442. Economic freedom and trust
Do economic freedom and trust help or oppose each other? I come to this question from an article by Johan Graafland, who investigated the issue empirically.[i] Economic freedom consists of property rights, freedom of competition (free entry into markets), small government, and low taxes.
That is mostly ‘negative freedom’: absence of interference, no constraint on action, as opposed to ‘positive freedom’, which entails access to resources.
Trust yields a constraint on action, not to cheat, not to lie and make promises one cannot keep, not to take unfair advantage of people, to be loyal, and thus by definition limits economic freedom.
Now, are economic freedom and trust complements, reinforcing each other, or substitutes, replacing each other?
The institutions of economic freedom, such as property rights, legal contracts, access to courts, access to markets, do contribute to trust. Also contributing to trust is access to courts at low cost, and intelligibility of legal process and communication. All these provide ‘institutional trust’, a basis for trust to build on.
There are more institutions that support trust. Trust entails positive expectations, and fake news undermines expectations and thus hinders trust. Reliable news is thus needed for trust. So do reputation mechanisms..
Economic freedom is regularly limited by limits to competition. When left unchecked, markets develop into their antithesis, with entry barriers to markets, created by monopolies and oligopolies. By way of economies of large scale, concentration arises in large firms, which then exercise lobbying on government for advantages. This reduces economic freedom and creates distrust. Oversight by a competition authority and countervailing power of government to curtail economic power are needed for trust.
On the other hand, institutions can never be complete, to foreclose all the opportunities for coercion, cheating, lying that inhibit freedom of choice. Contracts can never be complete, must leave things to be taken for granted. Then, trust is needed to fill the gaps, so to speak.
Alternatively, one can try to fill the gaps with oversight by institutions, such as a competition authority, a consumer authority, a health authority, an education authority, a central bank, etc. but that can constrain freedom too much. Such efforts tend to accumulate and stifle freedom of action, in excess of control from the perceived need to close off all loopholes, which is impossible. Every time a new breech or work-around is invented, a new regulation is heaped onto the stack. If trust can come in its stead, it helps economic freedom.
Also, it is often expensive to make contracts as complete as possible. Trust can allow for more limited contracts, thus reducing ‘transaction costs’.
Trust is more needed to the extent that contracts and control are more difficult, and that is the case, in particular, under the uncertainty of innovation, where by definition one does not know what will happen or even what can happen, so contracts cannot be specified.
Trust fosters collaboration, and that can lead to obstruction of economic freedom. But sometimes relationships require a certain stability, also for economic reasons, when jointly produced added value demands investments that are specific to the relation, for mutual understanding and adjustment, specific installations, instruments or training, and for building trust, and require a certain duration of collaboration to make the investments and recoup them. But for the duration that by definition excludes other participants, and hence limits competition. In other words, sometimes institutions for economic freedom need to be relaxed for economic reasons.
And, finally, apart from economic value, trust-based relations can have intrinsic value that merit a bit less economic value, if needed. They may enhance social conditions and personal satisfaction.
So, in conclusion, economic freedom and trust are both substitutes and complements, and need to be carefully mixed.
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