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By Root 1615 0

got into gear in the Industrial Revolution—capitalism, in essence—has continued until it now includes almost the whole world. The late-twentieth- and early twenty-first-century era of globalization means that I am fed and clothed by Kenyan farmers or Cambodian factory workers, who are paid through a financial system that stretches from my bank account to their wages in Kenyan shillings or Cambodian riels. In the symbolic global shirt—a simple product—bought in the United States, the design may be Italian, the fabric could be woven in Bangladesh, the buttons made in India, the cutting and sewing done in Mauritius, the finishing and logistics in China.3

Finance is a special case, in being dependent only on trust. One thing the financial crisis has made plain is that the activities of financial markets had come to obscure the relationships between people implied by financial contracts. As Amartya Sen put it: “The moral and legal responsibilities associated with transactions have in recent years become much harder to trace, thanks to the rapid development of secondary markets involving derivatives and other financial instruments.”4 This loss of traceability and trust is a serious matter. Apart from their buildings and computers, banks have no physical assets. Their stock market value is entirely an indicator of their intangible assets—which are, more or less, a measure of the extent to which they are trusted. Until the later part of the twentieth century, other companies had a market valuation that mostly reflected the value of physical assets, such as factories and machines, but a growing share of the value of all companies in recent decades has consisted of intangible items, including the important asset described as “goodwill.” This is a sign of the transition of the leading Western economies away from the processing of materials, basic manufacturing, to higher value intangible, or “weightless,” activities.5 A growing proportion of every dollar spent by consumers is paying for clever ideas, design, or service quality or brand cachet, something intangible, rather than the materials from which products are made. Goodwill is real, even if it is intangible. A successful brand such as Coca Cola or Louis Vuitton is valuable because of what customers believe about the products. But the companies that have tumbled have shown that much intangible value can evaporate overnight. Literally so—from billions of dollars to next to nothing due to one announcement. Weightless value is fragile. Modern economies, in becoming increasingly weightless, are more than ever dependent on trust.

The structural shift in leading economies toward intangible activities, and the related globalization of the economy whereby manufacturing has been parceled out around the world in increasingly specialized niches, has made trust more fundamental than ever. That trust is embodied and expressed in global finance. This is why the fraud, greed, and incompetence revealed in the banking system by the financial crisis has struck such a serious blow to the economy. If we seem to have come through it with a relatively minor recession—certainly compared with the Great Depression—that is because governments have laid their credibility on the line to substitute for the collapse of trust in the banking system. The massive expansion of government debt described earlier means that governments at present and for years into the future will be standing as guarantors for the financing of economic transactions, as described above.

This chapter explores some key issues arising from this fundamental importance of trust.

First I set out further the links between trust and economic success, drawing on the economic literature on “social capital.” The instinct for fairness and reciprocity in human nature mentioned in the last chapter takes its shape in social arrangements, the unwritten rules of culture and social norms, and the formal institutions through which we embody mutual trust and organize our living together in large and complicated societies. I will argue that social capital