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TRUST, TRADE, AND MORAL PROGRESS: HOW MARKET EXCHANGE PROMOTES TRUSTWORTHINESS

  • Jonathan Anomaly (a1)
Abstract:
Abstract:

Trust is important for a variety of social relationships. Trust facilitates trade, which increases prosperity and induces us to interact with people of different backgrounds on terms that benefit all parties. Trade promotes trustworthiness, which enables us to form meaningful as well as mutually beneficial relationships. In what follows, I argue that when we erect institutions that enhance trust and reward people who are worthy of trust, we create the conditions for a certain kind of moral progress.

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1 Bowles Samuel, “Endogenous Preferences: The Cultural Consequences of Markets and Other Economic Institutions,” Journal of Economic Literature 36 (1998): 105. Deirdre McCloskey concurs: “I do not want to rest the case for capitalism, as some of my fellow economists feel professionally obligated to do, on material achievement alone” (Bourgeois Virtues: Ethics for an Age of Commerce [Chicago: University of Chicago Press], 22). McCloskey’s discussion of the reciprocal relationship between certain character virtues and capitalism is important. She focuses our attention on the astounding leap in Western living standards beginning in the mid-1800s, and proposes that changes in some of the virtues embedded in Western culture were both a cause and consequence of this success.

2 This does not mean there are no good arguments for restricting trade. Problems associated with externalities and public goods often generate at least a prima facie case for restricting or regulating trade. See my “Public Goods and Government Action,” Politics, Philosophy, and Economics 14, no. 2 (2015): 109–128.

3 Of course, trust is a vague term. Even if we stick with the above definition there are many different reasons we trust people, and different degrees of confidence that they will perform a particular action. Instead of focusing on trust, I want to rely on a common sense of the word and explore a particular sense of trustworthiness, and its relationship to market exchange.

4 McCloskey, Bourgeois Virtues, 159.

5 Gauthier David, “Morality and Advantage,” The Philosophical Review 76 (1967): 471.

6 Emphasizing dispositions rather than capacities is consistent with Gauthier’s focus in Morals By Agreement (New York: Oxford University Press, 1986). Trustworthiness, as used in this essay, is a close cousin to what he calls “constrained maximization” in Morals by Agreement.

7 See Thomas Schelling, The Strategy of Conflict (Cambridge, MA: Harvard University Press, 1960), and Jon Elster, Ulysses and the Sirens (Cambridge, UK: Cambridge University Press, 1998). The terminology can be confusing since Ulysses is the Roman name for Odysseus, the mythical Greek character who implored his crew to tie him to the mast and stuff his ears with wax when they neared the island of the Sirens, whose sweet songs lured sailors into dangerous waters.

8 Legal mechanisms for inducing psychological solutions to the problem of infidelity can include opting for a “fault” rather than “no-fault” divorce in states that offer the choice. This allows potential cheaters to agree in advance to incur a penalty if their philandering breaks up the marriage. Thanks to Allen Buchanan for the example.

9 I use the Greek god Prometheus (translated, literally, as “foresight”) to indicate that psychological solutions can help us overcome myopia.

10 See Robert Frank, Passions Within Reason: The Strategic Role of the Emotions (New York, NY: W. W. Norton & Co, 1998), 54: “A purely rational person who married solely because of exchange possibilities might willingly pledge fidelity, fully aware of all he stands to lose if he reneges . . . The person whose marriage is based on love has an inherent advantage in solving this problem. Love for one’s partner imposes an additional cost on the affair, one that is experienced right away. Because the emotional cost of betraying a loved person occurs in the present moment, there is at least some chance it can outweigh the immediate attractions of the affair. The purely rational materialist, who does not experience this immediate cost, will have greater difficulty implementing his pledge.”

11 Nozick Robert, The Nature of Rationality (Princeton, NJ: Princeton University Press, 1994).

12 Derek Parfit, Reasons and Persons (Oxford, UK: Oxford University Press, 1984); and Loren Lomasky, Persons, Rights, and the Moral Community (Oxford, UK: Oxford University Press, 1987), 32.

13 Robert Frank, Passions Within Reason, 69.

14 For a nice account of the problem, see David Gauthier, “Three Against Justice: The Foole, the Sensible Knave, and the Lydian Shepherd,” Midwest Studies in Philosophy 7, no. 1 (1982): 11–29.

15 Plato, The Republic, Book II. http://classics.mit.edu/Plato/republic.3.ii.html.

16 Frank, Passions Within Reason, 9.

17 Ekman Paul, ed., Emotion in the Human Face, 2nd ed. (Cambridge, MA: Malor Books, 2015).

18 Honoring commitments because we have made them, not because of what they’ll get us at a particular time, seems inconsistent with the traditional economic assumption that we should never take past investments (or “sunk costs”) into account in thinking about how to act. But as Robert Nozick says, “If someone offered us a pill that henceforward would make us people who never honored sunk costs, we might be ill advised to accept it; it would deprive us of a valuable tool for getting past temptations of the (future) moment.” The Nature of Rationality (Princeton, NJ: Princeton University Press, 1993), 23.

19 This is the main lesson from Gregory Kavka’s famous essay, “The Toxin Puzzle,” Analysis 43, no. 1 (1983): 33–36.

20 There is a vast literature on this question. The most salient is in Douglas MacLean, ed., The Security Gamble: Deterrence Dilemmas in the Nuclear Age (New York, NY: Rowman and Allanheld, 1985).

21 The reason for intending to carry out the threat comes from the fact that, if it is believed, we are more likely to obtain the benefits we seek by issuing the threat (in this case, peace) without having to pay the costs of carrying it out. David Gauthier now believes that the prospect of a failed threat against someone who we have no interest in harming (but whose actions we have an interest in influencing) renders these threats impossible to rationally make. See Gauthier, “Assure and Threaten,” Ethics 104 (1994): 690–721.

22 Frank, Passions Within Reason, 69.

23 For an overview of the relationship between trust and trade, see chapter 3 of Matt Ridley, The Rational Optimist (New York, NY: Harper Perennial, 2011). See also Paul Seabright, The Company of Strangers: A Natural History of Economic Life (Princeton, NJ: Princeton University Press, 2010).

24 For more on how social norms and moral emotions can interact to promote mutually beneficial exchange, see Jonathan Anomaly and Geoffrey Brennan, “Social Norms, the Invisible Hand, and the Law,” University of Queensland Law Journal 33, no. 2 (2014): 263–83.

25 In game theory, Robert Aumann is widely credited with discovering the conditions under which cooperation can be an equilibrium strategy in an iterated prisoner’s dilemma. See “Acceptable Points in General Cooperative n- person Games” in Robert Luce and Albert Tucker, Contributions to the Theory of Games IV (Princeton, NJ: Princeton University Press, 1959): 287–324. In biology, Robert Trivers appears to be the first to discuss the conditions for conditional cooperation in animals. See “The Evolution of Reciprocal Altruism,” The Quarterly Review of Biology 46, no. 1 (1971): 35–57. In the social sciences, Robert Axelrod discusses similar conditions for human interactions. See The Evolution of Cooperation (New York, NY: Basic Books, rev. ed., 2006).

26 The payoffs presented in this diagram might be misleading after the players cooperate many times and begin to sympathize with one another, thereby transforming the interaction into something more like an assurance game.

27 The proviso about repeating a game indefinitely is necessary to avoid the problem of backward induction. Other familiar provisos that should be added are that the players have a sufficiently low discount rate, and that they know these facts about one another. Trade may also be modeled as an Assurance Game rather than a PD.

28 Some evidence suggests trust emerges subconsciously via behavioral cues that make us more or less sympathetic to the specific people we encounter in repeated games. See Robert Frank, “Cooperation through Emotional Commitment,” in Evolution and the Capacity for Commitment, ed. Rudolph Nesse (New York: Russell Sage Foundation, 2001), 66.

29 Ridley, The Rational Optimist, 98.

30 Samuel Bowles makes this point in “Endogenous Preferences,” 93. Adam Smith also recognized that “Where people seldom deal with one another, we find that they are somewhat disposed to cheat, because they can gain more by a smart trick than they can lose by the injury which it does to their character.” Lectures on Jurisprudence (Oxford, UK: Oxford University Press, 1976 [1763]), 539.

31 Akerlof George, “The Market for ’Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84, no. 3 (1970): 488500.

32 As Jerry Evensky says, “the weaker our trust, the greater the transaction costs, and the more constrained the market.” See “Adam Smith’s Essentials: On Trust, Faith, and Free Markets,” Journal of the History of Economic Thought 33, no. 2 (2011): 251.

33 We might think firms can be trustworthy in the metaphorical sense that they act as if they were a person who ignores the immediate advantages of breaking policies to which they have committed themselves. But since I’m using “trustworthy” to refer to a cognitive disposition — a certain way of reasoning — it can only apply to conscious creatures.

34 The inferred motivations or dispositions that underlie behavior can provide us with additional reasons to trust, which is to say they generate greater confidence that a particular action will be performed. We can imagine someone — or perhaps a robot — who acted as if he were trustworthy, but didn’t actually have the psychological disposition to act on his commitments without consideration of advantage. This person would be behaviorally indistinguishable from a trustworthy person. But from the fact that we can imagine such a case it doesn’t follow that in ordinary circumstances like ours, in which trustworthiness is difficult to fake, the best strategy is always to act as if we were trustworthy without being trustworthy, or to think that trustworthiness doesn’t matter as much as behavior does. For an empirical test suggesting that inferred mental states can lead to greater mutual confidence that players will reciprocate in iterated trust games, see Kevin McCabe, Mary Rigdon, and Vernon Smith, “Positive Reciprocity and Intentions in Trust Games,” Journal of Economic Behavior and Organization 55 (2003): 267–75.

35 Bruni Luigino and Sugden Robert, “Moral Canals: Trust and Social Capital in the Work of Hume, Smith, and Genovesi,” Economics and Philosophy 16 (2000): 25.

36 While we are rightly skeptical of information provided by sellers (book jackets and movie posters never feature negative reviews), we can rely on information provided by third parties who have no financial interest in biasing our decisions in ways that make us worse-off, and consequently losing us as customers.

37 Niclas Berggren and Henrik Jordahl, “Free to Trust: Economic Freedom and Social Capital,” Kyklos 59, no. 2 (2006): 161.

38 Phrases like “honor among thieves” suggests it is sensible to say that even those with malicious or otherwise corrupt motivations exhibit character virtues. Aristotle disagrees. I do not wish to make a claim one way or another since it strikes me as a semantic dispute that we can settle by stipulating what we mean.

39 James Buchanan and Gordon Tullock, The Calculus of Consent: Logical Foundations of Constitutional Democracy (Ann Arbor, MI: University of Michigan Press, 1962), 287.

40 O’Hara Erin, “Trustworthiness and Contract,” in Zak Paul, ed., Moral Markets: The Critical Role of Values in the Economy (Princeton, NJ: Princeton University Press, 2008), 179.

41 O’Hara, “Trustworthiness and Contract,” 179. It is likely that authors like Erin O’Hara are not using “trustworthiness” in precisely the same way I am, but the way they use the term suggests they agree that trustworthy people reason in ways that differ from people who are merely trusted for reasons having nothing to do with their psychological dispositions or intentions.

42 Elinor Ostrom, “Collective Action and the Evolution of Social Norms,” Journal of Economic Perspectives 14, no. 3 (2000): 137–58; Robert Ellickson, Order without Law, (Cambridge, MA: Harvard University Press, 1991).

43 “The Origin, Regulation, and Development of Norms,” Michigan Law Review 96, (1997), 362.

44 A Cooperative Species: Human Reciprocity and Its Evolution, (Princeton, NJ: Princeton University Press, 2011), 193.

45 Claudia Williamson argues that formal institutions (like legal sanctions) can crowd out informal institutions and rules (like norms and customs), and that informal institutions are a better predictor of economic performance. Williamson, “Informal Institutions Rule,” Public Choice 139 (2009): 371–87.

46 One explanation for this rests on the psychological generalization that if people act simply out of fear of the consequences of breaking their commitments, they may fail to dispose themselves to keep their commitments for reasons that are likely to last if the sanctions are removed.

47 It is conceivable that people might internalize a norm that directs them to reason in a trustworthy way, but norms and laws cannot force people to acquire psychological dispositions.

48 The relevant empirical literature on trustworthiness is scant. But if we could show that most people are capable of radical compartmentalization such that trustworthiness in one domain has no effect on how we reason, or are capable of reasoning, in other domains, this would challenge my thesis. In particular, if we could show that people are constrained maximizers in the market but straightforward maximizers in personal relationships, this would weaken my conclusion. An empirical result wouldn’t automatically undermine the thesis, but it would suggest a more tenuous connection than the one I defend.

49 Berggren Niclas and Nilsson Therese, “Does Economic Freedom Foster Tolerance?” Kyklos 66, no. 2 (2013): 177207.

50 Joseph Henrich et al, “In Search of Homo Economicus: Behavioral Experiments in 15 Small-Scale Societies,” American Economic Association Proceedings and Papers 91, no. 2 (2001): 73–78. Apart from fairness, Deirdre McCloskey discusses the relationship between markets and character virtues in Bourgeois Equality. Jason Brennan reviews the evidence that markets promote rather than diminish important virtues in “Do Markets Corrupt?” Mark White, ed., Economics and the Virtues (Oxford, UK: Oxford University Press, 2016).

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Social Philosophy and Policy
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