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Capitalism And The Decline In Trust Of Our Markets

Source: by Kieron O'Hara, UK Centre for Policy Studies
Posted on: 25th October 2009

As the debate about the future of capitalism as a way of life continues to swirl, and questions arise about the extent to which the direction of economic activity should be devolved to government, it is mildly surprising that interest has not increased in the greatest interpreter of markets in their social setting, Adam Smith.

In fact, a glance at Google Trends shows that the number of searches for Adam Smith has if anything declined slightly over the last five years.

Smith has not been well-served by commentators whether admiring or hostile. He was neither the apostle of ‘greed is good’, nor the evangelist of free markets as the ideal resource allocation mechanisms at all times. In fact, his careful and lengthy examinations of human motivation, The Theory of Moral Sentiments and The Wealth of Nations still contain important lessons for our time.

It is particularly interesting that free market economics is widely blamed for the decline of trust throughout society, because rereading Smith reminds us how once upon a time the spread of markets was thought beneficial because it helped spread trust.

Our understanding of markets has fragmented since the days of Smith. Economists see them as mechanisms for optimally allocating resources, while sociologists see them completely differently as exchange mechanisms that tend to overwhelm other types of connection that hold societies together. Ironically, it was Smith’s genius that enabled this disastrous bifurcation to happen; his brilliant analysis of markets enabled thinkers to conceptualise them as autonomous structures. But Smith himself saw them as both social and economic. Their two different aspects could not be separated out.

Participation in markets helped people internalise the norms of socially-beneficial behaviour, spreading habits of trust and trustworthiness. They used pre-existing trust mechanisms, such as respect for contracts, the rule of law, sound money and a work ethic, and brought them all together in a perfect storm, magnifying their individual effects and transmitting trustworthy behaviour, self-discipline, moderation and stability across society.

Smith denied that markets could rest on selfishness (as many on the left maintain they do). Markets do indeed rest on self-interest, but that is not the same as selfishness. My self-interest is not simply the sum of my preferences at the moment (as many on the right will say it is). I am not the sole determinant of my self-interest; society makes a contribution too.

Rent-seeking behaviour is self-directed – what can I get out of you? – whereas exchanges in markets are intrinsically other-directed – what can I do for you? I need to think what you want, and how I can help you, in order to induce you to make an exchange of goods, services or money. I cannot function in a market if I only think of myself.

Furthermore, markets are not inconsistent with altruism, nor with sympathy for others. However, unlike alternative utopian methods of resource allocation, they do not depend on saintly behaviour for their operation. They remain realistic.

Many surveys have shown a decline of trust in society over the last few decades. There has certainly been an increase in individualistic behaviour and a corresponding decline in civility, but it is not at all clear that the free market economy is responsible. It may well be the case that the operation of markets in highly individualistic societies tends to exacerbate inequalities, and that those who pay less attention to social signals do badly in market situations. Those unwilling to persevere at education and training, who find it hard to be polite to others, who want to get rich on their own terms, or who prefer to spend for immediate pleasure rather than save and invest are those least likely to be comfortable with working for others’ benefit.

Markets require trusting and trustworthy behaviour. Perhaps the decline in trust, and the growth of what Onora O’Neill has called the culture of suspicion, has undermined one important foundation for market exchange. Or maybe our individualistic society is more self-directed, preventing that other-directedness that magnifies the benefits of market exchange. A third possibility is that consumerist society has blurred Smith’s crucial distinction between selfishness and self-interest.

Whichever is the case (and they are not mutually exclusive), the knee-jerk reaction to blame market economics for the increase in individualism and the decline in trust is mistaken. Instead, following Smith, we should deduce that markets function less well, and are treated with more suspicion by consumers, when trust has declined for independent reasons.

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