Sunday, December 22, 2013

The Loss Of Trust Is One Of The Costs Of Inequality

Joe Stiglitz explains the importance of trust in social and commercial relationships.  He expresses his concerns about the loss of trust in our society and the substitution of incentives for the lost trust.  It is expensive to pay people to do things that were once based upon mutual trust.  While there are lots of forces at work that undermine trust, Stiglitz focuses his attention on the complete breakdown in trust that occurred in the financial crisis.  Interbank lending broke down completely and the government was forced to rescue the banks. 

What happened in the financial system is just one example of how we have become dependent upon the use of incentives, rather than mutual trust, to guide behavior.  For example, we have to pay executives with stock options in order for them to operate businesses in the interest of shareholders.  The assumption is that they will only work hard, in the interest of shareholders, if they are also large shareholders.  It is part of a more general belief that we are primarily guided by self interest.  We can't trust anyone to do the right thing unless it is in their best interest, and that is defined by the incentive system.  To the extent that we acknowledge society, as opposed to individuals, we are forced to believe that social welfare is determined by the actions of individuals maximizing their self interest.

Social systems, based upon selfishness as a guiding principle, eventually leads to a breakdown in ethics and the trust that once guided our behavior.  It encourages the powerful to engineer the rules and regulations in their self interest.  The game is then rigged to enable them to gain at the expense of other players in the game.  That leads to greater income and social inequality and a loss of faith in the game itself. 

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