Title: Trust: The Social Virtues and the Creation of Prosperity
Author: Francis Fukuyama
Scope: 4 stars
Readability: 4 stars
My personal rating: 5 stars
See more on my book rating system.

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Topic of Book

Fukuyama explores the role of trust in laying the foundation for economic growth. He uses examples from the United States, Japan, Italy, France, China and other nations.

If you would like to learn more about how humanity created prosperity, read my book From Poverty to Progress: How Humans Invented Progress, and How We Can Keep It Going.

My Comments

The book is a little dated as it was written in the 1990s. Some of its examples appear less relevant than when it was first published. Fukuyama, however, makes a compelling case for trust being essential to prosperity. Now there a international opinion polls related to levels of trust that partially validates his beliefs.

Key Take-aways

• The level of trust of strangers varies greatly between cultures.
• Trust is critical to the formation of large impersonal organizations. These organizations make democracy and capitalism function properly.
• High trust societies can create family businesses and scale them up into large-scale enterprises.
• Low-trust societies can create family businesses, but they cannot create large-scale enterprises.
• In low-trust societies, large centralized governments often play a sizable role in economic affairs. The reason is that the society does not have enough trust to create large private businesses.
• Large-scale enterprises are more effective at competing on the world market than either small family businesses or government-owned businesses. This leads to a more productive economy.
• Netherlands, Scandinavia, Switzerland, Germany, Japan and the United States are high-trust nations, while Russia, China, Taiwan, France and Italy are low-trust nations

Important Quotes from Book

[This book] is the story of how economic life reflects, shapes, and underpins modern life itself.

Today, having abandoned the promise of social engineering, virtually all serious observers understand that liberal political and economic institutions depend on a healthy and dynamic civil society for their vitality. “Civil society”-a complex welter of intermediate institutions, including businesses, voluntary associations, educational institutions, clubs, unions, media, charities, and churches-builds, in turn, on the family, the primary instrument by which people are socialized into their culture and given the skills that allow them to live in broader society and through which the values and knowledge of that society are transmitted across the generations.

A strong and stable family structure and durable social institutions cannot be legislated into existence the way a government can create a central bank or an army. A thriving civil society depends on a people’s habits, customs, and ethics-attributes that can be shaped only indirectly through conscious political action and must otherwise be nourished through an increased awareness and respect for culture.

Beyond the boundaries of specific nations, this heightened significance of culture extends into the realms of the global economy and international order. Indeed, one of the ironies of the convergence of larger institutions since the end of the cold war is that people around the world are now even more conscious of the cultural differences that separate them.  political and economic, increasingly will be cast in cultural terms.

Perhaps the most crucial area of modern life in which culture exercises a direct influence on domestic well-being and international order is the economy. Although economic activity is inextricably linked with social and political life, there is a mistaken tendency, encouraged by contemporary economic discourse, to regard the economy as a facet of life with its own laws, separate from the rest of society. Seen this way, the economy is a realm in which individuals come together only to satisfy their selfish needs and desires before retreating back into their “real” social lives. But in any modern society, the economy constitutes one of the most fundamental and dynamic arenas of human sociability.

The satisfaction we derive from being connected to others in the workplace grows out of a fundamental human desire for recognition.

Indeed, this drive is so deep and fundamental that it is one of the chief motors of the entire human historical process. In earlier periods, this desire for recognition played itself out in the military arena as kings and princes fought bloody battles with one another for primacy. In modern times, this struggle for recognition has shifted from the military to the economic realm, where it has the socially beneficial effect of creating rather than destroying wealth. Beyond subsistence levels, economic activity is frequently undertaken for the sake of recognition rather than merely as a means of satisfying natural material needs. The latter are, as Adam Smith pointed out, few in number and relatively easily satisfied.

Thus, economic activity represents a crucial part of social life and is knit together by a wide variety of norms, rules, moral obligations, and other habits that together shape the society. As this book will show, one of the most important lessons we can learn from an examination of economic life is that a nation’s well-being, as well as its ability to compete, is conditioned by a single, pervasive cultural characteristic: the level of trust inherent in the society.

If the institutions of democracy and capitalism are to work properly, they must coexist with certain premodern cultural habits that ensure their proper functioning. Law, contract, and economic rationality provide a necessary but not sufficient basis for both the stability and prosperity of postindustrial societies.

There are also clearly major cultural differences with respect to the nature and prevalence of corruption. One of the chief problems with any industrial policy is that it invites the corruption of public officials, which in turn vitiates any possible beneficial effects of the policy. Clearly industrial policies work better in societies with long traditions of honest and competent civil service.

As this book will show, the significance of the state sector varies enormously by culture. In familistic societies such as China or Italy, state intervention is often the only avenue by which a nation can build large-scale industries and is therefore relatively important if the country is to play in global economic sectors demanding large scale. On the other hand, societies with a high degree of trust and social capital like Japan and Germany can create large organizations without state support.

Current economic discourse needs to recover some of the richness of classical, as opposed to neoclassical, economics, by taking account of how culture shapes all aspects of human behavior, including economic behavior, in a number of critical ways.

More important, when the information age’s most enthusiastic apostles celebrate the breakdown of hierarchy and authority, they neglect one critical factor: trust, and the shared ethical norms that underlie it. Communities depend on mutual trust and will not arise spontaneously without it. Hierarchies are necessary because not all people within a community can be relied upon to live by tacit ethical rules alone. A small number may be actively asocial, seeking to undermine or exploit the group through fraud or simple mischievousness. A much larger number will tend to be free riders, willing to benefit from membership in the group while contributing as little as possible to the common cause. Hierarchies are necessary because all people cannot be trusted at all times to live by internalized ethical rules and do their fair share. They must ultimately be coerced by explicit rules and sanctions in the event they do not live up to them.

Trust is the expectation that arises within a community of regular, honest, and cooperative behavior, based on commonly shared norms, on the part of other members of that community.  Those norms can be about deep “value” questions like the nature of God or justice, but they also encompass secular norms like professional standards and codes of behavior.

But while contract and self-interest are important sources of association, the most effective organizations are based on communities of shared ethical values. These communities do not require extensive contract and legal regulation of their relations because prior moral consensus gives members of the group a basis for mutual trust.

The social capital needed to create this kind of moral community cannot be acquired, as in the case of other forms of human capital, through a rational investment decision.

The most useful kind of social capital is often not the ability to work under the authority of a traditional community or group, but the capacity to form new associations and to cooperate within the terms of reference they establish.

Governments often have to step in to promote community when there is a deficit of spontaneous sociability. But state intervention poses distinct risks, since it can all too easily undermine the spontaneous communities established in civil society.

There are indeed truly individualistic societies with little capacity for association. In such a society, both families and voluntary associations are weak; it often happens that the strongest organizations are criminal gangs. Russia and certain other former communist countries come to mind, as well as inner-city neighborhoods in the United States.

At a higher level of sociability than contemporary Russia are familistic societies, in which the primary (and often only) avenue to sociability is family and broader forms of kinship, like clans or tribes. Familistic societies frequently have weak voluntary associations because unrelated people have no basis for trusting one another. Chinese societies… France and parts of Italy share this characteristic.

In contrast to familistic societies are ones with a high degree of generalized social trust and, consequently, a strong propensity for spontaneous sociability. Japan and Germany do indeed fall into this category. But from the time of its founding, the United States has never been the individualistic society that most Americans believe it to be; rather, it has always possessed a rich network of voluntary associations and community structures to which individuals have subordinated their narrow interests.

In Europe and North America, private sector firms in the United States and Germany are significantly larger than those in Italy and France. In Asia, the contrast is even sharper between Japan and Korea, on the one hand, which have large firms and highly concentrated industries, and Taiwan and Hong Kong, on the other, whose firms tend to be much smaller.

There is a relationship between high-trust societies with plentiful social capital-Germany, Japan, and the United States-and the ability to create large, private business organizations.. The economies of relatively low-trust societies like Taiwan, Hong Kong, France, and Italy, by contrast, have traditionally been populated by family businesses.

If a low-trust, familistic society wants to have large-scale businesses, the state must step in to help create them through subsidies, guidance, or even outright ownership. The result will be a saddle-shaped distribution of enterprises, with a large number of relatively small family firms at one end of the scale, a small number of large state-owned enterprises at the other, and relatively little in between. A high-trust society can organize its workplace on a more flexible and group-oriented basis, with more responsibility delegated to lower levels of the organization. Low-trust societies, by contrast, must fence in and isolate their workers with a series of bureaucratic rules.

If you would like to learn more about how humanity created prosperity, read my book From Poverty to Progress: How Humans Invented Progress, And How We Can Keep It Going.