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How to win trust and save the economy

Public trust in institutions may be in short supply right now, but it’s a necessary ingredient for prosperity. How can we get it back?

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Politicians lie, bankers cheat and global corporations cover up their worst mistakes. It’s wrong – but it’s worse than that. Bad behaviour by individuals and the institutions they’re part of creates distrust and distrust leads to a messed-up economy, which means we’re all worse off. So what can we do about it?

But first: can trust really be so important? Absolutely, says Elias Papaioannou, Professor of Economics at London Business School (LBS). Trust is vital to a thriving society for several reasons, he explains:

1. Trust enables efficiency

All contracts are inherently incomplete. If you sign a contract with someone and then they cheat you, you can go a judge but the process is costly and takes time, even in countries with the most efficient legal and judicial systems. Trust is a necessary ingredient for a well-functioning society.

2. Trust makes trade possible

Especially on an international level, when one company trades with or invests in another, trust is essential. You need to know that when shipping your goods, the person at the receiving end will eventually pay you.

3. Trust fuels modern finance

The capital markets, investing and saving only work if there’s trust. When convincing individuals to save for retirement, you’re asking them to trust in the stock market and the fund manager to invest your money wisely.

4. Trust underpins good government

Benjamin Franklin and George Washington stressed that trust and civic virtue are key ingredients of well-governed politics. For politics to work effectively, citizens need to trust that the government will use their taxes to build roads and schools and to provide some safety net for the underprivileged.

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