Another exercise in economic thought: on trust, money and the individual

These are my thouhgts on these matters, which I have put together for the past month or so. They are incomplete, naturally. These topics are vast and libraries and research portals are full of authors that have dedicated their lives to explore them. I only want to share my views, as they are: raw.


I believe that everything is, somehow, connected. That no action remains without its consequences, even if this may not be initially apparent. Additionally, I am sceptical about answers or solutions that appear complete or, to use a more philosophically charged word, absolute. Therefore, I cannot be faithful to data alone. Nor can I say I trust in certain narratives over others: there is some truth in everything. After all, if God is dead, history is dead and reason is dead too, chaos reigns – as Hesiod observed 2700 years ago, in his Theogony, “ΗΤΟΙ ΜΕΝ ΠΡΩΤΙΣΤΑ ΧΑΟΣ ΓΕΝΕΤΟ”, which translates vaguely into “In the beginning, there was chaos”.  

Without embracing randomness, chance, chaos, we will always have a gap in our understanding of how things work in general or in more specific areas, such as that of economics or finance.

In this paper, I am looking at a qualitative element that matters a great deal to our socio-economic system. We try to measure this element through polls, studies, cleverly developed statistics that act as proxies for some kind of “key activity” that should tell us something about it. In the end however this is not quantitative and we should accept it as such.

This alchemical element I am speaking of is the relationship of trust between socio-economic actors – we can call it social trust. It is the bond that keeps markets alive and economic activity ticking further. It is the essence that gives politicians, the police and other authority figures and institutions a (varying) degree of influence over individuals’ lives.

Consequently, in this paper I will talk about social trust, how I believe it is formed, its role in sustaining economic and financial transactions and how it can be shattered. In particular, I will explore this in the context of monetary thought and economic development (which includes, by definition, economic growth).

On the origins of social trust

As mentioned in the introduction, we are not talking about trust in oneself – that is, we are not concerned here with confidence. Rather, we are referring to trust in other people, or social trust. This is a more complex creature than confidence as it involves trusting people who are profoundly different than the way we are and yet so similar to us: our deepest, darkest and most noble desires are common to all men and women but how they come to life differs.

It is from this apparent contradiction – that we are all different (if not unique by some claims) and yet, at our cores, very similar – that confusion as to how social trust is built, maintained and shattered typically arises. Indeed, this confusion can be seen primarily in the desire to empirically measure social trust – we are not comfortable with something so esoteric, so intangible and the subject to the whims of our psychic to be the basis of our socio-economic order. And yet, it is.

How do we define such trust? As you can imagine, there are many definitions out there. As a Forbes article put it in December 2018, “trust is hard to define, but we know when it’s lost”. Indeed, even if we do not express it through words, our actions (body language etc.) will speak volumes about whom we trust and whom we don’t.

My definition of social trust is built on the idea of growing with the community, not off the community.

As such, social trust is the belief shared between members of a group that each one of them will act in a manner that not only benefits themselves but also benefits the rest of the group. To give an example from the field of economics: before I commit to purchase something, I must trust the vendor; that is, before I decide to buy a good or a service, I must believe that the person who is selling something to me is not solely acting in his / her self-interest of making a profit but they are also acting in my interest in delivering a good or a service which was initially described or presented to me with all the benefits and deficits disclosed. One can see that providing a benefit larger than expected can strengthen trust in each other, especially in a consumer – vendor scenario. 

However, the nature and magnitude of these benefits will depend from case to case but, importantly, regardless of whether they are tangible or intangible, short-term or long-term lasting, delivered now or at some point in the future or even if they are proportionate with the benefit that one gains for oneself, the members of the group must believe that the actions of others are based, in part or entirely, on such intention to benefit, in one way or another, the whole group. Such benefits may be however, temporarily masked by detrimental effects. Nevertheless, at the heart of the action taken which has resulted in the perceived detriments there must lie the intent to eventually create a benefit (or benefits) that are at least proportionate to the effect of the detriment (or detriments) and others must believe that such intent existed.

Anthropologically speaking, “the psychological mechanism underlying attitudes of trust and the most common cooperative behaviour requires direct or close relationships to create emotional bonds between individuals”, especially those developed based on culture and linage. Indeed, this mechanism is very old, with some studies suggesting that these bonds were a core reason for why humans started to migrate 100,000 years ago.

One can subscribe or not to the evolutionary perspective, which would suggest that emotional commitments developed through strategic and economic considerations, with emotions acting as a binding contract(upon which social trust then flourished). The vast literature on this subject identifies a number of psychological building blocks of trust including reciprocity, moral obligation, trustworthiness, social relations, cooperation and familiarity.

It is however crucial to understand whether trust develops as a result of consciously taken decisions, be them more or less emotional or rational, or whether it comes from what psychologist Carl Jung calls the collective unconscious.

In his book, The Archetypes and the Collective Unconscious, Jung explained that the collective unconscious is the part of the psyche that is common to all of us and which consists of psychological elements that come from heredity and it is the realm of archetypes (manifestations of the psyche common to all humans). Meanwhile, the personal unconscious is constructed through personal experiences that have once been conscious and which, in time, have been forgotten or repressed, forming for the most part a realm of complexes.

The importance of this is as follows: if trust is built on emotional bonds that are the result of conscious decisions (more or less calculated or impulsive), then we are not naturally wired towards trusting each other. Rather, we require conscious cognitive effort to look in someone else’s eyes and believe that he or she will act in a way that will not be completely to their benefit while entirely to our detriment. In this case, social trust can be to a large extent, if not entirely, manufactured. If trust comes from the realm of archetypes, i.e. the collective unconscious, it means that to believe that others will act in a way that also considers us is deeply wired in us – or, to use a term which I think it is used too freely in common parlance without too much thought given to its significance, social trust is part of “human nature”. In other words, it comes from within us and we are not people without it.

My take on how social trust develops is slightly more philosophical. I take that social trust develops through a cognitive process which requires both our conscious decisions, be them based on logical or emotional channels, and our hereditary, common psychic ground that lead us to bond with others, believe their intentions, forgive their mistakes, understand their nature (for it is our nature as well) and carry the banner of human civilisation forward, even if that may mean walking into the abyss without a light.

To me, this approach is based on two observations. First one comes from the realm of children’s play. When we were kids, we would play with others upon agreed rules between ourselves, trusting that the other children will abide by them as long as we did too. Once in a while, someone, perhaps ourselves, cheated – that is performed an action that was outside the rules, either prohibited or not covered (they were both regarded as a cheat, even if the latter perhaps wasn’t, but an in-depth legal theory discussion is for another paper). In such instances, we would initially banish that youngster from our game, maybe for quite a while.

However, more often than not, especially if we changed the game, we would forgive (or even forget on purpose) that cheating happened and we would all play again. True, a reputation as a cheater could have been developed if this was a frequent occurrence but even so we would still engage in play, knowing that so and so might eventually cheat. This to me suggests that trusting others is, to some unknown extent, part of who we are as people. That said, this could have been the case due to the fact that there were almost never serious consequences for cheating. Nevertheless, in this case, one could say that trust arises from within us, organically.

The second observation consists in the acknowledgement that a legal system is necessary for the practical functioning of society. In such a system, where serious consequences such as the restriction of one’s freedom exist, it could be argued that we make conscious decisions not to betray others’ trust in us, especially in situations in which we’ve led the other person to rely on this bond. In other words, in the presence of the law trust can develop due to a source external to us. I do however want to stress that if social trust was entirely the by-product of our collective unconscious, we wouldn’t need the law, ever.

But this cannot happen in practice: “a market economy cannot flourish in a world of anarchy in which we suspect that everyone else will cheat”. Indeed, this comes down to that peculiar word – “human nature”: we are as we always were and always will be – humans, neither good nor evil, righteous nor malevolent, born pure nor corrupt; and as Machiavelli so clearly observed, it is futile to spend time on analysing a society that ought to be certain way only if humans were this or that way, instead of focusing on how things are.

The bottom line is that social trust is, in my view, the product of who we are – people – as much as it is the result of who we want and need to be. This ensures that social trust is supported by both psychological mechanisms common to all of us and by social institutions that are unique to each civilisation and reflect its own ambitions (e.g. the legal system).

The economics and politics of social trust

Trusting other people enables us to feel part of a larger group, share a common purpose and be willing to depend on one another (i.e. feeling safe when vulnerable). When trust between people exists, those bonded by it will actually “do their part” rather than just be present. Therefore, social trust can be the fuel that rebuilds struggling communities or promotes further growth within communities that are already doing well. Indeed, from a purely sociological perspective, trusting each other is akin to laying the foundations for the necessary social order that enables human interactions, such as transactions, to continue.

The totality of transactions, or exchanges, form a market and the aggregation of all markets forms the economy. Indeed, the literature discussing the role of trust within an economic context is vast, with some authors see social trust as a symbolic commodity. You can read the works of Hardin and Misztal listed in the Sources section if you are further interested. The key idea however is that trust enables economic activity and financial transactions.

Trusting each other (as well as ourselves) fosters economic development, for example, through innovation: those that take risks in pursuing new paths, venturing into the unknown and dedicating their time and efforts to create and bring to market novelties in any shape or form are more likely to do so if they trust that “society” (i.e. the community to which they believe they are part of) appreciates, values and acknowledges their creations as belonging to them first and fore most. As I’ve argued in a previous paper, innovation is a primary driver of economic development and consequently, economic growth.

In the day-to-day economic activity, social trust ensures, at a minimum, that we get what we pay for – based on such trust, resources move within and between borders, things are created, goods are consumed, and services are provided. Of fundamental importance for this network of markets is money.

There are number of theories about how something becomes money or what “kind” of money ought to be the right form (commodities, credit, fiat and anything in between). A slight but important digression: peering into the fog of history is, from a point onwards, an exercise of imagination. The genesis of money is such an exercise. Summarily, the two main views around the creation of money are that it either emerged out of a free economy (i.e. as a result of free market dynamics) or, as the other perspective has it, it was eventually imposed by ruling authorities (e.g. the state) in order to standardise barter and make it easier to rule. Because I like to think that we were made free, I choose to believe the second variation of this story: I take that money arose as a result of human interactions (such as exchanges) and out of the need to make them easier to occur (a cow for ten gallons of water and three apples is not easy to measure like-for-like).

But we are not concerned with the details of this debate here: the importance of money in our discussion comes chiefly from its function, which is widely seen as a medium of exchange, a store of value and a unit of account. But money has two further functions: an enabler of resources and a social institution. These functions do not exist if trust in whatever takes the role of money is absent.

In a fiat currency system, trust in money trickles down from trusting the authorities that are in charge of providing money and legislating where money goes – the central bank and the government (which for this paper we assume it is democratically elected). Social trust is built like a net: both horizontally and vertically, from the bottom up: the individual needs to trust his / her neighbours and colleagues (horizontally) and also needs to trust politicians to represent their views, judges to design fair rules and uphold them, the police to maintain a “civilised” order, the teachers, lecturers and preachers to truthfully guide them through the realm of knowledge and wisdom and the army to defend Babylon. These institutions are gatherers and guardians of trust in a particular socio-economic order – it is however important to recognise that it is the individual who builds or collapses the Tower of Babel.

Once authority is backed by social trust, the actions of that authority are also benefiting from the blessing of the people who believe that its actions have been taken at least in part mindful of their interests as well. In the current context trust in government and the central bank means trust in what they deem money.Authorities, of all kinds not just political or monetary, have at their disposal two major tools to manage and maintain the social trust in them: their actions and a range of means of communication. Obviously, actions speak louder than words. Quite simply, people trust authorities based on their achievements, skills and character. For example, people trust the government if they discharge their duties in a competent manner that is expected of those serving in public office.

However, clearly communicating the intentions behind their actions is vital for the survival of authorities backed by social trust. This is particularly important when we add the veiled element of vested interests which have plagued authorities for most of history.

In a somewhat Machiavellian spirit, I believe that authorities should be completely void of any personal interests (moral, financial or of any kind) – their only consideration when discharging their functions should be how their actions impact those over which they have authority. But this cannot be purely the case: we are greedy as we are generous. Often therefore, those in positions of authority must manage vested interests with the interests of those that are to be governed, judged, educated, disciplined and so on, in an ongoing attempt to maintain social trust in them. This is where communication comes into play.

Indeed, communication can build or shatter social trust. Its power in this respect can be overlooked by analysis that pays attention only to data – which is but the trace of actions, missing however the context within which these actions have been performed: through communication mediums (words, imagery and sound), narratives are built which contextualise data.  

A narrative which aims to clarify something, in general, will move from “bigger picture”, abstract themes towards concrete examples. On the other hand, a narrative that aims to confuse will usually start with specific examples that are then generalised to “bigger picture”, more abstract levels. Imagery and sound can be added to either of these situations to further enhance their impact which can clarify or muddy the situation. Both of these approaches play their part but getting the balance between these two forms of communication is key to maintaining social trust.

Truthful communication, which is straightforward and highlights the facts and how one got to the facts is usually desirable for social trust to be maintained. That said, manipulation can also be necessary if, behind the scenes, actions are indeed taken with the interest of those governed at heart – manipulation that is not backed by the right actions damages the social trust. This is more important in the context of economic and cultural changes: as long as the lives of the people are following their “normal” course, not knowing the truth behind the actions of those in positions of authority makes little difference to social trust at large – there might be some dissenting voices but they tend to be regarded as ungrateful heretics or makers of conspiracies during mild times of economic and cultural prosperity.

However, when things start to deteriorate usually due to economic conditions becoming more difficile (or, sometimes, and even more grave, cultural changes that do not happen organically), untruthful communication – that is, communication which was used to cover in part or entirely the actions taken by those in authority positions and which have since come to light, rendering the communication in part or entirely contradictory – begins to erode social trust because people start to question, i.e. doubt.

It is this doubt, that prompts me to ask the following question: “What is our money worth?”

Social trust and our money

The current [fiat] monetary system is not entirely compatible with the philosophy that underpins the Western socio-economic order: liberal-capitalism. This can lead to profound decay within our civilisation, for, as Montesquieu observed more than 200 years ago, “individuals and states decay when they contravene the rules of their particular ‘inner’ constitution”. In practical terms: one cannot behave contrary to what one is, or to what one aims to become without running the risk of “decay”.

The current monetary system enables our socio-economic order to behave in a contradictory manner regarding at least one of its core philosophical “rules”, or tenets: the idea that each individual matters – not only on paper, not only in boosting GDP or in generating votes but that each human matters metaphysically, which means that each one of us is, in a sense, unique and this uniqueness gives each individual the absolute quality of being invaluable. This clearly is not a practical notion: a socio-economic system that functions on quantifications cannot be sustained if one of its core values is by definition unquantifiable. Therefore, in practice, no individual is invaluable for our time and what we produce in our time has a monetary value.

At the most atomic level, the fundamental equation in any economy which concerns the individual is time (t) plus energy / resources (e) equals a quantity X of money (Qm), which, in turn should be exchangeable for a quantity of whatever else others produce.

The problem at hand has two aspects: the fluctuations in the purchasing power of Qm and the fact that individuals have no control over Qm.

The first aspect arises when Qm no longer reflects the time and energy we give up in producing whatever it is that it is valued as Qm. Stated differently, Qm no longer is exchangeable for the same quantity of goods and service as it was in the past. It is regarded as a beneficial thing the fact that our money buy more of the same stuff today than it did yesterday as it implies that some kind of technological progress has lowered the costs (the usage of E and T) in producing the same or an increase quantity of goods and service (keeping Qm unchanged). However, this does not solve the central issue here: the fact that the individual is no longer invaluable – his or her monetary value has increased due to technological advancements but in a very quantifiable manner: they can buy 3 loafs of bread more than they could do so yesterday with the same amount of money. Clearly, the situation, although it would have been perceived to be worse, it would be, in essence, the same if the purchasing power of Qm would have decreased: the individual is no longer invaluable.

This issue seems to be further compounded by the fact that individuals have no control over Qm: indeed, their time and energy is valued “independently” by an all-powerful marketplace that engages in large scale manipulation (marketing) to attract money flows towards particular goods and service, suggesting its gross indifference to the individual’s needs and wants. These fluctuations in the purchasing power of our money, which range from inflation to deflation, together with the lack of control over one’s time and effort render the idea of the individual to be invaluable as philosophically meaningless.

However, this issue is not necessarily a by-product of fiat money per se. Throughout history, there have been episodes of inflation and deflation under other monetary regimes. Although, I would stress that fiat money which is centrally controlled does have a tendency to be more prone to fluctuations in its purchasing power due to the whims of those authorities which have a grip on money creation and money flows. That said, money itself has no mind of its own and therefore, it cannot decide to pile on a certain good. Variations in purchasing power are usually the result of policies pursued by authorities that are in charge with its creation and flows: that is of central bank’s monetary policy and of government’s fiscal policy. However, this effect is not an inevitability of such a monetary system: it depends entirely on the “greatest monarch on earth”: [self] interest.

If we are to grow with the community and not off the community, our self-interest needs to be aligned, at least in part, to the self-interests of others: this is especially the case for those in positions of authority which depend on others trusting them. It isn’t necessary, nor desirable, to always align your interest with those around you – the world needs exceptions for they are drivers of change. However, when we agree that “we are in this together”, and we can see such agreement in the existence various societal institutions such as marriage, churches, law and retirement systems, we ought to have in mind the question of “what do our actions may mean for those around us”. When the self-interests of those in authority positions different too much and for too long from the interests of those that are impacted by authority it can be seen to be the case in the actions of these institutions: namely, the laws, regulations, guidelines, opinions, speeches and budgets will reveal what they care about the most.

In the context of a fiat monetary system, the more financialisation is permitted or even encouraged, the more the real socio-economic activity will be devalued.

The deviation from only economic activity is to include activities which apparently have no economic value as captured by the conventional GDP measure but which no doubt participate in producing the GDP figure by influencing labour productivity – these items are creations of art, such as music, literature and paintings, all which inspire, move and encourage people to innovate, work harder and improve.

This is a broad process and includes the expansion of money and money-like instruments (credit) in the economy, reducing the purchasing power of Qm, as a temporary solution to structural changes (aging populations, declining productivity etc), the production of financial assets for the sake of nominal returns (derivatives that help generate alpha but which benefit the economy minimally or not at all), the permission of wealth concentration (especially nominal wealth), and so on. These are all signals that suggest that the self-interests of those in positions of authority have been put before the interests of those “ruled” for too long and can erode social trust.

Now, it is not practical to suggest that the solution would be to give each individual sovereignty over his / her money – we need authorities. If we demolish the central bank and close down the government, it won’t be too late until we build another lender of last resort and elect people to show us the way. Therefore, the solution is to demand change: a change in the attitudes of those that are in control of our money.

Firstly, we should remove the philosophical incompatibility of the current monetary system with the idea of the invaluable individual. I am in no position to suggest whether one should embrace the fact that our lives have a monetary value (which can be calculated if you discount back the expected total earnings throughout your working live) or the fact that our lives are invaluable – the first choice implies submission and standardisation of who and what you are, while the later implies freedom and uniqueness: who can bear the burden will choose accordingly.

Secondly, demand that your needs and wants are considered and protected by laws which guard your time and effort either as invaluable or as somewhat valuable.

Finally, in answering “what is our money worth”, consider how much light you can buy with $ 1 billion.

(Non-digital) Sources:

Nesse, R M (2001) Evolution and the Capacity for Commitment (Vol. 3). New York: Russell Sage Foundation, pp. 1–44

Against the current: Essays in the History of Ideas, Isaiah Berlin

Misztal, B. (1996), Trust in Modern Societies

Hardin, R. 2001. “Conceptions and Explanations of Trust” in K.S. Cook (Series Ed. &  Vol. Ed.), Trust in Society: Vol. 2. The Russell Sage Foundation Series on Trust  (1st ed., pp. 3-39). New York: Russell Sage Foundation

Innovation – the role of trust Kornélia lazányi, Obuda University,  Keleti Faculty of Business and Management, 1084, Budapest, Tavaszmező st 15-17, Hungary, June 2017

Origins of Money, Charles Menger

Authority: A social history, Frank Furedi

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