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Thursday, April 15, 2004


Markets and Trust


Markets depend upon trust. As Adam Smith stated in Wealth of Nations: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest." Markets engender trust that the other guy is going to do what is in his best interest. This working paper investigates the perceptions of public corruption as they relate to levels of trust. The results indicate that where individuals do not trust strangers, percpetions of public corruption are greater. But it is exactly in market situations in which you must trust the stranger, otherwise transaction costs increase to an extent that overall economic activity grinds to a standstill. Not surprisingly, where people don't trust strangers "free" markets have not developed.

Reading the paper brought to mind a long-standing thought experiment on my part concerning the various -isms. Specifically, how to define a particular -ism in one sentence or so. I am sure others have done this but I have purposefully tried to avoid seeking them out. However, perhaps it is also useful to add the type of trust required for the various isms, and the likelihood that such trust is well placed.








IsmBrief DefinitionTrustChances Trust is Well Placed?
CommunismNo private property, production directed by the "people" (read the dictatorship)Trust your neighbor to do what is in your best interest but not what is in his best interest.Nill
SocialismPetty private property allowed, means of production owned by the "people," production decisions determined by the "people".Trust the state beuracracy to do what's best for you and not what's best for themNill
FascismPrivate property allowed, means of production owned privately, production decisions made by the stateTrust the state to make the correct decisions on what to produce and when. Slim
State CapitalismPrivate property allowed, means of production owned privately, majority of production decisions made by private individuals, state does have considerable regulatory control over private industry.Trust the regulators, trust the producers to act in their own best interest.Unlikely
Free Market CapitalismPrivate property allowed, means of production owned privately, majority of production decisions made by private individuals, state has little regulatory control over private industryTrust the producers to act in their own best interestLikely
LibertarianismAll actions initiated by private individuals, government exists to enforce legal contracts and defend the general society for foreign attackTrust everyone to act in their own best interestGuaranteed

These are just fledgling ideas. Which systems run counter to the natural human behavior? Is libertarianism impossible because those attracted to government will ALWAYS be so attracted for their own self-interest rather than for your best interest? Damn that Scottsman.

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