天美传媒

Capitalism relies on a trust-based system. Even though citizens have lost trust in the economic/financial world and public entities, it鈥檚 not too late to regain it, as 天美传媒 Prof. Jordi Gual explains in his new book.

Human beings are social creatures. Our social interactions 鈥� with friends, family, colleagues and even the strangers we cross paths with daily 鈥� are what influence us, more than money and material goods, despite living in a capitalist economy. We鈥檙e not isolated individuals, existing in a vacuum. What happens around us 鈥� politically, socially, economically 鈥� affects us all. Our wellbeing depends on and concerns others鈥�. Even the so-called 鈥渇ree鈥� market economy depends on social networks to function well.

In this interview, 天美传媒 Economics Professor Jordi Gual explains how trust plays a crucial role in capitalist economies and why, in recent decades, citizen trust has decreased. It鈥檚 the basis of his new book, (Trust is priceless), which partly draws upon his experience as Chairman of CaixaBank (Spain) between 2016 and 2021.

Why is trust so important for capitalism?

The market economy is an impersonal system of economic transactions. People exchange goods and services at prices that are, in most markets, freely set by the market players themselves. However, because not all market transactions or contracts are foolproof, business operations can get complicated. Only when there is a baseline of trust can business relationships flow smoothly and be profitable.

Let me give an example: Cryptocurrencies emerged to avoid transactions that relied on banks or central institutions. However, precisely because the identity of people trading in the digital currency space is unknown, there have been numerous scandals stemming from dishonest players who are shielded by anonymity.

A company must earn the trust of its customers and employees. At the same time, society tends to place its trust in companies whose primary objective is to address societal needs through their products and services. The company must be profitable for the sake of fulfilling this function.

Trust is also crucial for public institutions. As Confucius observed thousands of years ago: Public authorities can lead without armies, even without food, but not without the trust of those they govern.

What does trust look like in Spain? And how does that compare with other free-market democracies?

According to the (2017-2022), 41% of respondents in Spain indicate that 鈥渕ost people can be trusted,鈥� a percentage that aligns with the European average of trust. In Germany, that figure is at 44.6%, and in Italy, 26.6%. Nordic countries fare much better, with figures exceeding 60%. In Denmark, the percentage of trust is at 73.9%; in Finland, 68.4%; and in Sweden, 62.8%.

At the other end of the spectrum in Europe is Greece, where only 8.4% of respondents say they trust others. Eastern European countries such as Romania and Bulgaria have similarly low numbers at 12.7% and 17.1%, respectively.

For reference, 37% of respondents in the United States say they feel most people can be trusted 鈥� a percentage that has been declining for some time now.

Generally speaking, when trust in others is low, it can extend to public entities, including government bodies, political parties and policymakers.

What has caused trust in others to decrease so much?

In recent decades, the world has undergone profound transformations on several fronts. The global economy and people鈥檚 lifestyles have been drastically altered, affecting our collective sense of stability and our expectations of the future. Years of rapid globalization have led to economic migration, offshoring of production and significant changes in Asian economies, particularly with regard to China. We have experienced a digital revolution, culminating in new AI technologies that are already affecting our workplaces. What鈥檚 more, climate change is affecting the way we approach energy, creating tense debates within society.

All this has taken place in a macroeconomic environment characterized by greater instability, reaching a peak with the global financial crisis of 2007-08. The more recent COVID-19 pandemic amplified people鈥檚 sense of insecurity and anxiety.

In many countries, citizens feel their existing economic and political systems are not living up to expectations. A rejection of capitalism and liberal democracy is on the rise. Trust in large companies and public institutions is being undermined.

We see this in the financial sector, a part of the economy that is especially reliant on trust. We place a lot of trust in the private banks where we deposit our money, in the people we loan to, and in the central banks that issue our currencies. That is why the financial crisis of 2007-08 had such a dramatic effect: It highlighted what can happen when overly accommodating monetary and regulatory policies go on for too long. When the bubble burst, it damaged the credibility not only of the financial system but of the entire market economy itself. For the average citizen, the global financial crisis was unfair, incomprehensible and, in many cases, had unanticipated, lasting negative consequences.

Can you elaborate on how the response to the financial crisis fomented distrust?

First, because it was a debt crisis, businesses and households had a hard time regaining financial balance and the recovery was slow. There were also policy errors: a delay in cleaning up balance sheets, and banks were required to accumulate capital too quickly. On top of this, in Europe, we didn鈥檛 have a fully integrated financial market and there were many fiscal authorities; that is, we had the additional suffering of a still-developing monetary union.

Second, monetary interventions went on for too long. This led to a policy of negative interest rates that lasted for many years, with multiple adverse effects, especially on people鈥檚 savings.

Third, there was a lack of proper communication from public administrations. It wasn鈥檛 made clear enough to citizens that the bank bailouts were an attempt to prevent the collapse of the financial system so that the deposits of citizens remained protected. This, along with difficulties in holding individuals accountable for the firms that went bankrupt, created distrust toward the economic/financial world and policymakers. What鈥檚 more, fiscal and redistribution policies, which could have alleviated the consequences of financial instability on the population, didn鈥檛 solve the problem.

Overall, our fiscal policies didn鈥檛 deal effectively with the impacts of the financial crisis. In Western democracies, the public sector tends to accumulate deficits, which prevents it from acting as a counterbalance to unexpected negative shocks like the 2007-08 financial crisis, the COVID-19 pandemic or the war in Ukraine. Fiscally prudent countries, such as Denmark or Finland, have successfully avoided the accumulation of public deficits 鈥� and therefore, of debt 鈥� allowing for a better response to unprecedented events. Not surprisingly, they tend to be the countries where trust in others 鈥� and in the state 鈥� is greater.

While redistribution policies across continental Europe have helped reduce some income inequality, they still fall short of providing the necessary opportunities for the most disadvantaged segments of society. That鈥檚 because redistribution policies can generate distrust if they are used solely for electoral purposes, resulting in an appropriation of state resources by political elites to stay in power. In countries where this has happened, citizen disillusionment with their economic and political systems has gone up.

What about private companies: what societal responsibilities do they have?

Because public policies have failed to meet people鈥檚 needs, there鈥檚 demand for private companies to step up and play a more active role in addressing society鈥檚 biggest problems. Many businesses can take on this challenge by clearly defining their corporate purpose, aligning it with meeting societal needs and contributing to solving social issues.

The company must, of course, be profitable, otherwise it won鈥檛 be able to achieve its purpose. A company that isn鈥檛 profitable and can鈥檛 pay its shareholders for the risks they have taken in investing in the company will simply disappear from the market. And although profitability is not an end in and of itself, it is essential in ensuring the company鈥檚 goals are met.

That being said, purpose-driven companies create an atmosphere of trust and commitment among all their stakeholders. This is the foundation of their competitive advantage, and it鈥檚 a way to gain society鈥檚 trust.

Your new book argues that capitalism is facing a backlash because people feel insecure about their jobs, their pensions and the precariousness of the welfare state. How can this situation be remedied?

Globalization is often blamed for these things 鈥� used as a scapegoat by politicians because it鈥檚 an external enemy. Politically speaking, it鈥檚 more advantageous to blame outsiders than to recognize one鈥檚 own shortcomings in failing to improve the quality of the workforce or the education system.

Capitalism, on the other hand, is an efficient system for generating wealth, although it doesn鈥檛 necessarily distribute that wealth equitably. As I mentioned before, public policies have not fulfilled their function of providing for the common good because they have been used too shortsightedly, using public spending to win votes or to satisfy special interest groups that support the political parties in power.

In order to revitalize capitalism, we must acknowledge that individualism 鈥� which is an essential part of the current political and economic ideology 鈥� should be complemented by altruism. The good news is that altruism is innate to us as social beings and it is a necessary means of fomenting trust in each other. Trust ultimately leads to better social cooperation, promoting the creation and development of institutions and economic growth.

If what we need is more trust and everyone would benefit from it, why is it so hard to obtain?

Trust is a valuable asset, but it can鈥檛 be bought; it arises naturally in human interactions. And although it鈥檚 priceless, it can be costly. That鈥檚 because when we trust someone, we take a risk. Other people may disappoint us, even if it鈥檚 unintentional, because they don鈥檛 meet the expectations we鈥檝e placed on them.

Likewise, if someone places their trust in us, we鈥檙e assuming a lot of responsibility. If we鈥檙e selfish or think only of ourselves, it will be difficult for others to trust us because trust requires benevolence. It also requires having shared values of honesty, loyalty and commitment. When we trust someone, we expect them to act in our best interests without asking them to prove themselves. In the words of : 鈥淭rust is the pleasant feeling that others are with us in our endeavors.鈥�

It鈥檚 also important for societies to have a shared concept of justice. Trusting others involves judging their behavior in unforeseen circumstances, and it鈥檚 imperative to agree on what behaviors are considered morally or ethically correct. In today鈥檚 complex societies where many cultures coexist, reaching this agreement isn鈥檛 always easy.

Trust, or distrust, can spread quickly. If we accept the trust that others place in us, and if that trust is validated by our actions, we can contribute to a virtuous circle of trust. This is why every single person鈥檚 behavior is important. Our actions will either foment trust or hinder it.

What can public entities do to regain trust?

Societies with higher levels of trust 鈥� placed on fellow citizens as well as on public entities 鈥� tend to be societies where altruism extends beyond one鈥檚 close circle of family and friends. In these societies, people care about the common good and collective pursuits.

One way to create trust is by ensuring that public institutions remain politically neutral and serve the interests of the entire population, rather than favoring any one specific political party. What鈥檚 more, discrimination can never be tolerated, and professionalism must always prevail.

European countries with the highest levels of trust are those that have an active and demanding civic society. These countries do not necessarily have higher levels of public spending or a government that plays a more active role in providing for citizens鈥� welfare. Instead, these are countries where the financial stability of the public sector is prioritized. Moreover, their social inclusion policies are not merely about wealth redistribution via taxes and regulation, but a set of actions aimed at the inclusion of every individual in the labor market and in the social fabric. That鈥檚 how trust can be restored. With policies that foster the common good.

MORE INFO: (Trust is priceless) by Jordi Gual is published by Penguin Random House (2024).

This interview is published in 天美传媒 Insight magazine #167 (May-Aug. 2024).