Giving Thanks for Trust Old and New

Thanksgiving is a time to reflect on trust and to be grateful for its presence in our lives.  Originally, Thanksgiving was a celebration of trust between two different peoples, the indigenous Indians and the Pilgrim settlers. Despite their different cultures and religions, they were able to trust one another enough to contribute food to a feast and sit down to dine with one another.

Today Thanksgiving is quintessentially a family celebration. At its best, it is suffused with trust because the family is a locus of trust.  Because of the bonds among kin, for most of human history much commerce took place among extended families. And most of the rest of it took place between people who were known to one another. Being a repeat player who must live in a community inspires trust in others, particularly past eras when being ostracized was very costly.

But as civilization developed, communities became larger and the opportunities for gains from trade extended beyond those that could be easily satisfied by family, new institutions had to arise to police trust. Some were private. Banks are famously trust intermediaries. From the Renaissance on, they have furnished letters of credit that allow a seller in one country to trust that he will paid by a buyer in another. Governments too have provided frameworks for trust.  For instance, one justification for regulating taxis is that government will vet taxi cab drivers so passengers will trust them to drive at high speeds on roads they do not know to a destination they have never been.

But these institutions of trust have costs. Banks charge fees and governments levy taxes. Even worse they have substantial agency costs. Bluntly, trust institutions are made up of workers whom you do not know, including politicians, who have incentives that do not align with yours.

Perhaps the greatest innovation of the information age is that it again makes effective the decentralized structures of trust of an earlier era. You have never met your Uber driver, but he has been rated by enough different people that there is reason to trust him, even if no government has licensed him.  Information technology creates ad hoc communities that have much the same trust function as traditional communities.  And this kind of trust goes both ways. No sane person would rent out one of his rooms on Airbnb without a system that rates the users as well. This decentralized rating system provides assurance that a short-term renter won’t trash your house.

And more recently cryptocurrency and the associated innovation of blockchain provides a new mechanism of trust that may replace (or at least discipline) private and government institutions on the grandest of scales—that of money, the greatest of all trust institutions.  Fiat money depends on trust, in this case the trust in the government to maintain the value of money. As Kyle Roche and I have noted, the problem is that there is often reason to distrust the government’s stewardship of the money supply.  But because it relies on a  structure of transactions that are run on an algorithm verified by a blockchain, Bitcoin provides a decentralized method of verifying value that may come to substitute for at least some fiat currencies.

So this Thanksgiving, give thanks to the innovators of our information age. Because of their work, we can get closer on a daily basis to the sense of trust that is Thanksgiving’s great gift.