Importance of Trust in Modern Economics

1350 words (5 pages) Business Assignment

20th Apr 2020 Business Assignment Reference this

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What is trust? Is trust related to the economy? Many times it is difficult to connect trust and the economy. In fact, trust is closely related to the economy. The world’s economy has witnessed an unprecedented boom in recent decades, but it is also accompanied by many issues such as economic fraud. Therefore, the issue of whether the trust is significant for the modern economy has received much public attention. Objectors proposed that trust would bring risks because trust can cause organisations and businesses to lose correct and objective judgement. So they think that trust is not necessary for the economy, and a lack of trust can boost economic development. However, trust is not only an ethical norm but also is the basis of trading and is therefore called an important social capital (Schmidt, 2003). The establishment of trust is not simple, and it takes both parties to experience a lot of impressive things before trust can be produced. Trust has a great impact on the development of the economy. Trust can promote cooperation, have a positive impact on financial investment and reduce transaction costs. Thence, trust is crucial in the modern economy.

First of all, dissenter of trust supposed that company cooperation is because of common interests rather than trust because common interest is a reason why companies cooperated, and cooperated companies or businesses can do their best because of common interests. Admittedly, common interests are momentous for cooperation between companies, but common interests cannot directly lead to cooperation. Whether in the power society or the market society, mutual trust between members of society is the basis of cooperation, and trust is the confidence of both partners that they will not use their weaknesses (Korczynski, 2000). Trust is the lubricant in which cooperation. If there is no trust, it is difficult for both parties to cooperate despite the common interests. Companies suspect each other, even if they cooperated, they cannot maximise their profits. For example, the cost of producing a tire for an automobile manufacturing company is very high, so the company wants to work with the tire company to maximise mutual benefits. Now there are two companies, one has never worked together and is not aware of it, but the tire cost is very low. The other one has cooperated several times, but the cost of tires is higher than the previous one. At this time, the automobile manufacturing company still chose the second company, which cooperated several times but the cost of the tires is higher because the automobile manufacturing company had enough understanding and trust of the tire company. The automobile manufacturing company believes they will not take bad tires to fill the gap. However, this car manufacturing company has never worked with the first company, in which the cost of tires is lower, and the company worried about the quality of its tires. Companies are more willing to find trusted partners. Then, trust is an important factor in promoting company cooperation (Schmidt, 2003), and trust is significant in modern economics.

Furthermore, discommenders of trust claimed that trust would cause economic fraud. This is because many people use the trust of others to borrow money and then run away and no pay back. Because of this kind of economic fraud, people really should have doubts about trust, but it rarely happened and not commonly. So, people can’t use a few examples to deny the economic impact of trust. One of the economic impacts of trust is financial investment increased. In the field of financial investment, since financial commit to future payments, and future commitments depend on the credibility of the debtor, then the effective operation of financial investment is highly dependent on trust (ke, Li, &Weiyang. 2017). Even if individuals enter the stock market, in the low level of trust, they rarely buy stocks, and then the investor’s stock market participation is not significantly related to their wealth level, but related to the level of trust in the financial market (Guiso, Sapienza, &Zingales. 2008). Trust affects decisions of financial investment, and financial investment affects economic development. Therefore, trust is important in economics.

Finally, foes of trust claimed that trust would bring losses to companies. Because companies work with trusted companies, they miss out on companies that bring the most benefit. However, the trust would help companies to reduce transaction costs. Transaction costs are generally large. Transaction costs are expenses incurred when buying or selling a good or service. There are two kinds of transaction costs. One is the ex-ante cost, and the other one is ex-post cost (Cai, 2004). Ex-ante cost means the money spent before the transaction such as costs of advertising and costs of the survey a range of alternatives before making a decision. Ex-post cost means the money spent after the transaction such as monitoring costs, insurance costs, implementation costs, and certification costs. If companies trust each other enough, they will not do this, and they can save a lot of money. Sometimes, when companies want to cooperate or trade, they will find a trust intermediary company. Intermediaries of trust can be described as advisors, guarantors, or entrepreneurs (Coleman, 1994). Intermediaries of trust help two unfamiliar companies to know each other and trust each other or intermediaries of trust itself as a guarantor. Two companies will have to pay remuneration to the intermediary if the transaction is successful. However, if two companies that trust each other trade, they don’t need to find an intermediary of trust, so they can save a lot of money. Trust can reduce transaction costs not only between the company and the company but also between the customer and the company. For example, many famous and big brands are barely advertised. Nevertheless, customers still always go to buy their products because costumers trust them. Then, these famous brands not only can save money in advertising but also can sell many products just because customers trust them. Therefore, trust is vital in economics.

In summary, whether or not trust is important in the economy is very controversial. Opponents think that trust will bring crises and is not necessary for modern economics. However, trust is the basis of trading and is crucial in modern economics. Trust can promote cooperation, has a positive impact on financial investment and can help companies or businesses to reduce transaction costs. Both people and organisations should be good enough to gain the trust of others because trust is important in the modern economy and has an impact in the future. In economics, economics and company managers should pay more attention to trust.

References

  • Schmidt, K. (2003). Is Trust Important for Economic Development and Growth?. Berlin Disponível em: http://www2. wiwi. huberlin.         de/wpol/html/diplom/pdf/Diplomarbeit_Katja_Schmidt. pdf.
  • Cook, K. S., Hardin, R., & Levi, M. (2005). Cooperation without trust?. Russell Sage Foundation.
  • Korczynski, M. (2000). The political economy of trust. Journal Of Management Studies.
  • Coleman. James. S. (1994). Foundations of social theory. Harvad University Press: London.
  • Cai, R. (2004). Interaction between trust and transaction costs in industrial districts.
  • 16-21. Retrieved from https://pdfs.semanticscholar.org/036c/d160a736b6ba9ae6701565f3b93cb9f4ee1a.pdf
  • Ke Feng, Li He, & Weiyang Meng. (2017). Trust, economic development and  financial development.
  • Guiso, L., Sapienza, P., &Zingales, L. (2008). Trusting in the stock market. The Journal Of Finance. 12. 1095-1131

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