Markets, trust and growth

Markets, trust and growth
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First Published: Tue, Jun 01 2010. 08 31 PM IST

Illustration: Shyamal Banerjee / Mint
Illustration: Shyamal Banerjee / Mint
Updated: Tue, Jun 01 2010. 08 31 PM IST
India needs both faster and more inclusive growth. According to a powerful school of economists and policymakers, free markets are the solution to economic development. However, mainstream market economics does not provide a solution for more inclusive growth, as the Commission on Growth and Development headed by Nobel laureate economist Michael Spence admitted in its 2008 report.
The free marketeers’ case is built on the logic of efficiency of free markets that enables the most efficient producers of any product or service to emerge. Thus, in their model, all economic activities, through some efficient process of competition, will be performed by the most efficient entities that trade with each other. Thereby, according to this school, the world will use its overall resources most efficiently for the benefit of all mankind.
Illustration: Shyamal Banerjee / Mint
Trade between people involves transactions. Therefore, transaction costs between the various actors in the economy must be reduced to create efficient markets.
Many economists have emphasized the importance of “trust” within societies to reduce transaction costs and enhance economic progress. Therefore, they are interested in the conditions that create trust among people. The principal conditions, according to economists, are (1) availability of adequate and symmetrical information to the parties involved, and (2) confidence that all parties will comply with their obligations in their transactions. (Therefore, institutions, such as stock market regulators, are empowered to ensure transparency and adequacy of information, and to ensure compliance.) The transactional mode of working with others, if properly governed by written, or widely accepted “unwritten rules”, creates confidence in the predictability of actions of the parties involved. Hence it is efficient— in economic terms, and also adds to the stock of “trust” in society. But this trust is limited to the bounds of the transactions, and does not automatically extend beyond them. To put it simply, New Yorkers know how to complete daily transactions with each other quickly and efficiently, with no waste of time on pleasantries. But New Yorkers are also notorious for avoiding needless contact with others because their instinct is not to trust them.
It is necessary to distinguish different types of situations in which trust is required. One type, already explained, is “market transactions” between strangers. In such situations, the actors trust that the system will ensure that others will perform to their contracts within the context of that system. They will not necessarily trust these others outside the purview of that system, as the example of New Yorkers illustrates, because they cannot predict how they will act in a different context. An established system provides the scaffolding for working safely within its contained space. Therefore, what we must examine is what will engender trust between parties interacting in situations beyond the safety of accepted systems, or when the rules governing the system have to be reformed.
In such situations, a deeper trust is required of each other. For this, there must be confidence that the other is unlikely to cause harm. Therefore, the parties must know the principles that will guide the other’s actions, and know each other’s wants and fears. They can learn these through the hit-and-miss of trying to work with each other, which could lead to greater mistrust. Or they can sit down and listen to each other’s aspirations and beliefs, and locate the tripwires they will watch out for and help each other across, and thus build stronger coalitions for development. Such deep dialogues are not the norm when parties try to work together. Perhaps they should be, for trusting relationships to be built, stronger partnerships created, and foundations strengthened for a richer and happier society.
The development of an inclusive and harmonious society is too large an undertaking to be left to economists alone. Within economics, many Nobel laureates have taken a broader view than the mainstream free marketeers. These include Douglass North, Amartya Sen, Joseph Stiglitz, George Akerlof and Elinor Ostrom. Their work points to the need for a more holistic model that integrates the perspectives of the various social sciences. Because, as North writes in his book Understanding the Process of Economic Change, “The human environment is divided by social scientists into discrete disciplines—economics, political sciences, sociology—but the constructions of the human mind that we require to make sense of the human environment do not coincide with these artificial categories. Our analytical frameworks must integrate insights derived from these artificially separate disciplines if we are to understand the process of change.” The problem in combining the perspectives of the various social sciences is that their proponents do not know how to talk to each other. They have their own jargon, which is generally understood within their own community only. They live within “conceptually gated communities”, talking to and listening to their own kind only.
In summary: efficient contracts may build a good economy; trusting relationships will also create a good society. And inclusion begins with a state of mind open to other perspectives.
Arun Maira is a member of the Planning Commission
This is the concluding article in a two-part series. Comments are welcome at theirview@livemint.com
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First Published: Tue, Jun 01 2010. 08 31 PM IST