Honesty and Trust

Several decades ago I used to enjoy an occasional lunch in Washington, D.C. with the late Professor G. Warren Nutter, a distinguished economist who taught at the University of Virginia. Professor Nutter had considerable expertise in comparative economic systems, particularly that of the former Soviet Union. While he had a deep understanding of economic markets, he always stressed that markets do not operate within a vacuum and we gain a greater understanding of human behavior if we paid attention to the role of non-market forces.

At one of our luncheons, just out of the clear blue sky, and maybe to get an argument, Professor Nutter said to me that if we had to stop to count our change each time we purchased something markets would grind to a halt. That’s a bit of exaggeration but Professor Nutter was making the point that the institutions of trust and honesty are vital to human well-being. Honesty and trust are not simply matters of character and morality; they’re crucial for efficient human interaction and a smoothly working economy.

To appreciate the significance of honesty and trust, consider what our day-to-day life would be if we couldn’t trust anyone. We purchase a bottle of a hundred aspirins from our drug store. How many of us bother to count the tablets to ensure that in fact we received a hundred? We drive into a gasoline station and the meter reads that we put ten gallons of gasoline into our fuel tank. Does anyone of us bother to verify whether in fact we received ten gallons instead of nine? We paid $7.00 for a one-pound package of steak. How many of us bother to check to verify that if was in fact one pound instead of three-quarters or seventh-eighths of a pound?

Then there’s, "Send me 100 diskettes and bill me." Or you call your broker telling him to purchase 50 shares of AT&T at the market price and you’ll settle within seven days. A salesman says, "If you're not satisfied with your order, bring it back and your money will be refunded." Or, Mow my lawn and I’ll pay you. In literally millions upon millions of transactions like these, we simply trust each other.

Imagine the costs and inconvenience we’d suffer if people were generally dishonest and we couldn’t trust anyone. We would have to lug around measuring instruments to ensure, for example, that it was ten gallons of gas and one pound of steak we purchased. We’d have bear the costly burden of writing contracts instead of relying on a buyer or seller’s word and bear the monitoring expense to ensure compliance in the simplest of transactions. It's safe to say that whatever undermines trust and confidence raises costs of transactions and makes us worse off.

But generalized honesty and trust goes further than that. I live in the Main Line suburbs of Philadelphia. FedEx, UPS and other deliverymen leave packages containing valuable items on the doorstep if we’re not home. A local supermarket leaves plants, fertilizer and other home and garden items outdoors overnight with no one to guard them from theft. As one enters the store, he sees merchandise unattended in the entryway. In neighborhoods, where there=s less honesty, leaving merchandise on doorsteps, outdoors overnight and in the supermarket entryway would be equivalent to economic suicide. Delivery companies must bear the costs of making return trips or the customer is inconvenienced by delayed receiving. If the supermarket places goods outside, they must bear the costs of retrieving the items at the close of business, that’s if they can risk have merchandise outdoors in the first place.

Generalized honesty affects stores like supermarkets in another way that often goes unappreciated. One of the goals of a supermarket manager is that of maximizing the rate of merchandise turnover per square foot of leased space. When theft is relatively low, the supermarket can use outdoor and entryway footage thereby raising his profit potential. That opportunity is denied in localities where there’s less honesty.

The fact that honesty and trust are vital should make us re-think the treatment of those who violate honesty and trust. Dishonest people impose losses that go beyond those suffered by the actual victim of the dishonest behavior. If packages are stolen from people’s doorsteps, the response of delivery companies to not leave a package unless someone’s home imposes costs on rest of us. If people rob bus operators, taxi drivers it requires all of us to have exact change or small bills.

Considering the large economic effects of dishonesty and not being able to trust one another, we should show little tolerance for violators. Fortunately, on the one hand we live in a society where we can generally trust and accept the word of one another, but on the other hand it’s not quite the level of trust and honesty of earlier periods.

Walter E. Williams

FEE.26

Ideas on Liberty

January/February 2005