By Sterling Xie. Edited by Aniket Bose and Swastik Patel
Economics is often presented as a system of complex mathematical functions. However, increasingly, economists have recognized the importance of human behavior in the prediction of certain economic trends. As such, the field of behavioral economics has gained popularity in recent years, built on the idea of the economy of trust.
Trust as a Basic Economic Concept
The entire economic system is built on trust. For example, if a seller is selling pastries and the buyer does not trust the seller to produce such pastries, there will most likely not be an economic transaction, due to the lack of trust. Therefore, the majority of economics is based on the study of behavior and psychology. Consumer psychology influences the decisions made by everyone in the economy, complicating general mathematical models and functions to account for such. However, despite this widespread dependence on trust, it is easy to gain trust in some situations. For instance, if the seller from the previous example has the ability to prove they have pastries to sell, then that garners trust from the buyer. If there is a written contract that assures the consumer to some extent, that garners trust. Yet, sometimes it is simply impossible to gain the trust of the buyer, such as in the initial stages of pharmaceutical testing.
The Rationality of Trust
Rationality of the common consumer is intrinsically connected to trust. Historically, according to Niko Matouschek of Northwestern University, the Quakers were so integral to the British economy and often dominated other businesses because they had an unwritten contract that inspired trustworthiness.- their religion compelled them to be more trustworthy than other business owners. The same concept applies to consumerism today – because we often perceive certain sellers as more trustworthy than their competitors, established businesses or corporations tend to be more powerful or dominate more of the market than other smaller businesses.
Based on Northwestern University’s behavioral economic studies, the two most important things for conducting business that inspires trust is a level of “cold-heartedness” that demonstrates the business owner’s eye for the future, and a level of transparency that shows how the seller has treated consumers in the past. In order for both the consumer and seller to have an optimal future, it would be preferable that both engender trust in the other, demonstrating this “cold-hearted,” rational perspective. For the consumer, it is also rational to trust the seller if the seller has a past precedent of being a good seller, whether it be in terms of the quality of products they produce or the quality of customer service they provide. In other words, the situation is complex. Everything is built on a scale and consumers need to meet the balance between orientation to the future and past precedent in order for there to be an economy of trust.
Today, trust is more important than ever with the rapid growth of the service sector in the world’s economy. Companies like Uber, Airbnb, and many other service providing companies require there to be a certain degree of trust as they are third party services where individual people are not associated with the companies that provide service. Consumers that use these services need to trust the seller or producer on many levels, whether it be safety, quality of service, cleanliness, etc. Sellers must trust their consumer in the interest of their own safety. The economy for these “trust goods” today is incredibly important and is integral to the growth of the economy. We have lowered our demand for many goods and as such, the only way to expand is through providing services, most of which require trust on both parties in a transaction.
As trust becomes increasingly important in economics, one cannot solely view economics from the lens of mathematics and calculus. Instead, one must consider the behaviors associated with economics and how they affect people’s decisions in the first place.