Canada’s best source for informed, lively commentary and
analysis on the issues facing the country — and the world.


Columns

 
 

Trust on a street corner, 
approaching midnight

by Finn Poschmann

A few blocks north and slightly to the east of the Capitol in Washington, D.C., there is a post office. Around a quarter to midnight on April 15 this year, I happened to be walking by (don’t ask why). One thing, then another, grabbed my attention. The first was that traffic was heavy as I neared the intersection of 1st NE and Massachusetts Ave. Since the downtown office core of Washington goes into a deep, fitful sleep at night, traffic is an oddity.

The second thing I noticed (hardly a feat of observation) was a handful of men and women weaving among the cars that stopped at the light with the seemingly slow ease and fleet steps of squeegee kids. Unlike squeegee-wielders, however, they were not kids, they were wearing reflective vests, and they had a singsong call that I could not easily make out amid the partylike din.

The people moving amid the traffic, no doubt out of sight of occupational health inspectors, were carrying shipping boxes of a very familiar sort – they were stackable bulk mail boxes. On noticing that (pardon me for slowness), I realized what was going on. The squeegee-like crew were postal workers – I assume on time-and-a-half at least, which I could hardly begrudge them – and April 15 is tax day in the United States. The people driving by were meeting their tax-filing deadline, and the singsong call was the posties’ message to “drop returns here, tax returns!”

And that prompted a moment’s reflection. The U.S. Postal Service and the U.S. Internal Revenue Service are institutions that receive almost ritual torment in public, at least some of it justified. They are perceived as slothful, unresponsive, lazy on the one hand and too energetic and vengeful on the other. To liberty-minded Americans, these two institutions also symbolize the overbearing state. They are, one might imagine, not much to be trusted.

Yet here were Americans, whose financial well-being could depend on delivering tax returns by midnight on the 15th, driving down the street near the post office and trusting that dropping their returns, cheques stapled inside, into a box carried by someone wandering among traffic would mean that those same returns would be accepted by the post office within minutes, postmarked, delivered to the IRS promptly and there accepted as delivered on time. There are several risks involved there, and potential points of failure even if good intentions prevail.

The scenario I describe, I thought, was a remarkable display of public trust in institutions well known for their uneasy public images. Why remarkable? In many countries, the transactions I described would be unlikely to happen. If they did, they would require an ex gratia payment, a bribe, to intermediaries. Another way to look at the sight of citizens casually passing important documents to strangers in the middle of the night is to consider the large number of developing countries where the notions of self-assessing and even paying taxes would be all but unthinkable – and that’s not to mention dropping unreceipted documents at the roadside, in the naive expectation that they would arrive whole, at a prescribed pace, at their intended destination.

What is remarkable about successful societies is that non-naive residents do expect transactions involving strangers and casual acquaintances to be successfully completed – and, in the main, happily resolved. Not all of them of course, but a big enough share of them that trust in the system prevails. After all, if such transactions failed too often, the trust that underpins them would swiftly evaporate. The implication would be that more resources would be devoted to verification and enforcement, successful transactions would be more costly to execute and fewer of them would happen. Lack of trust would put sand in the wheels of interpersonal transaction, slowing the flow of human and financial resources to their most valuable uses and making us all the poorer for it.

Which is just another way of saying that trust in one another and trust in institutions is a valuable asset or, in the now well-known economic jargon, a form of social capital. The trust that permits us to engage in transactions with people when we have less than perfect information about them or their ability to execute the commitments into which they enter can be interpreted as a capital asset that a society or community may or may not possess. Social capital improves the ease with which our efforts, our property or our financial capital can be traded with others. That makes the attributes we control more productive. We trade our time, or the things we own or produce, until they find their most valued use. The ease with which we are able to do so raises the usefulness of the resources within our collective possession. Social capital, while an intangible asset, improves a community’s productivity.

Think of two communities, each possessing similar access to natural resources, human and financial capital and people able to work. The community which is able to steer resources more smartly is better able to convert those resources into products and services that they and their trading partners value. Trust, or social capital, facilitates this conversion, so it helps to think of trust as an asset analogous to human capital, which boosts the productivity of a community’s natural resources and physical capital.

That people (much of the time anyway) display trust when dealing with members of their family or tribe, where it is relatively easy to verify and enforce the terms of a deal, is unremarkable. But trust is an enabler when it comes to dealing with strangers and casual acquaintances. It takes on a special value when dealing with new relationships, and when verification and enforcement are not so simple.

Game theory – and simple experience – show that, when engaging with new parties, individuals fare better if they begin by trusting. If both sides to an exchange trust each other initially, more happy exchanges take place. The most successful strategy is tit-for-tat – as in, trust a new pizza shop enough to try it, but if the owner reneges on the implicit deal by delivering a cold pizza with minimal toppings, punish him immediately by shifting your trade elsewhere. The process of building and reshaping trust networks is all around us.

New communication and information technology has a role to play in reinforcing and extending trust networks. EBay’s scoring system for establishing sellers’ reputations is an electronic trust network built from scratch, and built precisely to facilitate the growth and profitability of the exchange web. Improved, computerized consumer credit scoring systems facilitated a boom in U.S. home ownership and a huge securitized mortgage market.

These examples point to something else – trust networks can be gamed. Shady sellers try to puff up their online identities through phantom trades and adopt multiple identities, specifically to steal some of the benefit of others’ trust in the trust network itself. Mortgage originators, who profit from connecting borrowers to lenders but whose financial incentives are unaffected by whether debts are repaid, routinely failed in recent years to verify borrowers’ abilities to carry credit, contributing to an inflated (and eventually deflated) U.S. housing market.

The message is a familiar one from international arms negotiations: “Trust, but verify.”

Of course, trust with verification can feel like not much trust at all. A border security officer inquiring after your travel documents hardly conveys an initial stance of trust. But it is part of the process, because once credentials are established, personal travel and trade can proceed apace, and border agencies make significant investment in information systems to facilitate exactly that.

Frequent travellers across the Canada-U.S. land border take advantage of special identification cards, electronically establishing that they are who they say they are, and they travel to and fro across the border all but unimpeded. Businesses that trade goods across the border likewise take formal steps to establish their credentials, and comply with reporting procedures so that their shipments quickly cross the border. And a good thing, too, because visual inspection of every Canada-U.S. crossborder shipment would be tantamount to closing the border, impoverishing both sides. That means verification is an essential part of keeping the trust system working to our mutual benefit.

Now what about those late-night taxpayers, dropping their returns by the roadside? They are relying on the credibility of the postal service, and personal experience indicating that when you give an envelope to someone who looks like a postal worker, it will be postmarked and delivered on time and unmolested. More and more, such exchanges will be supplanted by computer communications verified by electronic signatures, and the trust network will be less visible to us. Meanwhile, we should be happy to see that trust exists and can be traded on, even on dark corners in the dead of night.

 

To see the full text of Inroads articles on the web you must Login as, or Register to become, an Online subscriber.

Existing print subscribers should Register and select Existing Subscriber option. We will manually verify your account and then activate it accordingly.

This content is available for purchase for non-members.

Purchase Only



About the Author

Finn Poschmann
Finn Poschmann is Vice President, Research, of the C.D. Howe Institute and an Inroads columnist and editorial board member.




0 Comments


Be the first to comment!


Leave a Reply

Your email address will not be published. Required fields are marked *