Economic Growth and the Evolution of Trust

Let's not get all gooey in a 'we are the world' kind of way. Necessity breeds innovation. The human species has always been pretty good at figuring out how to make do in order to survive. And if 'survival' means funding activities never even remotely considered in Maslowe's hierarchy of needs, well, welcome to the new reality.

Trust has always been essential to economic growth because the world was just too big a place for face to face relationships to generate activity sufficient to satisfy the needs of a population long on ambition but frequently short on means to fund it. So creativity drove the search for making something from nothing, relatively speaking.

This has come to particular fruition in the sharing economy. The ingredients are technology, an educated, knowledgeable populace and, of course, need. The traditional economy is not generating income to enhance, let alone maintain the aspirations of the world's increasingly connected and sophisticated populace. So they are doing something about it. In the same way that a generation ago hitchhiking was a manifestation of the local or regional belief in trust and the power of interconnectedness, so sharing beds, bikes, cars, pets and virtually anything else one can imagine across the planet - and then crafting a business plan to fund it - either traditionally or through the power of those self-same crowds - has become both possible and successful.

What is especially noteworthy is that these are not the sort of utopian socialist enterprises which have historically generated such fear and condescension. They are demonstrably and categorically for-profit initiatives, but designed to generate wealth alongside the grid of established institutions. Which is not to say that they are all good, nor necessarily superior in any moral sense. But they are a reflection of the world as its inhabitants find it. Who increasingly have the means, the impetus and the sense to try. Both because the status quo isnt working for them and because they can. And if this seems both disruptive and challenging,well, it might be smart to trust that instinct. JL

David Brooks comments in the New York Times:

But now there is a new trust calculus, powered by both social and economic forces.
I’m one of those people who thought Airbnb would never work. I thought people would never rent out space in their homes to near strangers. But I was clearly wrong. Eleven million travelers have stayed in Airbnb destinations, according to data shared by the company. Roughly 550,000 homes are now being shared by hosts. Airbnb is more popular in Europe than it is even in the United States. Paris is the largest destination city.

And Airbnb is only a piece of the peer-to-peer economy. People are renting out their cars to people they don’t know, dropping off their pets with people they don’t know, renting power tools to people they don’t know.

In retrospect, I underestimated the power of a few trends that make the peer-to-peer economy possible. First, I underestimated the effects of middle-class stagnation. With wages flat and families squeezed, many people have to return to the boardinghouse model of yesteryear. They have to rent out rooms to cover their mortgage or rent.

Second, I underestimated the power that liberal arts majors would have on the economy. Millions of people have finished college with a hunger for travel and local contact, but without much money. They would rather stay in spare rooms in residential neighborhoods than in homogenized hotels in commercial areas, especially if they get to have breakfast with the hosts in the morning.

And the big thing I underestimated was the transformation of social trust. In primitive economies, people traded mostly with members of their village and community. Trust was face to face. Then, in the mass economy we’ve been used to, people bought from large and stable corporate brands, whose behavior was made more reliable by government regulation.

But now there is a new trust calculus, powered by both social and economic forces. Socially, we have large numbers of people living loose unstructured lives, mostly in the 10 years after leaving college and in the 10 years after retirement.

These people often live alone or with short-time roommates, outside big institutional structures, like universities, corporations or the settled living of family life. They become very fast and fluid in how they make social connections. They become accustomed to instant intimacy, or at least fast pseudo-intimacy. People are both hungrier for human contact and more tolerant of easy-come-easy-go fluid relationships.

Economically, there are many more people working as freelancers. These people are more individualistic in how they earn money. They often don’t go to an office. They have traded dependence on big organizational systems for dependence on people they can talk to and negotiate arrangements with directly. They become accustomed to flexible ad-hoc arrangements.

The result is a personalistic culture in which people have actively lost trust in big institutions. Strangers don’t seem especially risky by comparison. This is fertile ground for peer-to-peer commerce.

Companies like Airbnb establish trust through ratings mechanisms. Their clients are already adept at evaluating each other on the basis of each other’s Facebook pages. People in the Airbnb economy don’t have the option of trusting each other on the basis of institutional affiliations, so they do it on the basis of online signaling and peer evaluations. Online ratings follow you everywhere, so people have an incentive to act in ways that will buff their online reputation.

As companies like Airbnb, Lyft and Sidecar get more mature, they also spend more money policing their own marketplace. They hire teams to hunt out fraud. They screen suppliers. They look for bad apples who might ruin the experience. The one thing the peer-to-peer economy has not relied on much so far is government regulation. The people who use these companies may be mostly political progressives, but they are operating in a lightly regulated economic space. They vote left, but click right.

As this sector matures, government is getting more involved. City officials have clashed with Airbnb and Uber on a range of issues. But most city governments don’t seem inclined to demand tight regulations and oversight. Centralized agencies don’t know what to make of decentralized trust networks. Moreover, in most cities people seem to understand this is a less formal economy and caveat emptor rules to a greater degree.

Meanwhile, companies like Airbnb and even Uber seem inclined to compromise and play nice with city governments. They’re trying to establish reputations as good citizens, to play nice with bureaucrats and co-op boards; they can’t do that with in-your-face, disruptive tactics.

We’re probably entering a world in which some sectors, like energy, retain top-down regulatory regimes. Other sectors, like bake sales, are unregulated. But more sectors, like peer-to-peer, exist in a gray zone in between.