 My name is Saint-Baknin. I served as economic advisor to several governments around the world Almost three decades. I worked with Multinationals as financial advisor. I've collaborated with Multilateral institutions such as the IMF and the World Bank and Based on all these all this experience and the observations I've made I would like to discuss with you today the issue of trust in economics On my other main channel, Saint-Baknin on YouTube I just posted a video which deals with trust in interpersonal relationships And in that video I've analyzed the psychology of trust So actually the two go together. They're complementary pieces But this particular part this particular video deals with economics Economics Acquired its dismal reputation By pretending to be an exact science rather than a branch of mass psychology Yes granted there is behavioral economics, but even behavioral economics is not going far enough There's no admitting among economies even behavioral economies That economics is 100 a branch of psychology In truth it is a narrative struggling to describe the aggregate behavior of human beings It seeks to cloak its uncertainties and shifting fashions With mathematical formulae and elaborate econometric computerized models. It's not working too well So much is certain though that people operate within markets These markets are free. These markets are regulated. They're patchy. They're organized. There are numerous types of markets But people work within markets people attach numerical and emotional values to their inputs work capital And similarly they attach values to their possessions their assets the natural endowments People communicate these values to each other By sending out signals And these signals are known as prices Prices of signals about the value that people attach to various things. There's a famous saying That the cynic knows the price of everything and the value of nothing This distinction is a bit artificial yet this entire edifice the market And its price and signaling mechanisms They critically depend on a psychological fact And this is trust If people do not trust each other If people do not trust the economic envelope within which they interact pre-emptive mistrust He if there is a lack of trust or pervasive lack of trust permeating ambient economic activity gradually grinds to a halt There is a strong correlation between the general level of trust and the extent and intensity of economic activity Francis Fukuyama the political scientist distinguishes between high trust and prosperous societies And low trust and therefore impoverished collectives Trust underlies economic success He argued already in 1995 But there's a problem with it Like every psychological extensive trade It's not a monolithic quantity There are a few categories of economic trust Some forms of trust are akin to a public good And they are closely related to governmental action or inaction The reputation of the state and its institutions The pronounced agenda of the government They all determine to a large extent trust Because the government had become a huge part of modern economies Other types of trust are the outcomes of kinship tribal ethnic origin personal standing Goodwill reputation corporate brands And other data generated by individuals households and firms They are data related trust Such information creates two types of output Reinforced trust Where behavior matches expectations And inductive trust Inductive distrust, I'm sorry Where behavior frustrates expectation So there we have kind of two processes Sometimes we behave so that Our behavior reflects expectations Enhances them and realizes them in many cases Sometimes, and this is what I call Reinforced trust And sometimes our behavior frustrates the expectations Diminishes them, negates them, challenges them, undermines them Or even vitiates them And this is what I call inductive distrust Let's start with various types of trust The most basic foundational trust Is trust in the playing field To transact, people have to maintain faith In a relevant economic horizon And in the immutability Of the economic playing field or envelope Put less obscurely A few hidden assumptions underlie The continued economic activity of market players Market players, for example, assume or agents Assume that the market will continue to exist It's a very simple assumption In the foreseeable future The market will continue to exist in its current form It will remain inert Unhindered by externalities and external shocks Like government intervention Geopolitical upheavals Pandemics Crisis Abrupt changes in accounting policies and tax laws Hyperinflation Institutional and structural reform And other market-deflecting events and processes This projection This extrapolation of the market Is, of course, counterfactual Markets are very often subject to external shocks This would explain the dynamic of bubbles and busts Because bubbles are founded Fundamentally, they are extensions of the extrapolation Without this extrapolation, there would be no bubbles The belief that future market players Operating in identical markets Would absorb the current supply Is, yields leads to bubbles And bust is when reality testing is restored And there are external shocks Regulation, taxation, pandemics, crisis, wars, etc. And so market players assume That their price signals will not be distorted Or thwarted constantly That the market signals will not be interfered with Or interrupted There would be no intervention skewing the efficient and rational allocation Rational allocation of risks and rewards So things like insider trading Stock manipulation Monopolies, cartels, trusts Informal economic activities Like the black market or the grey market Hording All these tend to consistently but unpredictably Distort price signals And so they deter market participation in the market The liquidity dries up Market players take for granted The existence and continuous operation of institutions Financial intermediaries Like banks, insurance companies, law enforcement agencies Courts, civil service, educational institutions, and so on and so forth It is important to note that market players prefer continuity and certainty To evolution, however gradual, however ultimately beneficial A vinyl bureaucrat, a corrupt politician Is a known quantity Can be cackled effectively The cost is known, the transaction cost A period of transition to good and equitable governance Can be more stifling, more damaging than any level of corruption and malfeasance And this is why economic activity drops sharply Whenever institutions are reformed, are being reformed Witness the transition from communism to capitalism in Eastern Europe And in the former republics of the USSR The second type of trust is trust in other players Market players assume that other players are generally benign Rational, that they have intentions They're intentional, that they intend to maximize their benefits They're likely to act on their intentions in a legal, rule-based, rational manner This has been challenged by the School of Behavioral Economics, Kahneman, etc Not going to it right now But this is an underlying sort of assumption You can trust others Then there's a trust in market liquidity By the way, the second type of trust It leads to phenomena like world.com and Bernie Madoff, etc This Kahn artist leveraged this type of trust And I encourage you to watch the video about the psychology of trust in my other channel Then there's a trust in market liquidity Market players assume that other players possess or have access to The liquid means that they need in order to act On their intentions and obligations They know from personal experience That idle capital tends to dwindle And that the only way to perhaps maintain or increase the capital Is to transact with others directly or through intermediaries such as banks So they trust that liquidity will never remain hidden Obscured under the mattress But we'll always exit, we'll always out In order to participate in market activities so as to grow Then there is trust in other people's knowledge and ability Market players assume that other players possess or have access to The intellectual property, the technology and the knowledge that they need In order to realize their intentions and obligations This implicitly presupposes that all other market players Are physically, mentally, legally and financially able, competent and willing To act their parts as stipulated For instance, in contracts they sign The emotional dimensions of contracting are often neglected in economics Players assume that their counterparts maintain a realistic and stable sense of self-worth Based on intimate knowledge of their own strengths and weaknesses Self-awareness is critical Market participants are presumed to harbor realistic expectations Commendate with their skills and accomplishments Fake it till you make it is a very bad foundation for any market Allowance is made for exaggeration, of course We all know that there is disinformation Even our try deception But these are supposed to be fringe phenomena Very rare They can't become the founding principle And gradually in today's modern economies We regrettably are moving in that direction Fake it till you make it had become an operating and organizing principle When trust breaks down, often the result of an external or internal systemic shock People react as expected The number of voluntary interactions and transactions decreases sharply With a collapsed investment horizon, individuals and firms become corrupt In an effort to shortcut their way into economic benefits Because they don't know how long will the system survive Short horizon Criminal activity increases People compensate with their market failure People compensate with fantasies and grandiose delusions For their growing sense of helplessness and certainty, fears This is a self-reinforcing mechanism It's a vicious cycle which results in Underconfidence and fluctuating self-esteem And people develop psychological defenses From now on psychological defenses They act out very often Cognitive dissonance begins to rain People say, I really choose to be poor Rather than, for example, heartless or ruthless This pathological ending People seek to deprive other people of their possessions and achievements and assets And this way gain emotional reward Relative positioning becomes paramount and predominant You can see this in social media Where people compare their popularity with others There's rigidity that sets in I'm like that My family or ethnic group has been like that for generations There's nothing I can or am willing to do Then there's passive-aggressive behavior obstructing the workflow Absentism, stealing from the employer and bezeling Adhering strictly to arcane regulations These are all reactions These are all dysfunctional reactions To a breakdown in one or more of the four aforementioned types of trust When trust breaks down There is something called anomy Dukheim, Emil Dukheim described it in his work Anomic societies, andanomic institutions, andanomic economies They create dysfunctional counterproductive and anti-social behavior In a trust crisis People are unable to postpone ratification They often become frustrated, aggressive, deceitful If they're denied They resort to reckless behavior and to stop gap economic activities In economic environments with compromised and impaired trust Loyalty decreases and mobility increases People switch jobs People renege on obligations They fail to repay debts They relocate often Concepts like exclusivity Sanctity of contracts Workplace loyalty Career path All these get eroded and become meaningless As a result, little is invested in the future In the acquisitions of skills In long-term savings Short-termism Bottom-of-line mentality ruled the day And you have many get-rich-quick schemes The outcomes of a crisis of trust are usually catastrophic Economic activity is much reduced Human capital is corroded and wasted Brain drain increases Illegal and extra-legal activities rise Society is polarized between haves and haves not Inter-ethnic and inter-racial tensions increase To rebuild trust in such circumstances is a daunting task The loss of trust is contagious Finally, it infects every institution Every profession in the land It is the stuff that revolutions are made of I've designed a very simple index of trust and distrust It has the following variables Each of these variables is scored on a scale of 1 to 10 So they formalize t i equals p plus l plus c plus i plus s plus m plus v plus f plus r plus w And I will explain each one of these a bit shortly The index can range of course from 0 to 100 With 100 signifying total absolute unreserved or pervasive and enduring economic trust 0 represents a complete absence of any form of trust Between and among economic agents and actors 1 divided by the index, 1 divided by t i Would be the index of economic mistrust, of course So what is p? The first variable p is population size The bigger the population, the easier it is to cheat and to deceive Because information is disseminated more slowly Peer pressure is limited and reputational capital remains localized L the next variable Law enforcement Efficient law enforcement and a functioning judiciary Enhanced trust The rule of law is critical C is corruption Surprisingly, in the formula Calculating the coefficient Corruption is a neutral effect On the one hand it encourages preemptive mistrust By upsetting the level playing field On the other hand corruption and finality Increase certainty in otherwise uncertain economic environments By providing a tried and true price list for services Connectivity is the next variable i The most connected individuals are The more I'm sorry The more connected individuals are And the faster the dissemination of accurate transparent information The higher the level of trust Technology such as the internet Serve to enhance Economic trust The less information friction there is The higher the trust The next variable is s Stability and predictability They are the cornerstones of economic trust Government intervention Geopolitical upheavals Crisis Abrupt changes in accounting policies And tax laws Hyperinflation Institutional structural reform And other market deflecting events and processes All tend to reduce the average level of trust M is available in reliable price signals Not distorted by insider trading Stock manipulation Hording informal economic activities Black market, grey market Monopolies, cartels, etc This is M The next variable is V A reliable store of value A currency or goods and services That can serve as means of exchange And generate trust only when they represent Real long-term value So a value store is critical F. Functioning institutions They are crucial to the establishment and maintenance of trust Financial aid and intermediaries Banks Insurance companies Law enforcement agencies Courts Civil service Education institutions Their functioning Predicates trust Creates trust R Cultural and social rationality In all cultures and societies There are times when the optimization of profits and benefits The ethics of contracting And otherwise rational economic behavior They are all subordinated to often self-defeating Self-destructive irrational beliefs Biases Prejudices And stereotypes Societies lapse Into these irrational states Just look at Nazi Germany And this is spurred on usually By capricious ignorant Narcissistic, psychopathic or arbitrary leaders By some malignancy of the ethos By some changing mores And such surrealism is not conducive to economic trust In a nightmare environment One can hardly rely on a dream And we're withle The next variable is W We're withle When all the economic actors and agents possess the liquidity And the knowledge necessary to complete their transactions And to honor their obligations And this creates and sustains an atmosphere of trust It is impossible To exaggerate or overemphasize The critical role of trust And trust being a psychological trait dimension Belief Value It's not an economic thing It's in the mind It reflects expectations It's volatile It's led by it It's sometimes dysregulated It reacts to external shocks Many of which, if not all of which Are many of which are not economic So there is trust mediates shocks Trust brings shocks into the economic system Introduces shocks into the economic system Trust is the transmission mechanism of shocks When an external shock happens, like a pandemic The first thing to react is trust Trust fluctuates or goes down It is through trust that changes in the behavior of economic agents And economic players take place And these changes in behavior in turn have economic consequences So the economic consequences are the very last And not necessarily the most important link In a much longer chain The bulk of which is actually psychological