The Trust Deficit

We don't trust our banks. We don't trust our big businesses. We don't trust our schools, our media, or our labor unions. We don't think we can trust our future, and we know we can't trust our politicians to secure that future. A fresh conspiracy theory aimed at the Bureau of Labor Statistics implies that we now seem unable even to trust our numbers.

America has a trust deficit. This spreading lack of faith in our strongest institutions contributes -- as surely as our fiscal deficit -- to economic weakness, political paralysis, indecision, and despair. Every breach unrepaired and fear unaddressed increases that deficit, until we find ourselves unable to believe even the most basic promises. And when trust is gone, the promise of capitalism goes with it.

Trust economics
Capitalism is a game of trust. This tired old adage gets trotted out by disaffected journalists whenever another ethical lapse smears its way across the financial pages -- Bernie Madoff, Enron, WorldCom, LIBOR, subprime liar's loans, Lehman Brothers, "doing God's work," and so on. Yet the breaches continue, and in some ways they appear to grow larger and more frequent.

Economists have known that trust is an essential part of capitalism for generations. John Stuart Mill wrote in 1848 that in some European nations, "the most serious impediment to conducting business ... is the rarity of persons ... fit to be trusted." Nobel-winning economist Kenneth Arrow remarked in 1972 that "virtually every commercial transaction has within itself an element of trust." The past two decades saw a boom in "trust economics" as the bonds of trust appeared to weaken. If we know so much about the importance of trust to the free flow of commerce, why have we had such a difficult time maintaining it?

It takes a village
It's through community that we build trust. Indeed, the pillars of local communities -- small-business owners, local governments, doctors, nurses, and schoolteachers -- continue to be held in high ethical regard by the American people. However, as our communities become increasingly digital, their bonds of trust have weakened.

Our online social connections are, by and large, geographically diverse but emotionally shallow. Humans have a hardwired limit to the number of social connections they can meaningfully process, and it tops out at around 150. If you have 500 Facebook (Nasdaq: FB  ) friends, you're not only connected to a larger social group than your brain can handle, but many people in that far-flung group may well occupy a space in your brain that local community members might have held in years past.

Community organizations, as a result of the increasing digitization of our lives, have dwindled. Boy Scout membership is half what it was 40 years ago, despite an increase of 100 million in the American population. The Junior Chamber of Commerce has lost two-thirds of its membership in two decades. The Parent Teacher Association's membership has fallen by more than half since the 1960s.

Instead of participating in their communities, average Americans spends 32 hours online every month. Facebook-connected users spend nearly eight hours per month on the social network.Today, people have fewer close friends than they did when the Internet was first commercialized in the 1980s. Fewer Americans now trust their friends to provide accurate information than trust "the Internet" as a whole. What's the point of having so many friends if you can't really trust them?

The crux
The Internet's architects, mindful of the role trust plays in its success as a commercial platform, have made various efforts over time to burnish the credibility of its participants. The Open Identity Exchange, a nonprofit trust-building foundation backed by AT&T (NYSE: T  ) , Google (Nasdaq: GOOG  ) , eBay's (Nasdaq: EBAY  ) PayPal, and other online-dependent enterprises, is one recent attempt. Its focus is the creation of "trust frameworks" supported by the interlocking reputations of policymakers, credentialing institutions, and individuals. Universally acceptable reputation systems, as the trust frameworks aim to become, would help online users feel more comfortable with their transactions -- but what about the majority of transactions that still take place in the real world?

If the Internet is the problem, there's not likely to be an easy solution. Constant connectivity has done more to change the nature of human life and commerce than perhaps any development since the Industrial Revolution. We certainly can't go back and turn it all off. Nor can we ignore the impact it has on our ability to trust in each other and in our institutions.

Without communities, our sense of trust in each other deteriorates. Stronger interpersonal social bonds won't stop the next Madoff, but they can do much to improve the sense of civic responsibility necessary to maintain strong institutions and fair outcomes, preventing many other potential economic calamities from growing out of control. How can we rebuild those bonds? That's a question we may soon need to answer, if we're to hope that the American economy can again be an engine of prosperity for all.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 09, 2012, at 2:53 PM, IWWT wrote:

    Apply third party audits to sustainable product/company standards, then educate the population on what these standards do to provide the rules for very fair play.

    B Corps, Good Guide, CERES SAQ, ULE 880... there are many - start championing the most comprehensive in your posts, tying their social and eco good back to profits.

    Transparency is crucial. Small towns don't lock their doors because everyone knows everyone else. In today's tech environment, big business knows everything about you, but you don't know anything about what big business is doing. You can't expect mutually beneficial trust in that environment.

  • Report this Comment On October 09, 2012, at 6:15 PM, NobodysFool2011 wrote:

    The phrase "trust frameworks" should not even be used in the same sentence as eBay, Paypal, Google and AT&T. These companies are among the least trustworthy and I'm certain many consumers would be more comfortable using the term "necessary evil" in relation to them.

    However, given their track record, it's fairly easy to see why they would be involved with Open Identity Exchange. It's sort of like Dracula, Nosferatu and Radu teaming up to sponsor a blood drive.

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