Whither Trust?

A new wave of food scandals has erupted in China.  Melamine-laced dairy products have resurfaced; pork tainted with toxic clenbuterol, as well as millions of tons of diseased carcasses of chickens and pigs, continue to be sold as food.

Beijing office worker Zhang Lihua said , “If the police don’t crack down on profit-driven businessmen who have lost their morality, they will become even bolder and produce even more poisonous food. It has become so bad that no one knows what foods are safe and which ones are poisonous.”

Can the Chinese experience be generalized? Do profit-driven firms in America intentionally inflict harm on others so that they can earn a few extra dollars of profits? Unfortunately, many Americans believe this conjecture. But, is it really true?

Last week we finalized our kitchen cabinet selection at Lowe’s. We will be taking a short trip during our kitchen installation, and we are hoping to come back to a finished kitchen. Thus, one of our selection criteria was choosing a cabinet maker who was least likely to deliver a defective cabinet. For a variety of reasons, the helpful sales consultants at Lowe’s recommended cabinets by Diamond. Their recommendation was consistent with ratings in Consumer Reports, and so our choice was easy.

One of the sales consultants explained that Lowe’s purchases so much cabinetry from Diamond that Diamond sets aside a special section on their factory floor to ensure extra quality control for cabinets sold to Lowe’s. As a consequence of two layers of quality control, the sales consultant had never seen a defective cabinet from Diamond.

It is not just with kitchen cabinets that Lowe’s is fastidious about quality control. The Wall Street Journal recently explained how Lowe’s “reviews 1,000 flower varieties each year to select a few dozen to test and ultimately ten to sell” in their garden center. In turn, the greenhouses selling to Lowe’s must do extensive testing and conduct consumer focus groups in order to identify potential flowers that will pass muster with Lowe’s.

So why do some Chinese food producers poison their customers, but Lowe’s consistently goes the extra mile to ensure quality?

Perhaps you might think that competition explains quality control at Lowe’s and at Diamond. This is, at best, a partial explanation. Why? Dairy companies in China that poisoned their customers are also in competition with other dairy companies. The Sanlu Dairy Group, one of the oldest and most popular Chinese brands, was at the center of the scandal.

Almost 4 years ago in “The Real Lesson of the Chinese Food Scandals” I wrote:

Zhou Qing tells a disturbing tale about a poisonous pig-feed additive called clenbuterol. Although it is poisonous to humans, it makes pork redder and meatier. Newsweek tells this story:

“Zhou hears from a food-safety official about a provincial political leader told by a farmer that his pigs still get the banned chemical because it makes their meat a hot seller in urban areas. “Don’t you know that it harms people?” asks the official. “‘Yes,” replies the farmer. “But city people have free medical care, so it’s no problem.'”

I would state with certainly that very few American businessman or farmers think like the Chinese farmer. They don’t think: “City dwellers are buying my product; I can harm them.” James Surowiecki in his Forbes essay “A Virtuous Cycle” helps us to understand why. He explains that a key ingredient in the development of free-markets is trust, and capitalism has been moving in the direction of more trust:

“That evolution, of course, has not taken place because capitalists are naturally good people. Instead, it’s taken place because the benefits of trust—that is, of being trusting and of being trustworthy—are potentially immense and because a successful market system teaches people to recognize those benefits. At this point, it’s been well demonstrated that flourishing economies require a healthy level of trust in the reliability and fairness of everyday transactions. If you assumed every potential deal was a rip-off or that the products you were buying were probably going to be lemons, then very little business would get done.”

In a free-market economy, honest transactions do not occur only if you have affection for the people with whom you are dealing. The Chinese pig farmer who is poisoning others is able to sleep at night because there is no social norm of trust that has been established by commerce in a free-market. In his eyes, city dwellers were less worthy than rural dwellers. Perhaps to the city dwellers, the farmer was just a mere peasant. Both attitudes breed contempt and bad behavior. Provincial and ethnic prejudices run very deep in China.

Now here is the key point—the social norms of being trustworthy and being trusting develop over many generations, and trust can only develop in an economy when competition is the norm. Competition begets quality, transparency, integrity, respect, and trust.

My wife and I walked into Lowe’s predisposed to be trusting of our sales consultants, not just because of previous transactions at Lowe’s, but because of hundreds of thousands of transactions that went well over our lifetimes. Like all of you, I can tell stories of a few times I was ripped off, but I can tell only a very few of those stories—and that is the key point. In other words, in only an infinitesimally small fraction of the transactions I have engaged in over my lifetime did the seller behave in a manner that violated my trust.

Being trusting and trustworthy began long before I became a consumer. As a child growing up in America, I was not taught the tribal mentality that develops in a non-market based economy. No regard was paid to the ethnicity of the shopkeeper; quality and price were the variables that mattered.  In contrast, in a non-market based economy, one learns to trust and respect only those you know personally and who are members of your tribe.  You and I enjoy an inheritance that generations before us built and left for us—an economy that runs on trust.

But are we destroying our inheritance? Transfers of wealth from productive members of society into the hands of bailed-out bankers, subsidized ethanol producers, public employees retiring at unsustainable pensions, and bloated governments creates the impression that the game is rigged. Add to this an educational system that fosters a culture of entitlement, rather than a culture of perseverance and hard work, and you have a recipe for disaster. Trust is undermined.

Trust is a necessary element in a spontaneous order such as a free market. If trust is undermined, we cannot simply press the reset button. Trust has to be rebuilt, interaction by interaction, over generations.

The seeming inability of the Chinese to transcend their food scandals underlines the importance of trust. The disdain for city dwellers by the rural pig farmer in the Newsweek story is a legacy of socialism; rewards were dispensed not by the impartial justice of the market but instead by the arbitrary decisions of central planners. How could trust develop?

It only takes a minute to see that trust is an invisible ingredient that powers our economy; we squander our inheritance at our peril.


One Response to Whither Trust?

  1. The New York Times today reported on fake eggs being sold in China and made from chemicals, gelatin and paraffin.

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