Monday, January 12, 2009

The Economics of Trust

"The bureaucracy is expanding to meet the needs of the expanding bureaucracy."

A statement that most of us will be familiar with as we look at government and the ever expanding number of lawyers and other bureaucrats.

Why do we need so many? A lack of trust. The less trust there is in a society, the more bureaucracy and bureaucrats we need to administer the rules and laws that govern us.

If we don't trust our employers to keep us safe at work, we need health and safety officials, both inside and outside the company, to inspect our offices and factories. How much extra is added to the cost of our food because companies can't be trusted to sell food that isn't contaminated? How much is added to local taxes because some people would rather sue the council than report a broken paving slab?

Despite this, there is still one major area where trust is endemic and keeps costs down: postage. How much more would we pay for goods if all deliveries had to be signed for? An extra £1 on a CD or DVD? Extra time on the postie's round? More postal workers to deliver the same number of packages and letters? Higher postal costs?

Because we trust the companies to deliver their goods and they trust that we won't lie about it turning up, these costs are kept down. If most people lied, what would happen then? More bureaucracy, more cost.

It would be easy to sit here and blame customers, consumers, citizens for all the increases in cost, but that would be a lie. Most of the increases are due to some bad businesses swindling people, causing government intervention, more laws and more people to administer those laws. How much health and safety legislation would we have if some companies hadn't caused fatal incidents (Hatfield rail crash for instance)? How many dog or firearm laws would we have if some people were more careful?

Some lawyers take advantage of this bureaucracy for their own ends, adding to the lack of trust and increasing cost of living, as do many politicians.

A wise man once said, that 'as long as more than 50% of people are trading honestly, the economy will grow. The more honesty in business, the more growth. Once more than 50% start trading dishonestly, the economy will shrink. It may take time to seep through, but these things can be seen throughout history'.

Sounds about right to me.

(For a good book on economic history, read 'The Great Wave' by David Hackett Fisher)

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