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Trust has become a significant topic of study in the social sciences over the past decade. Trust can be defined in relational terms as the belief that the trustor will take the trustee’s interests to heart. In the encapsulated interest view of trust articulated by Hardin (2002) one party A trusts party B with respect to x (a specific domain of activity) when A believes that her interests are included in B’s ”utility function” such that B values what A desires because B wants to maintain good relations with A or wants to maintain a reputation for being trustworthy in the network of relations in which the A-B relation is embedded. The shadow of the future casts a protective veil over the relationship.
Others define trust as the belief that the trustee will not take advantage of the vulnerability of the trustor. Often theorists do not make a clear distinction between trust and trustworthiness. Perceived trustworthiness lowers the likelihood of monitoring in many situations. In this way trust reduces the cost of monitoring and in some contexts it may also reduce transaction costs since investment in contracts or credible commitments are not required to secure the transaction.
The Nobel-prize winning economist Kenneth Arrow (1974: 23) recognized much earlier the pragmatic value of trust. Arrow (like the sociologist Luhman) viewed trust as 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.” In Arrow’s view trust not only saves on transaction costs, but it also increases the efficiency of a system enabling the production of more goods (or more of what a group values) with less cost. But it cannot be bought and sold on the open market and it is highly unlikely that it can be simply produced on demand. A lack of mutual trust is one of the properties of many of the societies that are less developed economically, Arrow argues, reflecting a theme that was picked up two decades later by Francis Fukuyama.
The lack of mutual trust makes collective undertakings difficult, if not impossible, since individuals cannot know if they engage in an action to benefit another that the action will be reciprocated. It is not only the problem of not knowing whom to trust, it is also the problem of having others not know they can trust you. The difficulty that arises is how to coordinate the interests of individuals in society to produce more of what they need as a collectivity. This problem is at the heart of the work on social dilemmas in the social sciences and it has attracted much attention in the past few decades. As Arrow notes, the lack of mutual trust represents a distinct loss economically as well as a loss in the smooth running of the political system which requires the success of collective undertakings.
Shapiro (1984) argues that financial transactions do not occur easily without trust because contracts are incomplete. Trust thus provides the social foundations for relations of exchange and production. Monitoring is ineffective. Sanctioning can be costly. Transaction costs may be high. To the extent that actors are trustworthy with respect to their commitments such costs can be reduced within organizations and in the economy more broadly. But without the institutional backing of contract law and other forms of legal protection few societies rely strictly on the vagaries of personal relations. In economies under transition from one major form of economic organization to another, as in the transitions that occurred in post-communist societies, reliance on personal networks and trust relations is often an important step in the evolution to systems of trade that require interactions with strangers in the context of market economies. New linkages between economics, psychology, political science and sociology are being developed, as topics such as trust take on broader social significance, especially in uncertain times.
- Arrow, J. (1974) The Limits of Organization. W. W. Norton, New York.
- Cook, K. S. (ed.) (2001) Trust in Society. Russell Sage, New York.
- Hardin, R. (2002) Trust and Trustworthiness. Russell Sage, New York.
- Shapiro, S. (1984) Wayward Capitalists. Yale University Press, New Haven, CT.