their own networks of trust, just like the big bankers. The problem for the poor is that they can’t afford the costs and regulations that the formal economic sector operates with. They cannot afford the operate in the formal sector. So they improvise, with ingenuity, and often with entrepreneurial skills and determination that are celebrated in the formal business sector.

Christopher Chantrill blogs at www.americanmanifesto.org.

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Beyond Mere Blame
What led our liberal friends into the blind alley of the administrative welfare state?

Government and the Technology of Power
If you scratch a social reformer, you will likely discover a plan for more government.

Business and the Web of Trust
Business is all about trust and relationship.

The Bonds of Faith
No society known to anthropology or history lacked religion.

All of the Above
Society is differentiated into three sectors.

Springtime for Freeloaders
The modern welfare state encourages freeloaders.

The Curse of Compulsion
The larger the government, the smaller the society.

The Real Meaning of Society
Broadening the horizon of cooperation in the “last best hope of man on earth.”

The Greater Separation of Powers
If you want to limit power then you must limit power.

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“When we began first to preach these things, the people appeared as awakened from the sleep of ages—they seemed to see for the first time that they were responsible beings...”
Finke, Stark, The Churching of America, 1776-1990

In 1911... at least nine million of the 12 million covered by national insurance were already members of voluntary sick pay schemes. A similar proportion were also eligible for medical care.
Green, Reinventing Civil Society

“We have met with families in which for weeks together, not an article of sustenance but potatoes had been used; yet for every child the hard-earned sum was provided to send them to school.”
E. G. West, Education and the State

Law being too tenuous to rely upon in [Ulster and the Scottish borderlands], people developed patterns of settling differences by personal fighting and family feuds.
Thomas Sowell, Conquests and Cultures

The primary thing to keep in mind about German and Russian thought since 1800 is that it takes for granted that the Cartesian, Lockean or Humean scientific and philosophical conception of man and nature... has been shown by indisputable evidence to be inadequate. 
F.S.C. Northrop, The Meeting of East and West

Inquiry does not start unless there is a problem... It is the problem and its characteristics revealed by analysis which guides one first to the relevant facts and then, once the relevant facts are known, to the relevant hypotheses.
F.S.C. Northrop, The Logic of the Sciences and the Humanities

“But I saw a man yesterday who knows a fellow who had it from a chappie that said that Urquhart had been dipping himself a bit recklessly off the deep end.”  —Freddy Arbuthnot
Dorothy L. Sayers, Strong Poison

I mean three systems in one: a predominantly market economy; a polity respectful of the rights of the individual to life, liberty, and the pursuit of happiness; and a system of cultural institutions moved by ideals of liberty and justice for all. In short, three dynamic and converging systems functioning as one: a democratic polity, an economy based on markets and incentives, and a moral-cultural system which is plural and, in the largest sense, liberal.
Michael Novak, The Spirit of Democratic Capitalism

The incentive that impels a man to act is always some uneasiness... But to make a man act [he must have] the expectation that purposeful behavior has the power to remove or at least to alleviate the felt uneasiness.
Ludwig von Mises, Human Action

[In the] higher Christian churches… they saunter through the liturgy like Mohawks along a string of scaffolding who have long since forgotten their danger. If God were to blast such a service to bits, the congregation would be, I believe, genuinely shocked. But in the low churches you expect it every minute.
Annie Dillard, Holy the Firm

“When we received Christ,” Phil added, “all of a sudden we now had a rule book to go by, and when we had problems the preacher was right there to give us the answers.”
James M. Ault, Jr., Spirit and Flesh

The recognition and integration of extralegal property rights [in the Homestead Act] was a key element in the United States becoming the most important market economy and producer of capital in the world.
Hernando de Soto, The Mystery of Capital

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