Streetwise Professor

August 27, 2009

Trust Me On This

Filed under: Economics,Politics,Russia — The Professor @ 8:34 pm

When the subjects of institutions is discussed, most commonly the conversation/analysis focuses on formal institutions, like laws and the courts that enforce them, or political bodies like legislatures.  But there is another body of research that views beliefs and norms as important institutional features that can decisively affect the costs of transacting, and hence economic progress and prosperity.

In particular, although discussions of “capitalism” or “market economies” frequently focus on competition, the most important institutions in such systems in fact have the effect of facilitating cooperation and coordination.  After all, economic competition is usually competition to cooperate with somebody: different sellers compete to sell to–to cooperate with–a buyer.  Individuals form firms or enter into contracts to facilitate cooperation so as to compete more effectively against other firms or organizations in their ability to cooperate with third parties.  Trade and exchange are all about cooperation between buyer and seller, and strong institutions support such cooperation, oftentimes by imposing penalties on those who opportunistically exploit those who would cooperate with them.

Frequently–and arguably typically–cooperation must take place over time, and the individuals who cooperate often perform on the commitments asynchronously; I may have to make an investment today that provides a benefit for you in exchange for your promise to do something for me in the future.  There has to be some mechanism in place that makes it in your interest to perform on your promise; if there isn’t, I won’t make the investment, and potentially mutually beneficial deals don’t get done.

Reliance on reputation–trust–is one such mechanism.  It is not foolproof, to be sure; reputation is costly (that’s what makes it work), and there are occasions when it is advantageous to incur a reputational hit to secure a more valuable, opportunistic gain.  But in general, trust facilitates cooperation, and more trade takes place in environments where trust levels are high than when they are not.

I’ve written a good deal about Russia’s institutional deficit, and much of that criticism has focused on the weakness of the formal institutions, most notably the appalling court system and the inability of an autocratic executive to commit to eschew expropriation.  But Russia’s “soft”–informal–institutions are weak too.  Paul Goble excerpts and translates portions of a very interesting article that makes that very point very persuasively:

“Rephrasing Hegel,” Pastukhov [obviously a Russphobe] says, “one can say that Russians have exactly the ‘capitalism’ they deserve. That is the kind of capitalism that only can exist in a country where there is no bourgeois consciousness and where the elites are incapable of economic cooperation – not to speak about social partnership and political participation.

To a great extent, the Moscow commentator suggests, “economic relations in most cases remain primitive and archaic.” Russians “do not trust one another,” always assuming that others will cheat them. But trust, confidence that partners to a deal will do what they say will do is the essence of modern capitalism.

Indeed, Pastukhov argues, “capitalism is a system of organized trust. Without trust, this system cannot work under any government.” And because the Russians lack that quality, along with a cultural commitment to honesty, something which “has practically disappeared” from their midst, it is impossible for capitalism to work among them.

Trust and lack of trust can both be self-enforcing equilibria.  If I trust you and you trust me and we both act on those beliefs, you perform and I perform  and we continue to trust one another, and on and on.  If you don’t trust me and I don’t trust you, I’m likely to try to screw you before you screw me–but may find that you’ve beaten me to it.  So being so distrustful, and expecting an opportunistic response to any deal, we probably won’t even try to cooperate in the first place.

Pastukhov’s argument is that Russia is in the no trust equilibrium.  Crucially, he concludes that this is true at every level of society, from the elites on down:

“The inability of the Russian elite to act in a consolidated way,” Pastukhov points out, is legendary. But as a result, “competition Russian-style is a process of unending efforts at surprise, betrayal and cannibalism.”

Pastukhov points out that Russians tend to emphasize the competitive, red-in-tooth-and-claw nature of capitalism, and are oblivious to its cooperative essence:

many Russians and their friends . . .  talk about competition as a basic characteristic of capitalism, but they ignore that “capitalism besides that presupposes social and economic solidarity the external expression of which is a civic position.”

He concludes that:

“a society in which there is no trust, self-control or cooperation, under any government will be incapable of building capitalism. Instead, it is condemned to an archaic kind of economy, based on primitive trade and theft.”

Pastukhov contemplates the possibility that government, through education, could inculcate the “bourgeois values” (or bourgeois virtues, as Deirdre McCloskey would call them) necessary to nurture a less “cannibalistic” economic system.  But, he resignedly concludes this is impossible:

“Who will bring the people back to its senses and return respect to basic moral values? Who? This is the most important and difficult question,” Pastukhov says. Tragically, he continues, the Russian government “is not capable of doing that” because it does not stand “‘above the fight’ but in the very dregs of ‘the events.'”

“In the very dregs of ‘the events.'”  There’s an understatement for you.

But this all raises the question: why is Russia in this bad equilibrium?  This is a complicated question, and I certainly cannot answer it completely.  It is fair to conjecture, however, that rather than being a potential cure, government has been an important cause, and continues to be so.

Autocratic systems, be they Czarist, Soviet, or Putinist, don’t want to encourage cooperation or institutions that facilitate cooperation.  Why not?  Because the autocrats and their henchmen are afraid that others will cooperate against them.  The kind of associative society that de Tocqueville described in Democracy in America is an anathema to an autocrat.  People who can cooperate and associate to start a business or a charity or a church can cooperate and associate to oppose the predations of autocrats.

Autocrats like atomized societies, where people lack trust.  It takes trust to work together against thugs.  A lot of trust.  Atomized individuals, distrustful of one another, pose far less of a threat than people used to cooperation.  For extreme examples, consider the myriad efforts in the Stalinist USSR or Hitler’s Germany to sow distrust: the informers, the spies.

Autocrats like hierarchical relationships (power verticals, if you will) where people look up rather than to their right or left.  Or, to use another metaphor, centralized relationships, with the autocrat at the spoke of the wheel.  (This brings to mind a captured Iraqi document that diagrammed military communications networks in Saddam’s army during the Gulf War.  All communications between units went through a central node–different units could not communicate directly.)

In other words, don’t look to an autocratic government to facilitate trust and cooperation among those it rules.  For the autocrat, a distrustful society is a blessing, not a curse.  The autocrat tries to atomize, to undermine cooperation and social solidarity.

The lack of trust, its difficulties in supporting autonomous cooperation, that Pastukhov describes, is therefore arguably part of Russia’s autocratic inheritance.  The same can be said for other former bits of the Russian Empire and the USSR, notably Ukraine.  It is, alas, one of the prized parts of Putin’s dowry.  Don’t expect him to give it up.

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  1. Excellent analysis. As someone who spent 30 years in Russia and grew up there I couldn’t agree with it more-mistrust and lies from top to bottom.

    Comment by voroBey — August 28, 2009 @ 11:32 am

  2. What an insightful post. It has been awhile since I studied this, but I believe “trust” played a big role in Adam Smith’s Moral Sentiments. I guess that’s not too popular in Russia, either. Please keep up the good work. I enjoy the blog and always learn a lot from it.

    Comment by Lee — August 28, 2009 @ 4:31 pm

  3. Poor and always pathetic Russia, there is simply no salvation at hand that could possibly get in front of their pathetic demographics and turn this around.

    Pootie will live on in whatever form the Kremlin serves up because this is a society that basically mistrusts and loathes each other.

    I’ll leave it to future historians to do the final autopsy on the eight decades of forced collectivization and Stalin’s mass murder and mayhem and the resulting culture of suspicion and poverty(of ideas being the worst victim) and what it did to people.

    And, I agree that bettering the lives of their citizens is an anathema to totalitarians who understand life as a zero sum game. Investment in human capital in Russia isn’t what the siloviki want.

    Comment by penny — August 28, 2009 @ 9:24 pm

  4. This is very, very interesting.

    In Ukraine, there is, without a doubt, and overwhelming distrust of government. For good reason.

    There is a lot of talk about looking for “the Messiah,” who will lead Ukraine out of its dysfunctional government.

    There is also more talk about voting for “none of the above” in elections – which, to me, is an absolute absurdity.

    When you ask Ukrainians why they can’t get around the oligarchs (Ukraine’s government if of, by and for oligarchs), they give you a blank stare, and you get a sarcastic response like “why don’t you run for President of Ukraine”, but they can’t seem to articulate the problem or the solution.

    Indeed, even the various “parties” (Ukraine really doesn’t have political parties – it has collections of oligarchs, who change and switch allegiances at times when it is convenient) openly admitted that the people don’t have any trust in the government.

    Yet, we have one candidate, Yanukovych, who was found to have participated in election fraud, currently out-polling all other presidential candidates.

    We have Tymoshenko taking away Yanukovych’s huge mansion (which he got with the cooperation of Yushchenko under mysterious circumstances from the government), and also taking away one of Firtash’s (he of RosUkrEnergo and ties to the Kremlin fame) chemical factories, which makes fertilizer and other stuff.

    Tymoshenko seems to view government, in her own extremely energetic way, as her own private domain, with her at the top, dispensing her own goodness and largesse to the people.

    Of course, machine politics is part of every one of the factions – each faction distributes largesse, as needed, in order to attract votes, in order to remain at the government trough, which is unabashedly used for personal gain.

    Are the various factions happy to maintain distrust of government?

    Very interesting question.

    Comment by elmer — September 1, 2009 @ 11:00 pm

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