If men were angels

Part of a collection of essays on TRUST by @futurepaul

If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.

In my process of trawling the internet for evidence to support my existing beliefs, I came across Kenneth Arrow, a Nobel Prize winning economist who has some serious meditations on trust:

Trust is an important lubricant of a social system. It is extremely efficient; it saves a lot of trouble to have a fair degree of reliance on other people’s word. Unfortunately this is not a commodity which can be bought very easily. If you have to buy it, you already have some doubts about what you have bought.

In my simplistic understanding of Kenneth’s framing, the “moral hazard” of trust is something that can’t be free market-ified, and therefore it seems to be a good excuse to get the government involved to fix things.

I appreciate Matthew McCaffrey’s criticism of Kenneth Arrow on this point:

By focusing on a competitive equilibrium, Arrow also overlooks a vital institutional problem: governments create moral hazard by socializing the costs of dangerous behaviors. Unlike other market actors, policymakers are in a unique position to systematically redistribute costs and benefits by force. They thereby increase the demand for regulatory capture and rent-seeking. Rather than impartial referees that reduce moral hazard, governments are its most common cause. Arrow definitely recognized some problems of government intervention and production, and he likewise understood that markets and civil society generate protections for consumers. Yet he never made the leap to understanding the power of entrepreneurship to eliminate moral hazard, and the power of intervention to create it.

The traditional recourse to imperfect trust is government. The “I’ll tell mother on you” solution. If Starbucks rug pulls me on my balance, I can complain to the authorities. In almost every aspect of the modern economy, if someone proves untrustworthy, my recourse is to run it up the food chain. I become Karen and I exact my revenge. The “people in charge” help make me whole, or at least punish my betrayer as a warning to others.

There’s a style of efficiency allowed by trust in authority. So much so that fiat apologists brag about it in the New Yorker:

Bitcoin is shockingly inefficient—an absurd amount of energy (approximately that consumed by the entire country of Sweden) is required to power a network capable of only seven transactions per second. (Visa processes more than two hundred times as many per second.) Transaction times often exceed ten minutes. A revolution in financial trust might be in the works, but it will have to be made of stronger stuff.

Posted Sep 4, 2022