The Paradox of Trust

Published on October 31, 2019

“We have listened to the wisdom of an old Russian maxim, doveryai, no proveryai – trust, but verify.”  

— Ronald Reagan

Trust is the foundation of society. Without a basic level of trust regarding the intentions and expected behavior of other human beings, our modern civilization would very quickly disintegrate into total chaos. If you need to be convinced regarding this basic premise, consider your activities over the past day. Chances are that you made countless implicit decisions to trust other people, whether you realized it at the time or not, and misplaced trust would have produced severely negative consequences.

Did you take the subway to work this morning? You trusted that the dozens of people standing nearby on the platform would not push you from behind onto the tracks. Maybe you stopped for a sandwich at the deli near your office. You trusted that the person who prepared your food practiced basic hygiene and did not sneeze over your food or, even worse, purposely contaminate it, and you trusted that the food supply chain was safe. For something that is about as personal as it gets – food that you ingest into your body. After work, you stopped by the local barber for a haircut and shave. You trusted that the barber had the skill to use that straight blade near your neck, and that he was not a murderous lunatic who would slit your throat.

It would be ridiculous to consider every one of these possibilities in day to day life. Your life would grind to a halt, and your mental state would be in tatters as you see threats lurking around every corner. And if everyone in society felt the same way, the consequences would grow exponentially. We need a certain level of trust in society to function as individuals and for the system to remain intact. A civilization that falls below a certain level of trust will descend into anarchy.

Trust in Society

Relatively small groups of people can form cohesive groups and social hierarchies based on close personal relationships and communication within the group. In his best-selling book, Sapiens: A Brief History of Humankind, Yuval Noah Harari pegs the upper limit of social cohesion based on such personal relationships and “gossip” at approximately 150:

Even today, a critical threshold in human organizations falls somewhere around this magic number [150]. Below this threshold, communities, businesses, social networks and military units can maintain themselves based mainly on intimate acquaintance and rumormongering. There is no need for formal ranks, titles and law books to keep order … But once the threshold of 150 individuals is crossed, things can no longer work that way. You cannot run a division with thousands of soldiers the same way you run a platoon.

Sapiens: A Brief History of Humankind, page 27

Harari believes that larger groups are able to function based on what he refers to as the “appearance of fiction”. This is described in more detail in this excerpt from our review of Sapiens:

Fictive language involves the ability to use imagination to describe things that are entirely abstract.  The concept of religion, for example, describes a set of beliefs that cannot be observed by ordinary human beings but, nonetheless, allows humans to form a common set of beliefs and customs.  Without fictive language, it is difficult for groups larger than about 150 individuals to form a cohesive society because they lack the ability to develop “fictions” that bind together larger populations.  The development of the notion of religion and nationality allowed much larger groups of humans to form social bonds.  

Harari’s use of the term “fiction” in the context of religion is unfortunate, but for our purposes we can simply regard what he is saying to mean that society on a large scale requires common value systems in order to properly function. Without these value systems, it would have been impossible to scale society beyond the tribal level. The concepts enshrined in religion and national identity allow individuals to assume a certain set of common beliefs when encountering strangers — to trust that strangers are very likely to behave in certain ways.

The written and unwritten rules of the road, established formally by governments and religions and informally through social conventions and habits, governs how we all interact with each other on a daily basis and what baseline expectations we have. Outside of deeply dysfunctional communities, in the United States most of us assume that those we meet on the street or in casual business contexts are basically honest and mean us no harm. This is why we can wait for a subway train, eat a sandwich, or have our hair cut without suffering a panic attack.

A Moral Imperative

Charlie Munger has often stated that it is a moral imperative to act in a rational manner and for those in charge of important institutions to create systems that promote rational and honest behavior. In other words, those who are entrusted with political and economic power must do their utmost to maintain an environment in which trust continues to exist.

The highest form which civilization can reach is a seamless web of deserved trust. Not much procedure, just totally reliable people correctly trusting one another.

Charlie Munger, USC Law School Commencement Address, 2007

Such a seamless web of deserved trust is extremely rare in today’s world but, if attained, can produce tremendous dividends. For most of us, at least for the fortunate among us, a seamless web of deserved trust is reserved for very close family members and friends but not often extended to coworkers or employers.

In Mr. Munger’s case, the seamless web of deserved trust extends into his professional life and sixty year business partnership with Warren Buffett. It is unlikely that a large society can ever approach that level of trust, but we must at least comfortably surpass the threshold needed for society to function reasonably well. At the very least, institutions should avoid creating systems that promote distrust. Perverse systems are much more common than one would expect.

The Cash Register

Consider the case of Eve, a woman who is well liked within her small community, active within her church, and seen as a solid employee and citizen by those in positions of authority. Eve was widowed at an early age, lives with her three pre-teenage children, and works paycheck-to-paycheck as a general manager at local small business. It is early November and Eve suddenly falls ill and is unable to work for several days. Her employer feels too financially insecure to offer any kind of paid leave so this sets Eve back financially. She’s able to cut back on enough spending in November to pay her rent on December 1 but is flat out broke heading into the Christmas season. She’s ashamed that she took a turkey and a few other groceries from the store for Thanksgiving dinner, but that seemed like a minor one-time indiscretion.

Eve’s employer is an elderly man who has owned the small market on Main Street for well over a half century and he has known Eve since she was a child. The business is run on a cash basis and there is no real inventory system in place. Most customers are known to Eve and some of the older folks still run a tab with the store. There are no barcodes on products, there is no scanner, and Eve uses a hand calculator to total up orders, accepts cash, puts it into a drawer, and takes cash out of the drawer to make change. The old man might come into the store every few days to socialize at the counter with old friends but he has long spent most of his days on the front porch of his house on the outskirts of town. Other than Eve, the store has a handful of part time employees who are mostly the grandchildren of the old man’s friends.

It is obvious that this type of scenario is tailor made to create massive temptation on the part of Eve and other employees to steal from the old man. She could steal inventory easily because there is no system in place to track what should be on the shelves. She could steal cash from the drawer. There is no real limit beyond her inherent honesty and, heading into Christmas flat out broke, her willpower gives in and she steals food and enough money to buy presents for her children.

In Charlie Munger’s worldview, the store owner has acted in an immoral manner. He was a man in a position of authority within the community and he failed to establish systems in which virtue and honesty are promoted within his business. Eve was wrong to steal, regardless of her situation, but the old man also had a responsibility as the owner of the business to promote good behavior even if he did not particularly care about the theft. Tempting an otherwise decent person to act immorally is itself immoral.

Obviously, the scenario here is a fantasy in today’s world. Almost no business would be run in such a lax manner. But this was the norm in the late nineteenth century. Temptation was rampant in retail businesses because there were few effective controls to promote trust. This began to change with the invention of the cash register:

The cash register did more for human morality than the congregational church. It was a really powerful phenomenon to make an economic system work better, just as, in reverse, a system that can be easily defrauded ruins a civilization. A system that’s very hard to defraud, like a cash register, helps the economic performance of a civilization by reducing vice, but very few people within economics talk about it in those terms.

Charlie Munger at U.C. Santa Barbara, 2003

Like many other inventions that change the world, the inventor of the cash register was not the man who popularized its use. James Ritty owned a saloon in Dayton, Ohio and suffered a great deal of theft from employees. Facing this “shrinkage” of inventory and outright thefts of cash, Ritty developed a machine that he referred to as an “Incorruptible Cashier” and filed a patent for the invention in 1883. John Patterson was one of the early customers of this new invention and saw the potential more clearly than Ritty. Patterson purchased the patents from Ritty and went on to found National Cash Register which dominated this market for decades to come. By 1915, the cash register was an essential piece of equipment for nearly all retail establishments.

It is obvious that the cash register reduced the temptation to steal from retail businesses, but how did it do so? It increased the perceived cost of theft by increasing the probability that one would be caught. By doing so, it also keeps fundamentally honest people honest by removing the temptation to act immorally in a way that carries little risk of detection. One might wonder how employees reacted to early versions of the cash register. Did they operate in a seamless web of deserved trust if the owner of a business felt a need to introduce this type of technology?

A Seamless Web of Suspicion

Let’s fast forward about a hundred years to the present time, nearly one-fifth of the way through the twenty-first century. Technology has advanced by leaps and bounds which allows for checks and balances that James Ritty and John Patterson could have only dreamed about. Over the past 150 years, we have gone from a world where almost nothing could be monitored without human eyes and ears to a world where literally every movement of every individual can be tracked and recorded. In the context of a private business, video cameras and facial recognition software can be used to track known shoplifters and to serve as evidence in criminal cases. Employees are under constant surveillance as they do their jobs and any kind of theft is far more risky than anything Eve could have contemplated.

For all of its intrusiveness, video cameras and facial recognition are relatively invisible technologies allowing people to go about their daily lives imagining that they are not being closely monitored. However, certain retailers have taken very visible steps to deter theft. For example, Wal-Mart has implemented increasingly drastic security measures recently. Initially, locked shelves for small, high value products such as razor blades were introduced. When one wants an item from a locked shelf, it is necessary to find a store employee to unlock the cabinet. This creates an environment of distrust and inconvenience.

Over time, my local Wal-Mart has added locked shelves for products such as deodorant, bath soap, over-the-counter drugs such as Tylenol, home cleaning products such as laundry detergent, and more. On my latest visit, the underwear section was entirely locked up. These are products that sell for $10-20 and are bulky. It is one thing for someone to steal a $20 packet of small razor blades and quite another to attempt to steal a twelve-pack of briefs or a 100 count bin of Tide Pods.

The seamless web of suspicion continues with very obvious facial recognition and video recording at the self-checkout registers. Wal-Mart has increasingly substituted capital for labor in its stores even in regions where the minimum wage remains at the relatively low Federal floor of $7.25. Customers are now the workers responsible for scanning their own purchases, and you are told that you are being watched and can even see an image of yourself as you check out. The cash registers of 1900 are nothing compared to these technological marvels of the twenty-first century. The final strand in the web of distrust occurs as you are leaving the store where an employee is stationed to inspect your cart and your receipt to detect signs of theft.

When I posted some of these details about my recent Wal-Mart experience on Twitter, I got my share of snarky responses regarding my neighborhood. Granted, this Wal-Mart is not in the best of neighborhoods but it is the closest Wal-Mart to my home and only four miles away. What is interesting is that the Walgreens on my street, in a much better neighborhood, has also started to lock up products in recent months including laundry detergent. The web of distrust seems to be spreading. And it might be bad for business. I would rather order underwear on Amazon than ask an employee at Wal-Mart, if I can even find one, to unlock a shelf. In a low-margin retail business, perhaps the calculation is that shrinkage is so costly that giving up on sales due to customer frustration is an acceptable trade-off.

Where is the Balance?

All of this brings us back to the essential role of trust in a functional society. Is it realistic to ever approach the “seamless web of deserved trust” idealized by Charlie Munger? The cash register was clearly a major advance in human civilization because it promoted virtue and discouraged vice, but what about modern advances in technology? If the cash register of 1919 was a positive impact on society and did not create an environment of distrust, why would the modern equivalent of monitored self-checkout registers be a problem in 2019?

A possible way to think about this question is to acknowledge that new technology almost always causes suspicion when it is introduced. If the old man who owns the market suddenly installs a cash register and inventory system at his store, Eve might think that her employer does not fully trust her. However, in due course, the cash register will become a familiar part of her work life. It also makes her job much easier and this is, in fact, the primary benefit of the technology. In addition to increasing her productivity, the register encourages her to live up to her true nature as an honest person.

Perhaps we can then differentiate between technologies such as background facial recognition and monitoring at self-checkout lanes and steps such as locking up products behind secure shelves. The former might eventually fade into the background and not be seen as an element of distrust. But the latter will never be seen by customers or employees as anything other than a sign that Wal-Mart or Walgreens distrusts those who they do business with. When there is distrust, people begin to question motives such as in the case of a Wal-Mart that locked up products commonly purchased by African-Americans while leaving other products out in the open.

Society should strive for systems that promote trust and keep people honest while avoiding systems that encourage people to think that everyone around them is dishonest. Trust is fragile and when society is full of cues that lead people to believe that no one is to be trusted, this can very well become a self-fulfilling prophesy. Striking the right balance is difficult but essential and the political, business, and community leaders in a society have a moral duty to get it right.

The Paradox of Trust
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