The Limits of Trust

The Limits of Trust

Mini Teaser: Although the syllogism conveys the essence of Fukuyama's argument, it does so at the cost of neglecting the book's broad sweep, sharp insights, and wide-ranging scholarship.

by Author(s): Charles Wolf, Jr.

Francis Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (Free Press, 1995).

One of the standard put-downs of economists maintains that "about half of what economists say is right--the trouble is they don't know which half." In the same vein, Nobel Laureate Paul Samuelson, with a mixture of derision and contrition, has observed that "economists have correctly predicted seven of the last four economic recessions." In Trust: The Social Virtues and the Creation of Prosperity, Francis Fukuyama is, ostensibly at least, more generous, conceding that neoclassical economics is "80 percent correct." The "missing 20 percent of human behavior" is the concern of his provocative, insightful, and deftly-written book.

The central thesis of Trust can be summarized in the following syllogism:

Premise I: High economic performance--i.e. the "creation of prosperity" (and sustaining it)--is substantially helped by large, private economic organizations.

Premise II: The establishment and progress of large economic organizations (e.g. corporate giants such as IMB, AT&T, Toyota, General Motors, Mitsubishi, Siemens, and Daimler-Benz) is substantially helped by what Fukuyama variously refers to as "social capital," "spontaneous sociability," and "trust."

Conclusion: Therefore, high economic performance is substantially advanced by the prevalence of social capital, trust, and cultural values that sustains these qualities.

Although the syllogism conveys the essence of Fukuyama's argument, it does so at the cost of neglecting the book's broad sweep, sharp insights, and wide-ranging scholarship. (Reflecting the latter, Trust contains fifty-seven pages of footnotes and a twenty-page bibliography.) The breadth and scope that are missing from the syllogism are conveyed by the book's four-part structure. In Part I, Fukuyama addresses "The Idea of Trust" and the "Power of Culture" in shaping economic performance. (In doing so he makes plainly evident that the explanatory "power" he ascribes to culture is really considerably more than the minimal "20-percent solution" mentioned earlier; hence my use of the word "ostensibly" in the first paragraph).

In Parts II and III, which comprise the two hundred-page core of a 362-page text, Fukuyama deals, respectively with "Low-Trust Societies" and "High-Trust Societies." The low-trust exemplars are China, Italy, France, and Korea, in which "familistic" Confucianism and its cognates ("Italian Confucianism"!) impede rather than propitiate the formation of large, private economic organizations and their attendant contributions to high-economic performance. The high-trust societies are Japan and Germany, which Fukuyama ranks number one and two, according to his judgment about their respective "degrees of trust."

According to Fukuyama's argument, high-trust societies benefit from their lower transaction costs in forming the large private business organizations on which prosperity and sustained growth depend. By way of contrast, low-trust, familistic societies and cultures are said to confront higher transaction costs that impede the formation of such organizations. The impediment arises because the primary focus of loyalty in these societies is directed to the family, rather than to organizations outside it. In seeking to overcome these obstacles and their attendant higher transaction costs, low-trust societies rely on state intervention, which turns out to be a generally poor substitute for the private organizations whose formation is inhibited.

In Part V, Fukuyama addresses the special problem posed for his thesis by American society and culture. That problem arises from the fact that, while American culture cherishes and advocates individualism, it has also "pioneered the development of the modern, hierarchical corporation," which foreshadowed the large, private business organizations whose nurturing Fukuyama extols and attributes to the pervasiveness of sociability and trust. This dilemma is resolved by Fukuyama's exposition of America's "dual" cultural heritage. Alongside America's individualistic tendencies, "which separate and atomize individuals," Fukuyama asserts, "there has been a powerful propensity to form associations and to participate in other forms of group activity."

The book concludes in Part VI with a broad-brush reconciliation between the liberal economic order envisaged as "the end of history," in Fukuyama's 1992 book of that title, and the quite different focus on cultural values and trust in his present work. As part of this reconciliation, Fukuyama advocates "the preservation and accumulation of social capital," as the essential goal of liberal civil societies.

In a book as ambitious as Trust, it is perhaps not surprising that its grasp falls short of its reach. One serious shortcoming is the absence of a metric for measuring societal trust. According to Fukuyama, societies can be characterized as "high-trust" and "low-trust, " and "social capital" can be described as something that can be "accumulated," and hence implicitly trades off against tangible capital (i.e. business investment), as well as human capital, in creating prosperity. For these concepts to be meaningful, let alone useful, there should be a metric: that is, a way of distinguishing between more and less, larger and smaller, increasing and decreasing.

Fukuyama provides little enlightenment on this score, although several possibilities are alluded to in the course of his exposition. One of these is the number of voluntary community associations and organizations across countries and over time. But use of this as a possible proxy for measuring the amount of trust is fraught with difficulties. For example, are associations to be weighted by their membership or their duration, by their geographic scope, by their budgets, or some other measure of activity, or some combination of all of these?

Moreover, Fukuyama dismisses interest-group associations, in contrast to "voluntary associations," because the former are brought together for reasons of self-interest rather than "sociability." This seems to me a dubious distinction because many, and perhaps most, interest-group associations--like those of doctors, lawyers, economists, workers, businessmen, social scientists, engineers--involve both sociability and advocacy. And many so-called "voluntary associations"--like PTAs, church groups, and the Association for the United Nations--often engage in lobbying activity, as well as community sociability.
Several other candidate metrics come to mind, that are not considered in the book. One example is the size of voluntary community contributions, as well as efforts-in-kind, in response to natural disasters. (Incidentally, the Los Angeles earthquake of January 1994 elicited considerably larger community contributions than did the more devastating Kobe-Osaka earthquake of January 1995, notwithstanding the supposedly higher-trust Japanese society, compared to the presumably "lower-trust" culture of California!) Other possible metrics might include voluntary enlistments in a nation's armed forces, membership and attendance in religious groups and services, and so on. To enumerate such possible metrics only highlights their manifest shortcomings as proxy indicators of Fukuyama's concept of trust and spontaneous sociability.

To be sure, not everything that counts can be counted, and not everything that can be counted counts. Nevertheless, in an exposition that repeatedly talks about degrees of trust, the extent of sociability, and the expansion or erosion of social capital, one would like to see some serious attention devoted to how to measure and reify these concepts. This is not an issue of the difference between the "touchy-feely" thinkers and the "quantoids," as one of my students has recently written. It is simply a requisite of serious analysis. Incidentally, with such a metric or metrics to concretize the concepts that Fukuyama is elaborating, it would be entirely possible to include them in economic models to test empirically the hypotheses he advances.

Were that to happen, I would not expect them to survive the test. For the central argument of the book does not stand up to careful scrutiny. While the syllogism I introduced earlier to summarize the book's central thesis can properly be criticized because it ignores the nuanced and allusive exposition by the author, it nevertheless has the advantage of exposing the essentials of the argument. When they are thus exposed, it seems clear that both the first and second premises in the syllogism, and hence the conclusion drawn from them, are not sustainable.

"High-economic performance" and "prosperity" can be properly defined as relatively high per capita levels of gross domestic product, or personal consumption, or sustained rates of growth, in these indicators. There is abundant empirical work indicating that these performance measures are directly dependent on high levels and rates of growth in both labor and capital productivity; and high rates of growth in labor productivity depend on increases in capital per worker and on the rate of technological progress. Productivity does not depend uniquely on the size of business organizations. While there are some types of efficiencies and lower transaction costs associated with large-scale organizations, there are other sorts of inefficiencies and higher transactions costs associated with large scale organizations--a point I have elaborated elsewhere.

Moreover, the corporate size at which scale efficiencies can be realized has been shrinking in the past decade as a result of advances in information technology, and this trend will probably continue. Recent corporate mergers and acquisitions do not contradict this point. These mergers reflect potential synergies among different business fields--for example, entertainment and telecommunications--rather than the benefits of larger size in a single field.
So it is unpersuasive to assert, as does the first premise of the syllogism, that high performance and prosperity depend significantly on large economic organizations.

It is also arguable whether, as the second premise of the syllogism presumes, the creation and sustenance of large economic organizations is decisively affected by "spontaneous sociability," "social capital," and the pervasiveness of "trust." There are, indeed, many other competing explanations for the prevalence, endurance, and sometimes resuscitation of large private corporations. A participative, yet decisive, management style is one such explanation. The management styles adopted by Jack Welch at General Electric and Louis Gerstner at IBM are cases in point. Management style can do a lot to enhance the performance of large as well as small corporations, as can regular communication, clear and simple administrative rules, incentive bonuses, and even binding legal contracts--quite apart from the prevalence of "social capital" and societal "trust."

Furthermore, the syllogism's second premise is belied by common experience. For example, New York is the headquarters of some of the country's and the world's largest business corporations (IBM, Citicorp, Chevron, and others), yet it is part of New York's culture that trust and spontaneous sociability are definitely not part of its culture! In the same vein, one of America's most strikingly successful companies, Walt Disney--now Disney-Capital Cities--and its charismatic CEO, Michael Eisner, flaunt a corporate culture pervaded by a minimum of trust and a maximum of internal as well as external competitiveness. Still another counterexample is provided by a recent survey in Los Angeles that showed a rate of participation by Angelinos in community activities less than half the national average. Yet, once again, the prevalence of large business organizations in Los Angeles is manifestly higher than the average among the nation's communities.

If, then, the major and minor premises of the syllogism are spongy, the conclusion deduced from them is compromised. Whether high-economic performance depends predominantly, heavily, moderately, or slightly, if at all, on trust and "the social virtues"--whether these are 20 percent of the solution or much less--remains an open question.

Even within the broad socio-cultural domain that Fukuyama emphasizes, there are many competing perspectives, apart from trust and sociability. For example, Samuel Huntington credits "pluralism" with a major part of the explanation for Japan's successful and sustained modernization. "Pluralism," Huntington contends, "made possible the existence of people who could espouse a new way of thinking," thereby providing a "major factor in the success of Japan's modernization."
Another socio-cultural perspective is advanced by Toshiro Shimoyama, chairman of one of Japan's large corporations. He has suggested that successful modernization in Japan has been due to the absence of a religious commitment to Islam or Confucianism, rather than to sociability or trust. Others, like James Heckman and Gary Becker at Chicago have argued that a critical ingredient in high-economic performance is the effectiveness of a society's educational system in building human capital.

Finally, to explain high-economic performance and the creation of prosperity, such diverse commentators as Joseph Schumpeter and John Maynard Keynes, as well as recent management gurus like Tom Peters, Peter Drucker, and David Osborne, accord top billing to entrepreneurial vision and drive. And entrepreneurship--whether in large, small, or start-up firms--is no less socio-cultural in character than are "trust" and "spontaneous sociability," yet is probably either independent of, or even inhibited, by them.

Trust concludes on a refreshingly candid note of agnosticism that can as well be applied to other socio-cultural analyses of prosperity as to Fukuyama's own. "What we can say," Fukuyama concludes, "is that the impact of cultural differences in the propensity for sociability will have a large, but at the moment indeterminate, impact on economic life." Indeterminacy hardly provides a basis for policy.

Essay Types: Book Review