Friday, May 13, 2011

Promoting Trust Through Guilt and Institutions

In order for an economy to work well, there has to be widespread trust. Where does trust come from? Well, Sanford Ikeda argues, with Jane Jacobs, that trust emerges due to the presence of the right institutions and structural elements in a city/economy. This is no doubt correct. Yet, recent psychological research, done in conjunction with two behavioral economists, shows that guilt also plays a significant factor in creating trust and cooperation. People cooperate both because the brain rewards itself whenever one cooperates -- it feels good -- and because people try to avoid the negative feeling of guilt. Free markets break down if there is little trust and, thus, cooperation. Yes, that's right, one of the cornerstones of the free market is cooperation, every bit as much as competition (the two are not mutually exclusive).

What does it mean, though, that guilt is a factor in promoting trust? Well, this suggests that more rather than less guilt is beneficial for the creation of free markets (or, at least, enough to promote a high level of trust). Thus, we need institutions that promote guilt, which help us to believe that guilt is good. At the same time, we must always be aware that guilt can be appropriated for anti-market purposes as well, such as support for redistributionist policies. Like anything, guilt can be used for good or bad purposes.

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