In eighteenth- and early nineteenth- century Britain, a sizable chunk of the nation’s economy was run by members of the religious sect known as the Quakers. Quakers owned more than half of the country’s ironworks. They were key players in banking (both Barclays and Lloyds were Quaker institutions). They dominated consumer businesses such as chocolate and biscuits. And they were instrumental in facilitating the transatlantic trade between Britain and America.
Initially, Quaker success was built around the benefits Quakers got from trading with each other. Because they dissented from - the English state religion’, members of the sect were barred from the professions, and as a result they gravitated toward business. When Quakers went looking for credit or for trade, they found it easy to partner with fellow believers. Their common faith facilitated trust, allowing a Quaker tradesman in London to ship goods across the ocean and be certain that he would be paid when they arrived in Philadelphia.
Quaker prosperity did not go unnoticed in the outside world. Quakers were well-known already for their personal emphasis on absolute honesty, and as businessmen they were famously rigorous and careful in their record keeping. They also introduced innovations like fixed prices, which emphasized transparency over sharp dealing. Soon, people outside the sect began to seek Quakers as trading partners, suppliers, and sellers. And as Quaker prosperity grew, people drew a connection between that prosperity and the sect’s reputation for reliability and trustworthiness. Honesty, it started to seem, paid.
In the wake of the orgy of corruption in which American businesses indulged during the stock-market bubble of the late 1990s, the idea that trustworthiness and good business might go together sounds woefully naïve. Certainly one interpretation of these scandals is that they were not aberrations but the inevitable by-product of a system that plays to people’s worst impulses: greed, cynicism, and selfishness, This argument sounds plausible, if only because capitalist rhetoric so often stresses the virtue of greed and the glories of what “Chainsaw” Al Dunlap, the legendarily ruthless, job- cutting CEO, liked to call “mean business.” But this popular image of capitalism bears only slight resemblance to its reality. Over centuries, in fact, the evolution of capitalism has been.in the direction of more trust and transparency, and less self-regarding behavior. Not coincidentally, this evolution has brought with it greater productivity and economic growth.
That evolution did not take place because capitalists are naturally good people. Instead it took place because the benefits of trust—that is, of being trusting and of being trustworthy—are potentially immense, and because a successful market system teaches people to recognize those benefits. At this point, it’s been well demonstrated that flourishing economies require a healthy level of trust in the reliability and fairness of everyday transactions. If you assumed every potential deal was a rip-off or that the products you were buying were probably going to be lemons, then very little business would get done. More important, the costs of the transactions that did take place would be exorbitant, since you’d have to do enormous work to investigate each deal and you’d have to rely on the threat of legal action to enforce every contract. For an economy to prosper, what’s needed is not a Pollyannaish faith in the good intentions of others—caveat emptor remains an important truth—but a basic confidence in the promises and commitments that people make about their products and services. As the economist Thomas Schelling has put it: “One has only to consider the enormous frustration of conducting foreign aid in an underdeveloped country, or getting a business established there, to realize what an extraordinary economic asset is a population of honest conscientious people.”
Establishing that confidence has been a central part of the history of capitalism. In the medieval period, people trusted those within their particular ethnic or provincial group. Historian Avner Greif has shown how the Moroccan traders known as the Maghribi built a trading system across the Mediterranean in the eleventh century by creating a system of collective sanctions to punish those who violated their commercial codes. Trade between groups, meanwhile, depended on rules that applied to the group as a whole. If one Genoese trader ripped off someone in France, all Genoese traders paid the price. This may not have been exactly fair, but it had the virtue of creating conditions under which interstate trading could flourish, since it compelled trading communities to enforce internal discipline to encourage fair dealing. On the flip side of this, merchant guilds—most notably the German Hanseatic League—protected their members against unfair treatment from city-states by imposing collective trade embargoes against cities that seized merchant property.
As the Quaker example suggests, intragroup trust remained important for centuries. For that matter, it remains important today—look at the success of ethnic Chinese businessmen in countries across Southeast Asia. But in England, at least, contract law evolved to emphasize individual responsibility for agreements and, more important, the idea of that responsibility began to take hold among businessmen more generally. As one observer said in 1717, “To support and maintain a man’s private credit, ‘tis absolutely necessary that the world have a fixed opinion of the honesty and integrity, as well as ability of a person.” And Daniel Defoe, around the same time, wrote, “An honest tradesman is a jewel indeed, and is valued wherever he is found.”
Still, Defoe’s very emphasis on how valuable people found an honest businessman is probably evidence that there weren’t many honest businessmen. And the Quakers, after all, became known for their reliability precisely because it seemed exceptional. It’s certainly true that the benefits of honesty and the relationship between trust and healthy commerce were recognized. Adam Smith, in The Wealth of Nations, wrote, “when the greater part of people are merchants they always bring probity and punctuality into fashion,” while Moritesquieu wrote of the way commerce “polishes and softens” men. But it wasn’t until the nineteenth century—not, coincidentally, the moment when capitalism as we know it flowered—that trust became, in a sense, institutionalized. As the historian Richard Tilly has shown in his study of business practices in Germany and Britain, it was during the 1800s that businessmen started to see that honesty might actually be profitable. In America, as John Mueller shows in his wonderful hook Capitalism, Democracy, and Ralph’s Pretty Good Grocery, P. T. Barnum—whom we all know as the victimizer of suckers—in fact pioneered modem ideas of customer service, while around the same time John Wanamaker was making fixed retail prices a new standard. And the end of the nineteenth century saw the creation of independent institutions like the Underwriters Laboratory and the Better Business Bureau, all of which were intended to foster a general climate of trust in everyday transactions. On Wall Street, meanwhile, J. P. Morgan built a lucrative business on the idea of trust. In the late nineteenth century, investors (particularly foreign investors) who had been burned by shady or shaky railroad investments were leery of putting more money into America. The presence of a Morgan man on the board of directors of a company came to be considered a guarantee that a firm was reliable and solid.
At the heart of this shift was a greater emphasis on the accumulation of capital over the long run as opposed to merely short- term profit, an emphasis that has been arguably a defining characteristic of modern capitalism. As Tilly writes, businessmen started to see “individual transactions as links in a larger chain of profitable business ventures,” instead of just “one-time opportunities to be exploited to the utmost.” If your prosperity in the long run depended on return business, on word-of-mouth recommendations, and on ongoing relationships with suppliers and partners, fair dealing became more valuable. The lubrication of commerce that trust provides became more than desirable. It became, necessary.
What was most important about this new concept of trust was that it was, in some sense, impersonal. Previously, trust had been the product primarily of a personal or in-group relationship— I trust this guy because I know him or because he and I belong to the same sect or clan—rather than a more general assumption upon which you could do business. Modern capitalism made the idea of trusting people with whom you had “no prior personal ties” seem reasonable, if only by demonstrating that strangers would not, as a matter of course, betray you. This helped trust become woven into the basic fabric of everyday business. Buying and selling no longer required a personal connection. It could be driven instead by the benefits of mutual exchange.
The impersonality of capitalism is usually seen as one of its unfortunate, if inescapable, costs. In place of relationships founded on blood or affection, capitalism creates relationships founded solely on what Marx called the “money nexus.” But, in this case, impersonality was a virtue. One of the fundamental problems with trust is that it usually flourishes only where there are what sociologists call “thick relationships”—relationships of family or clan or neighborhood. But these kinds of relationships are impossible to maintain with many people at once and they are incompatible with the kind of scope and variety of contacts that a healthy modern economy (or a healthy modern society) needs to thrive. In fact, thick relationships can often be inimical to economic growth, since they foster homogeneity and discourage open market exchange in favor of personalized trading. Breaking with the tradition of defining trust in familial or ethnic terms was therefore essential. As the economist Stephen Knack writes, “The type of trust that should be unambiguously beneficial to a nation’s economic performance is trust between strangers, or more precisely between two randomly selected residents of a country Particularly in large and mobile societies where personal knowledge and reputation effects are limited, a sizeable proportion of potentially mutually beneficial transactions will involve parties with no prior personal ties.”
As with much else, though, this relationship between capitalism and trust is usually invisible, simply because it’s become part of the background of everyday life. I can walk into a store anywhere in America to buy a CD player and be relatively certain that whatever product I buy—a product that, in all likelihood, will have been made in a country nine thousand miles away—will probably work pretty well. And this is true even though I may never walk into that store again. At this point, we take both the reliability of the store and my trust in that reliability for granted. But in fact they’re remarkable achievements.
This sense of trust could not exist without the institutional and legal framework that underpins every modern capitalist economy. Consumers rarely sue businesses for fraud, but businesses know that the possibility exists. And if contracts between businesses are irrelevant, it’s hard to understand why corporate lawyers are so well paid. But the measure of success of laws and contracts is how rarely they are invoked. And, as Stephen Knack and Philip Keefer write, “Individuals in higher-trust societies spend less to protect themselves from being exploited in economic transactions. Written contracts are less likely to be needed, and they do not have to specify every possible contingency.” Or, as Axelrod quotes a purchasing agent for a Midwestern business as saying, “If something comes up you get the other man on the telephone and deal with the problem. You don’t read legalistic contract clauses at each other if you ever want to do business again.”
Trust begins there, as it does in Axelrod’s model, because of the shadow of the future. All you really trust is that the other person will recognize his self-interest. But over time, that reliance on his own attention to his self-interest becomes something more. It becomes a general sense of reliability, a willingness to cooperate (even in competition) because cooperation is the best way to get things done. What Samuel Bowles and Herbert Gintis call prosociality becomes stronger because prosociality works.
Now, I realize how improbable this sounds, Markets, we know, foster selfishness and greed, not trust and fairness. But even if you find the history unconvincing, there is this to consider: in the late 1990s, under the supervision of Bowles, twelve field researchers—including eleven anthropologists and one economist— went into fifteen “small-scale” societies (essentially small tribes that were, to varying degrees, self-contained) and got people to play the kinds of games in which experimental economics specializes. The societies included three that depended on foraging for survival, six that used slash-and-burn techniques, four nomadic herding groups, and two small agricultural societies. The three games the people were asked to play were the three standards of behavioral economics: the ultimatum game (which you just read about), the public-goods game (in which if everyone contributes, everyone goes away significantly better off, while if only a few people contribute, then the others can free ride off their effort), and the dictator game, which is similar to the ultimatum game except that the responder can’t say no to the proposer’s offer. The idea behind all these games is that they can be played in a purely rational manner, in which case the player protects himself against loss but forgoes the possibility of mutual gain. Or they can be played in a prosocial manner, which is what most people do.
In any case, what the researchers found was that in every single society there was a significant deviation from the purely rational strategy But the deviations were not all in the same direction, so there were significant differences between the cultures. What was remarkable about the study, though, was this: the higher the degree to which a culture was integrated with the market, the greater the level of prosociality. People from more market-oriented societies made higher offers in the dictator game and the ultimatum game, cooperated in the public-goods game, and exhibited strong reciprocity when they had the chance. The market may not teach people to trust, but it certainly makes it easier for people to do so.