Trust and Prosperity
Trust by Francis Fukuyama (1995)
Why do some countries prosper while others languish? What predicts whether a society will succeed or fail? Having argued in his first book that liberal democracy was the culmination of human political development, Francis Fukuyama next turned his attention to the issue of trust. Without trust, humans cannot cooperate; without cooperation, they are doomed to economic stagnation.
Classical economics comprehends human beings as homo oeconomicus, self-interested utility-maximizers who calculate their every move to increase their personal advantage. Yet many (most?) of our motives and actions are habitual, a-rational, even irrational. They are the products of cultural or psychological imprints, for which we are often willing to risk everything; Fukuyama identified this aspect of human nature in The End of History as thymos, or the desire for recognition. In Hegel’s master-slave dialectic, it is what the master seeks in dominating the slave.
Most modern economic activity is not of this sort. It is undertaken more-or-less willingly by a multitude of strangers who plan and act in concert for some shared socio-economic benefit. In so cooperating, they demonstrate what Fukuyama calls “spontaneous sociability”, the propensity for members of a society to form new associations on their own initiative. This is easier when people believe in each other’s good-will; it is much easier to do business with someone when you trust them to uphold their end of the bargain. The alternative is to transact through a cumbersome legal apparatus, or a web of unpredictable custom.
Many of the ways in which we associate with each other are culturally-bound. Fukuyama uses the word “culture” in two senses: first as an “inherited ethical habit”—think Christian morality, the Protestant work-ethic, or Confucian filial piety—second to refer to the actual social institutions we participate in. Examples include churches, sports clubs, charity groups, and families. He also includes the particular forms those institutions take, such as the single parent family, the nuclear family, or broader circles of whānau.
Most economic enterprises begin as family affairs, because family members can pool their money together and are also willing to work hard for each other’s sake without the promise of immediate wealth. Beyond a certain size, however, a business can get too big to organise along family-lines. Some industries, such as chemicals, automotives, and semi-conductors, require a lot of start-up capital, which can’t really be obtained without professional contacts. Although the family plays an essential role in socialising the individual and reproducing the surrounding culture, it can also act as a bottle-neck on economic growth in these circumstances when it stifles the development of those broader socio-economic ties necessary for large-scale industry.
China is Fukuyama’s paradigmatic example of a society in which the “radius of trust” is circumscribed by the family. He traces this to the imprint of Confucian values on Chinese culture, which survived even the Communist revolution. Unlike the manorial systems of Europe and Japan, where oaths of fealty produced a fractal of duties linking king to peasant, Chinese families usually owned the land they worked. The ideal peasant household was self-sufficient. Villages rarely organised as collectives, and the state provided few services. The only guarantee of security and welfare was one’s family, which naturally became a “defensive mechanism against a hostile and capricious environment.” (88)
In the modern day, most Chinese businesses remain family affairs. There is a stark dividing line between managers (who are drawn from the family’s inner-circle) and workers, with the two groups sharing little sense of common purpose. A worker typically aspires to own his own business, rather than work hard at his position to advance his career. The preference for family over merit may exclude or alienate talents that otherwise would have helped grow or advance the business. As the founder’s vigour fades, his sons may be more interested in poetry than commerce, leading to a crisis of competency. Family schisms further dissolve the company’s wealth. The Chinese business environment is thus highly cyclical and competitive, with newcomers rising up, burning out, and bubbling away within a generation or two.
Japan was another society deeply affected by Confucianism, but its emphasis of those values was different from China’s. As regards the ideal family, the bond between father and son was always considered more important in Japan, from which developed a strong cultural sense of duty to one’s superior (be they daimyo, emperor, father, or company). Various forms of association beyond the family were also historically prevalent, such as iemoto, groups based around the practice of an art, craft, or martial art, and dozoku, voluntary, life-long obligations entered into for mutual benefit. Fukuyama gives the example of a samurai who vows to protect a village in exchange for a share of its grain.
Although the Japanese corporate model takes inspiration from the family, it is not a literal family like in China. Japanese companies do feel a sense of paternalistic obligation to their employees, but this is not advanced on the basis of kinship. They offer lifelong employment, generous benefits, and compensation based on seniority and need, rather than individual merit or nepotism. If a worker’s job is threatened or superfluous, he may be trained for a different position, or kept on in a symbolic role. This also goes for high-ranking jobs; an organisation can honour its esteemed senior members with ceremonial functions while allowing practical decision-making to pass into more youthful and capable hands.
A noteworthy feature of the Japanese economy has been its dominance by keiretsu networks. These are groups of interlocking businesses and organisations, historically organised around a bank which offers them credit. Those within the keiretsu give preferential treatment to each other, even if that means turning down cheaper offers from outside the network. Such is the degree of trust that organisations will share business secrets and align on internal operations. The most striking example of this was the 1975 restructuring of Mazda on the verge of bankruptcy. It allowed Sumitomo Bank to restructure its affairs, which saved the company without any job losses.
Fukuyama’s other example of a high-trust, economically successful country is Germany. Like Japan, German industrial growth was mostly financed by banks. Each had a relation to a particular sector, such as the Diskontogesellschaft, which loaned money to railway companies, or the Berliner Handelsgesellschaft, which loaned money to companies that manufactured electrical equipment. There was historically a great deal of consolidation in the German economy. Industries tended to coalesce into a few massive firms, such as Siemens AG (industrial automation and electrical generation) and IG Farbenindutsrie (chemicals). There was no equivalent of the Glass-Steagall or Sherman Acts, which the American government used to break up monopolies in the 20th century.
Unlike America, but like Japan, corporations in Germany have a somewhat paternalistic outlook. They fit into a broader social-market economy (Sozialmarktwirtschaft) based on class collaboration, rather than class conflict. Whereas French unions seek to maximise their disruption and intransigence with each strike, German labour representatives sit on the boards of major companies and share in the exercise of power. A network of workers councils arbitrates workplace disputes, while employee associations have an active role in setting the standards, expectations, protections, minimum wages, and other benefits of their sector.
The most celebrated feature of the German system is its extensive use of apprenticeships. This is a hold out from the guild system of the middle ages. Guilds in Germany gained a lot more power than they did elsewhere, due to the granting of privileges within free cities. In the modern day, students are streamed into different kinds of schools. Those who don’t go on to higher education usually take up an apprenticeship, which can cover a far broader range of careers than it does in the Anglosphere (you can do an apprenticeship in hospitality, for instance). Companies take on the responsibility for administering these programmes. Workers are trained to perform multiple tasks, moving from workstation to workstation to learn how the overall business functions, according to the ideal of an intelligent generalist, rather than a dumb specialist.
With the examples of China, Japan, and Germany—and some other smaller ones not mentioned here—Fukuyama highlights the need for trust in an economically successful industrial economy. This requires “spontaneous sociability”, or the ability for strangers to form new kinds of associations in response to social or economic challenges. It also requires the right balance between family and state, and the mediation of intermediate groups, such as voluntary organisations, churches, charities, clubs, and unions. If the institution of family is too strong in a society, it can act as a damper on economic cooperation between strangers, but if the family is too weak, it cannot perform its basic task of integrating individuals into society.
Fukuyama introduces this framework to overcome some of the more simplistic dichotomies of his time, including that of a communal vs. individualistic society, or a statist vs. free market economy. His arguments against these are fair, but by the end of the book I wasn’t entirely sure if high trust/low trust was a valid division either. Fukuyama himself points out that high-trust societies are often mistrustful of outsiders. Indeed, the deeper the bonds of solidarity, the more individuals would lose by their disintegration, so the more fiercely they fight to keep them alive. This at least superficially coheres with the occasional deadly outbursts of xenophobia in German and Japanese history.
Early in the book, Fukuyama claims that China lacked an historical range of intermediate associations between the state and the family; later, he admits the existence of lineage and kinship networks, especially in southern China, which were a major reason for the success of the Chinese diaspora abroad. Next to those were also tong, hui, secret societies, and other kinds of organisations which did provide services to people on the basis of something other than immediate kinship. These all seem to me like clear examples of association.
Perhaps we shouldn’t speak of entire societies being high-trust or low-trust. Trust is always bounded by the social context in which the interaction plays out. Some of those contexts—the craft associations of Germany or the preferential deals within Japanese keiretsu networks—could be tapped into for social and economic benefit, while others—the Catholic church in southern Italy or the street gangs of inner-city America—could not. I think this slightly adjusted way of thinking about it rescues the good, commonsensically obvious truth of Fukuyama’s framework.
I didn’t entirely agree with his characterisations of Japan and Germany. It is true that German social thinking has long valourised quality and craftsmanship and chafed at the divide between planning and execution betokened by the division of labour in an industrial society. This does seem to translate into a great deal of respect between white-collar and blue-collar professions, which you could describe as a certain kind of trust. I wouldn’t describe the German system as flexible though, which Fukuyama gets close to in his comparison to and praise of Toyota’s lean production methods. Japan’s system of worker benefits is generally kept off the books, which does seem like evidence of trust, but Germany’s requires a tangled complex of law and regulation to give it effect. Isn’t that the hallmark of a low-trust society?
With the benefit of hindsight, we can see that some of Fukuyama’s predictions were wrong. Despite scepticism about the long-term stability of the Chinese model, its economy has exploded since 1995, while Japan’s has been more-or-less flat. Germany powered on through the European debt crisis, but it sits at the heart of a political union imperilled by war, energy scarcity, and refugee resettlement. Its economy has been notably slow to recover from Covid, while the overall inflexibility of its automotive industry has already seen it lose potentially significant ground to foreign competitors in the worldwide transition from petrol to electric. Elections in Thuringia one month from now where Björn Höcke, leader of the AfD’s ultranationalist wing, is currently leading the polls, will really put the claim to the test: Is Germany still a high-trust society at the end of history? Or is it complacent and sclerotic, an aging society living large on the memories of old before the return of interesting times?