Regulation and Distrust
Via Alex Tabarrok, the crew of Aghion, Algan, Cahuc and Shleifer shows that there’s more regulation in countries with higher overall levels of distrust:
It’s hard to know how you create and sustain high levels of trust, but my understanding is that there’s lots of research indicating the positive social benefits of trust. As Tabarrok says:
Crucially, when people distrust others they invest not in the highest return projects but in human and physical capital that is complementary to distrust–for example, they invest in human capital that helps them bond with their group/tribe/family rather than in human capital that helps them to bond with “outsiders” and they invest in physical capital that is more difficult to expropriate rather than in easier to expropriate capital, even though in both cases the latter investments may be the all-else-equal higher return investments.
Consequently, some of the apparent benefits of low levels of regulation may in fact be benefits of high levels of trust. At the same time, insofar as low levels of trust drive people to embrace regulatory solutions they’re likely to be disappointed.
17 Responses to “Regulation and Distrust”
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June 27th, 2009 at 8:47 am
Trust is really weird. Distrust is usually good, but too much of it is really bad. Economies collapse when nobody trusts each other. But governments go bad when the people trust them. I tend to think of New Zealand as a good example. People trust each other, but they hate the government. And the government is really good because they fear the people. They know damn well the people hate them and don’t trust them. Consequently, they respond to them quite well. They attempt to earn trust. But that’s a real democracy. In less free countries, distrust can make everything dysfunctional. It simply becomes an us vs. them situation. And it gets violent. Ultimately, a trust in the system combined with a general distrust is what you want. You want a system everyone can believe in combined with a really cynical populace that wants to throw the bums out. And that’s a tricky balance. It works in New Zealand, and in the Netherlands. Can’t say it works anywhere else.
June 27th, 2009 at 8:54 am
Fostert:
I suppose you can see why we’re screwed then.
June 27th, 2009 at 9:00 am
I’ve recently taken up a faculty position in China. I’ve got a grant that lets me buy lots of equipment, but there’s no money for scientific staff. It’s possible to count machines, but the small possibility of corrupt hiring causes grant agencies here to avoid the problem by forcing someone else to pay for salaries.
June 27th, 2009 at 9:01 am
At the same time, insofar as low levels of trust drive people to embrace regulatory solutions they’re likely to be disappointed.
Really? Making the system less friendly to assholishness is not going to reduce the amount of it?
June 27th, 2009 at 9:08 am
What the hell is a level of distrust? What does that even mean?
June 27th, 2009 at 9:12 am
Johann Hari published an article recently which contained additional references, on the subject of equality. One conclusion was that more equal societies (Sweden, Japan) had higher levels of trust than more unequal societies (US, Portugal).
June 27th, 2009 at 9:14 am
It’s far more meaningful to discuss betrayal than to discuss trust.
A crucial determinant of trust is the ability to mete out swift, certain, and severe punishment where the temptation for betrayal is strong.
A well-lubricated guillotine on Wall Street would do a great deal more to ensure the trustworthiness of our friends in financial services than their all their years of moral instruction at fine schools ever did.
June 27th, 2009 at 9:16 am
Matt (and others):
Be very careful interpreting causing from correlation.
Clearly, in correlation one factor may cause the change in the other. And, from correlation, there is no way to know the direction of causation.
But, very commonly, the relationship is caused by a third, underlying factor. In these cases, manipulating one factor, either one, will have no influence on the other.
June 27th, 2009 at 9:17 am
I’d say one fair application of the study is that the eight years of relentless Bush bashing by the media bred distrust, and the desire for more regulation. Which in turn will breed more distrust of professions and institutions, like doctors and hospitals.
This is the fatal flaw in demonizing opponents as the main tool for changing policy. PR campaigns that influence change are always negative, and as a result diminish “social capital”. In short, using fear to win a short term goal, makes this a worse society every time it’s utilized.
It’s time for liberals to be positive about the country and it’s people, rather than endlessly complaining how life isn’t perfect. It doesn’t make things better, it makes things worse.
June 27th, 2009 at 9:55 am
This is the kind of thing that always amazes me about our ‘educated’ classes. Make a scatterplot with ‘trust’ (?) on one axis, one type of regulation on the other, put it through a statistical grinder, and, voila, a line with a slope.
It might seem intuitively obvious that you don’t need to trust someone if you believe regulations will keep them honest. If a package of cookies in the store is marked “12 oz”, I don’t think I need to weigh them before buying, and I don’t make any investment of trust at all in the matter if I don’t need to.
According to the graph, Americans are almost the most trusting of people. Crucially, this has not led to investing in the highest return projects. Our money has gone to war, a Wall Street oligarchy, suburban homes, and gas-guzzling SUV- none of which are in any sense a ‘high-return investment’.
In fact, we’re so damn ‘trusting’ that we have more people in prison than the rest of the world combined, and spend more ‘defending’ ourselves than the rest of the world combined. But that’s not enough! We sleep with guns under our pillows and spend our days beeping our burglar alarms to let ourselves in.
Least of all do I trust anyone who starts blathering about how if we had fewer labor regulations we would have more trust and be more efficient.
I’ve heard a duck fart underwater before.
June 27th, 2009 at 11:04 am
Who do we trust?
According to Hennessey the taxpayer cost of the bailout will be $530 billion, quoting the CBO report. When DeLong said we would profit from the bailout, I quit trusting him. My lack of trust was verified.
Most voters, and Chinese banker, are like me, they expect huge costs in inflation or tax hikes in the coming years for the Pelosi/Paulson bailout.
June 27th, 2009 at 11:10 am
“I suppose you can see why we’re screwed then.”
Well, of course were screwed. But in the end, it doesn’t really matter. Life itself is a terminal condition. We will die anyway, it’s just a matter of when. If someone kills us, it’s just an earlier death. And usually a simpler one. I will face cancer because that’s what everyone in my family does. But I’ve seen what chemo is like, and I’m not doing it. I’ll do the acute terminal lead poisoning instead. And I have really good knowledge of anatomy. If you want to do it right, take out the medulla oblongata. Don’t just shoot yourself in the face with bird shot. You’ll have no face, but you’ll live. Not good. Use a slug, and tilt the gun slightly upwards when you put it in your mouth. Simple and easy. At that point, your life will last about one second. And nobody would bother trying to revive you. But it makes a big mess, so do it outside.
June 27th, 2009 at 12:54 pm
One of the oldest lies of the three bigest lies in American street language.
“I am here from the federal government, I am here to help you”
It is part of our culture to distrust government. Possibly, its why Congress’s ratings are so low, simply, people don’t trust their government. Whether Republican or Democratic, we can only cringe.
June 27th, 2009 at 1:02 pm
“Human capital” is one of the most loathsome pieces of current nonprofit jargon. It literally reduces all that is meaningful and human to money. Blech.
June 27th, 2009 at 1:37 pm
I do recall seeing reports about how a third of Frenchmen do not actually pay their taxes, properly. I am not taking about (legal, technical) tax avoidance, I am talking about straight-up tax evasion, illegal.
That is to say, a third of Frenchmen distrust the fairness of the regulatory state so much, that they would risk illegality to escape it.
If they cheat (and not just pay minimally, but cheat illegally) on their taxes, this is an indictment of the trustworthiness of regulatory institutions.
Same with minimum wages, really. In some countries the minimum wage is high; consequently, there would always be a small batch of bad apples paying below minimum wage. There is something to be said about that and the corrosion of public trust.
June 28th, 2009 at 2:42 am
Considering we just had an epic crisis based on trusting financial regulation to much, no r squared in the world can convince me to just love each other and not regulate …..
June 29th, 2009 at 1:26 pm
I support everything said above about causation/correlation, how to measure the quantities involved etc.
One more point: the graph correlates “level of trust” with “regulation of the MININUM WAGE”. How about trust vs. regulation of the banking industry, of food safety, of building codes, of prescription drugs….?
Do they all have the same correlation? My money is on “no”.
This is a cherry picked graph to support a predetermined hypothesis — or else to support an outright lie.