Human relationships are fundamentally based on trust. The economic life of a community is the sum of these human relationships. Research has shown that there is a positive correlation between the trust people have in one another and in institutions and the level of economic and social development. Social capital, one of the cornerstones of development, requires high-quality, trust-based relationships between individuals.
To highlight the importance of trust, let’s consider a simple market transaction. During a purchase, there is an unwritten rule that we will pay the money and receive the goods in return. Neither the vendor nor we, except in very rare cases, claim that the goods weren’t received or the payment wasn’t made. No one harbors any concern about this. However, the quality of the goods we receive always remains a question mark. Is this vendor really selling high-quality products? Is what we bought worth the price? Due to trust issues, people tend to repeatedly shop from the same places.
However, when it comes to purchasing high-value items like a house or a car, the situation becomes more complex. Is the car truly accident-free as the seller claims? Is the house earthquake-resistant? At the notary or during the title deed transfer, should the money be paid first, or the signature given first? As trust issues grow, so do the costs of these transactions—costs tied to obtaining information, such as hiring experts or lawyers. As the cost of acquiring information increases, it can reach a point where transactions cease entirely, and markets grind to a halt. These examples can be extended to finance, banking, stock markets, and the broader economy.
In the early stages of civilized life, trust wasn’t as prominent an issue as it is today. In commercial interactions among tribal members, the parties involved had full knowledge of one another. There was little doubt about who was trustworthy and who wasn’t. As economic and social life grew more complex, so did the issue of trust. When merchants began engaging in international and intercontinental trade through agents, the importance of reliable commercial partnerships grew even further. To address this problem, people preferred partners or agents with whom they shared familial ties—or, failing that, religious or sectarian affiliations. This is one of the key reasons why religious orders and communities have retained their significance from the Middle Ages to the modern economy. To reduce the risks of economic interactions with anonymous, unrelated individuals, in-group activities are favored. This is because if an in-group member engages in deception or fraud, the penalty—such as exclusion from the group—carries a high cost.
Eliminating trust issues largely depends on societal institutions. When individuals trust economic, social, and legal institutions, uncertainties and risks diminish.