This year’s Economic Survey, a statutory document presented annually to the Parliament, had an unusual section on morality and economics. In its lucidly written second chapter, entitled “Micro Foundations of Macroeconomic Development”, the survey says that “honesty, integrity and trustworthiness are not just good moral qualities” but lead to economic progress and human development. Traditionally, economics and moral science have had an uneasy relationship, if at all. The former is based on the premise that people are fundamentally selfish and act only in self interest. Their collective selfish actions magically lead to social welfare and economic progress guided by the invisible hand of the market. The pursuit of self interest by the butcher, baker and bee-keeper was the foundation upon which was built the Wealth of Nations, as Adam Smith described in his eponymous book of 1776. So, what is the role of morality? The Economic Survey quotes from extensive research from behavioural economics, and asserts that efficient functioning of economies requires some amount of altruism and trustworthiness. Modern experimental economics research also shows that people are not just driven by innately self seeking behaviour. But their altruism thrives when there’s more of it around in society. The idea that social capital (a proxy for the level of trust) is a key determinant of wealth and prosperity is not entirely new, nor is it uncontested. Much before he wrote his most famous book, Adam Smith also wrote another book called The Theory of Moral Sentiments in 1759, which describes another innate motivation called sympathy, apart from self-interest. It was this book where Mr Smith first used the phrase “invisible hand”.
The survey gives many examples of how high levels of interpersonal trust is essential for higher economic growth. Long-term contracts do not get signed if there’s a lack of trust (corporate bonds anybody? or undeveloped mortgage markets? pensions?) The only really long-term promises are those with the sovereign behind them. If longer private contracts have to prosper, we need a culture of honesty. The survey admits that it is not clear how these qualities can be developed. The other explanation that certain societies are innately untrusting is too politically incorrect to even contemplate! How then to explain that in some countries, unmanned four-way stop signs suffice, while in India, traffic lights with multiple manning also cannot prevent law breaking! Or that coin-operated machines still require humans to supervise.
It has been an exceptionally bad season for the trust business. It is not simply because of the fallout of the Lehman crisis, wherein people found out that banks were selling short the very same securities that they were hawking to their clients. Or that banks were accepting stimulus money to pay fat bonuses to their own executives. Goldman Sachs turned down Facebook’s offer to invest as private equity, but then invited its own customers to invest $1.5 billion into Facebook at more adverse terms. Morality requires that “you do unto others as you would have others do unto you”. But the Facebook sauce that Goldman dished out to its clients, wasn’t sauce enough for its own gander. Turns out this makes economic logic, even if not moral. This transaction sure didn’t enhance trust capital.
More subtle but longer lasting damage to trust capital comes from individuals, not corporations. There are recent high-profile cases of trust dismayers. These are pedestalised, and much felicitated examples. The young and extremely popular defence minister of Germany, possibly a future Chancellor, resigned because his University stripped him of his PhD, as it was a copy-and-paste job. (Inadvertently, he said). A distinguished alumnus of IIT and Harvard, long time Managing Partner of McKinsey and Chairman of Public Health Foundation of India is tainted by serious charges of insider trading. A winner of global award of corporate governance confesses to SEBI that he has been stealing thousands of crores from his shareholders. The Director of London School of Economics resigned because of a money-tainted PhD. (Doctoral theses seem to be particularly vulnerable in this trust deficit times.) Even the Nobel Prize winning father of microfinance has not been spared. His central bank has asked him to resign, and he is also battling charges of theft, fraud, embezzlement and tax evasion.
These example may not be illustrative, but they have enough potency to putting cracks into the edifice of trust capital. Call it micro fissures in the macro structure of trust. The examples quoted above are telling, because these individuals became repositories of trust, which was strengthened over a long period of time. The breaking of trust by individuals in public life has huge externalities, and inflicts collateral damage on social trust.
The broader message from the Economic Survey cannot be denied. A culture of trustworthiness goes a long way in enhancing economic well being. But how to build it? While the survey wrings its hands saying that we don’t really know how trust capital accumulates, there may be simple thumb rules to follow. The rules should basically reward actions and behaviour that enhances trust capital, and swiftly punish actions that erode capital. More transparency to expose all kinds of conflicts of interest. Zero tolerance of trust breaking for high-pedestal occupiers. Zero tolerance for tainted individuals to occupy public office. In Germany, the minister resigned on mere charges of plagiarism in a PhD thesis. Can we aspire and hold ourselves to such standards?
