How - Dov Seidman [86]
This is an example of how existing trust can fill the Certainty Gap between two companies, especially when one is the target of an acquisition and may have a lot to lose. Obviously, having an exclusive, first-look opportunity to transact business represents a significant advantage in the marketplace. But it is another soft, anecdotal example of the value of trust, and I wanted to know if Mike could make a direct connection between trust and profit at the highest levels of business. “Absolutely,” he immediately replied. “In economic terms, trust is important to the cost of capital. When you need money to finance a large deal, you often can’t clue the market in to the exact specifics of your business plan without compromising your competitive advantage. So the market relies on trust and your past consistency. With trust, they lend you money at a lower rate. So a multibillion-dollar transaction will close at a lower price when you are a preferred partner, rather than going to the stock market and paying with the same green as everyone else.”
This same relationship of trust to economic advantage scales up to the macroeconomic level, too. Studies show that economic growth and prosperity within a given society require a certain minimum level of generalized trust. Without it, investment ceases and economic activity stalls. Francis Fukuyama first hypothesized this in his seminal 1995 book, Trust. The wealth of a nation, “as well as its ability to compete,” he wrote, “is conditioned by . . . the level of trust in the society.”5 Neuroeconomist Paul Zak extended Fukuyama’s thoughts about the relation of trust to general prosperity. “Our analysis also shows that if trust is sufficiently low,” Zak reports in the Journal of Financial Transformation, “then the investment rate will be so low that income will stagnate or even decline.”6 Economists call this a “poverty trap,” and once a society has slipped into one, a downward spiral of trust deficiency results. “We show that the primary reason for a poverty trap is ineffective legal structures that result in low levels of generalized trust, and therefore little investment,” says Zak. “Further, the threshold level of trust necessary for positive economic growth is increasing in per capita income; that is, the poorer a country currently is, the more trust is required to generate sufficient investment to raise living standards. This makes the low-trust poverty trap difficult to escape from.” In other words, when the societal Certainty Gap gets too large, it becomes almost impossible to fill.
Laws do many things well, and one is to create the reasonable amounts of generalized trust necessary for economic prosperity. This is one of those “floors” I spoke about. Zak’s research shows that general trust is high in Scandinavian and East Asian countries and low in South America, Africa, and the formerly communist countries. In a worldwide survey designed to measure the general ability of any two random people to trust each other in a society, only 3 percent of those surveyed in Brazil and 5 percent in Peru say their compatriots are trustworthy, while 65 percent of Norwegians and 60 percent of Swedes believe this to be so. The United States comes in at 36 percent, down from 50 percent in 1990; the United Kingdom has been holding steady at 44 percent since the mid-1990s.
Zak also found direct, quantifiable relationships between trust and prosperity. Business investment in a given society directly mirrors levels of trust. Where general trust is high, the national rate of investment—gross investment divided by gross domestic product (GDP)—is commensurately high, and vice versa. The same direct relationship also exists between trust and GDP growth. For each 15 percent increase in the proportion of people who find others trustworthy, per capita income rises 1 percent. If trust in the United States grew from 36 percent to 51 percent, for example, the average income for every man, woman, and child would grow about