The company of strangers a natural history of economic life

2 • Trust and Panic: Introduction to the Revised EditionThis book is about the trust that underpins our social life, and in ticular about what enables us to trust complete strangers with

The Company of Strangers

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The Company of Strangers

Copyright © 2010 by Princeton University Press

Published by Princeton University Press,

41 William Street, Princeton, New Jersey 08540

In the United Kingdom: Princeton University Press,

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All Rights Reserved

Library of Congress Cataloging-in-Publication Data

Seabright, Paul.

The company of strangers : a natural history of

economic life / Paul Seabright – rev ed.

p cm.

Includes bibliographical references and index.

ISBN 978-0-691-14646-1 (pb.: alk paper)

1 Social capital (Sociology) 2 Economics–Sociological aspects.

3 Sociobiology 4 Strangers 5 Trust I Title.

HM708.S43 2010

A catalogue record for this book is available from the British Library

This book has been composed in Lucida using TEX

Typeset and copyedited by T&T Productions Ltd, London

Printed on acid-free paper
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press.princeton.edu

Printed in the United States of America

10 9 8 7 6 5 4 3 2 1

To Alice, Edmond, and Luke

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P a r t II: From Murderous Apes to Honorary Friends:

P a r t III: Unintended Consequences:

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A smoothly running automobile is one of life’s delights; it enables you toget where you need to get, on time, with great reliability, and for the mostpart, you get there in style, with music playing, air conditioning keepingyou comfortable, and GPS guiding your path We tend to take cars forgranted in the developed world, treating them as one of life’s constants,

a resource that is always available We plan our life’s projects with theassumption that of course a car will be part of our environment Butwhen your car breaks down, your life is seriously disrupted Unless youare a car buff with technical training you confront your dependence on aweb of tow-truck operators, mechanics, car dealers, and much more Atsome point, you decide to trade in your increasingly unreliable car andstart afresh with a brand new model Life goes on, with hardly a ripple.But what about the huge system that makes this all possible: the high-ways, the oil refineries, the auto makers, the insurance companies, thebanks, the stock market, the government? Our civilization has been run-ning smoothly—with some serious disruptions—for thousands of years,growing in complexity and power Could it break down? Yes, it could,and to whom could we then turn to help us get back on the road? Youcan’t buy a new civilization if yours collapses, so we had better keep thecivilization we have running in good repair Who, though, are the reliablemechanics? The politicians, the judges, the bankers, the industrialists,the journalists, the professors—the leaders of our society, in short, aremuch more like the average motorist than you might like to think: doingtheir local bit to steer their part of the whole contraption, while blissfullyignorant of the complexities on which the whole system depends Theoptimistic tunnel vision with which they operate is not, Paul Seabrightargues, a deplorable and correctable flaw in the system but an enablingcondition The edifices of social construction that shape our lives in so

many regards depend on our myopic confidence that their structure is

sound and needs no attention from us

xii • Foreword

At one point Seabright compares our civilization with a termite tle Both are artifacts, marvels of ingenious design piled on ingeniousdesign, towering over the supporting terrain, the work of vastly manyindividuals acting in concert Both are thus byproducts of the evolution-ary processes that created and shaped those individuals, and in bothcases, the design innovations that account for the remarkable resiliency

cas-and efficiency observable were not the brainchildren of individuals, but

happy outcomes of the largely unwitting, myopic endeavors of thoseindividuals, over many generations But there are profound differences

as well Human cooperation is a delicate and remarkable phenomenon,quite unlike the almost mindless cooperation of termites, and indeedquite unprecedented in the natural world, a unique feature with a uniqueancestry in evolution

Much has been written about “the social construction of reality” and(much better) the “construction of social reality,” but most of it is writ-ten by thinkers who—like naive car owners—are full of admiration for

the marvel they are describing but haven’t a clue about how this struction actually has taken place, and why the parts intermesh the way

con-they do These life-enhancing institutions are made of interacting, locking systems of beliefs—about what to expect, what not to expect,what to worry about, what to take for granted, what is possible, andwhat is (almost) unthinkable We tend to take this structure as given, apermanent fact of life, but it is in fact a quite recent development, bio-logically speaking, and although it has some remarkable powers of self-stabilization, it is not as invulnerable as common sense typically sup-poses As the biologist D’Arcy Thompson said, many years ago, “every-thing is the way it is because it got that way,” and the deep idea behindthis truism is that a keen appreciation of the compromises and tensionsthat have gone into this largely unwitting construction is a prerequisitefor understanding both the strengths and fragilities of the social vehicle

inter-on which our life as human beings now depends Seabright cinter-onstructsour economic world piece by piece, showing why there is money, andbanks, and firms, and marketing, and insurance, and government regu-lation, and poverty, and political insecurity, and also showing how infor-mation is generated, used, ignored, exploited in this complicated socialfabric

Like other recent authors, Seabright sees the emergence of ation as a truly world-altering phenomenon that requires ultimately abiological—evolutionary—explanation, but he does not fall into the trap

cooper-of Panglossian optimism, as some have done Cooperation depends, he

The first edition of this book was an eye-opener, an invitation to think

in a new way about our predicament, and this revised edition buildsmore explanations on that base, demonstrating the power of the ideas

by applying them to our current economic crises, throwing a larly powerful light on the tempting mistakes we must avoid if we are

particu-to prevent even more catastrophic future collapses (For instance, ishing the crooks and removing the fools from power is only a first andrelatively minor part of what needs to be done, since there are systemicproblems that even saints and geniuses could stumble over in the future.)

pun-Like Jared Diamond’s Guns, Germs and Steel, this is a boldly

ambi-tious book, drawing on a breathtaking range of scholarship, from tory and biology and sociology and psychology in addition to economics,and challenging the blinkered visions of thinkers in all these fields, while

his-at the same time making excellent use of the fruits of their researches.Seabright’s imagination is as powerful as his scholarship, providing freshperspectives on just about every page He has a genius for arresting com-parisons: how are being wealthy and being ticklish similar, and why arethere driverless trains, but not airplanes? He notes, startlingly, that hedoesn’t have to suppress an urge to kill the waiter and get his meal forfree—which is a temptation that would surely be hard for our cousinthe chimpanzee to resist This book is the clearest and most persua-sive demonstration of the power and importance of economic thinkingthat I have encountered, and as such it is an ideal primer on economics,utterly jargon free, with vivid and graceful explanations of all the keyconcepts He punctures popular convictions on almost every page andelucidates easily misunderstood concepts with graceful examples He

notes, for instance, that children are, on average, slightly less intelligent than their parents; but their parents are, on average, slightly more intel-

ligent than their grandparents! How can this be? If this puzzles you, youhaven’t yet seen just how evolution works its inexorable trudge up the

appreci-nervous systems of its inhabitants We can also aspire to achieving a

similarly Olympian perspective on our own artifactual world, a feat onlyhuman beings could even imagine If we don’t succeed, we risk disman-tling our precious creations in spite of our best intentions Much of what

we take to be just “common sense” proves to be treacherous, so we need

to rethink the whole thing from first principles That is the task taken by this very important book

under-Daniel C DennettCo-Director, Center for Cognitive StudiesAustin B Fletcher Professor of Philosophy, Tufts University

I have been exceptionally fortunate to have so many colleagues andfriends who gave their time, energy, and ideas to encourage and im-prove this book Diane Coyle, Isabelle Daudy, Barbarina Digby-Jones,Jeremy Edwards, Stanley Engerman, Mark Greenberg, Denis Hilton, DavidHowarth, Sheilagh Ogilvie, Anne Péchou, Diana Seabright, Jack Seabright,Keith Stenning, and several anonymous readers all made detailed com-ments on the whole manuscript In addition, the following read some orall of the manuscript at various stages in its preparation and gave mevery useful information or reactions to some of its arguments: GiuseppeBertola, Susan Blackmore, Wendy Carlin, John Covell, Nicholas Crafts,Sophie Dawkins, Jeff Dayton-Johnson, Denis Eckert, Guido Friebel, Mur-ray Fulton, Azar Gat, Karen Gold, Andrew Goreing, Geoffrey Hawthorn,Paul Hirsh, Marc Ivaldi, Kostas Karantininis, Hélène Lavoix, Jean Leduc,Tanya Luhrmann, James McWhirter, Patricia Morison, Elizabeth Murry,Francesca Nicolas, Andrew Schuller, Alice Seabright, Edmond Seabright,Victor Sarafian, and Kay Sexton The following responded kindly andpromptly to requests for information and advice: Kaushik Basu, RaviKanbur, Paul Klemperer, and Leigh Shaw-Taylor Jennifer Gann provided

a massive input to the notes, bibliography, and index as well as manywise comments on the text

It has been a pleasure to work with Richard Baggaley, my editor atPrinceton He followed the project from an embryonic stage and has been

an untiring source of advice; the book’s title was his coinage His league Peter Dougherty has also taken a keen interest in the project, and

col-I have benefited greatly from his experience as a publisher and writer.The book was steered through production by Linny Schenck and Kath-leen Cioffi with the immensely professional copyediting skills of VickyWilson-Schwartz and the design talents of Leslie Flis Carolyn Hollisprovided valuable administrative support

xvi• Acknowledgments

Thanks to the intermediation of Patricia Morison and Felicity Bryan,Catherine Clarke began acting as my agent before we had ever had morethan email and telephone contact My daughter Alice found this strange:

“How can you trust to represent you someone you’ve never even met?”She then thought a moment and added, “I suppose that’s what yourbook’s all about, really.” She was right only up to a point: I’ve been lucky

to find an agent whose personal and professional qualities exceed thing for which social institutions can possibly take the credit

any-I began writing this book in Cambridge, England, and completed it

in Toulouse, at the outstanding research environment of the Institutd’Economie Industrielle Its founder Jean-Jacques Laffont and currentdirector Jacques Crémer, its scientific director Jean Tirole, the President

of the University of Toulouse-1 Bernard Belloc, and their colleagues MarcIvaldi and Michel Moreaux were all instrumental in enabling me to move

to Toulouse I am grateful to them all, and to the many other researchers

in Toulouse who have made it such a personally as well as an ally stimulating place

intellectu-Besides those named above, I am grateful to the following, who, inmany diverse ways that only they can know, have given me information,ideas, practical support, or inspiration, sometimes all four: David Begg,Robert Boyd, Sam Bowles, Florence Chauvet, Sabrina Choudar, ParthaDasgupta, Jayasri Dutta, Jon Elster, Rosalind English, Ernst Fehr, Chris-tiane Fioupou, David Hart, Lucy Heller, Angela Hobbs, Peregrine Hor-den, Susan Hurley, John Kay, Joanna Lewis, Sylvie Mercusot, Alice Mes-nard, Jim Mirrlees, Damien Neven, Nicholas Rawlins, Gilles St Paul, LarrySiedentop, John Sutton, Susie Symes, and John Vickers

Isabelle Daudy has been a constant support and sounding board forideas She urged me for many years to write a book for the general readerand has often helped me resist the pressure for the urgent to drive outthe important Our children, Alice, Edmond, and Luke Seabright, haveconstantly reminded me that the world around us is strange and needsexplaining; this book is dedicated to them

And finally, thanks to all the agricultural laborers, banana-growers,carpenters, dentists, engineers, flower-sellers, grocers, handbag-makers,inspectors, jewelers, knife-grinders, lathe-operators, midwives, night-watchmen, organists, potters, quantity surveyors, reed-makers, seam-stresses, tattooists, undertakers, vets, window-cleaners, xylophonists,yogurt-makers, and zoologists (to name but a few) that I have met andtalked with in the course of thinking about the issues discussed in thisbook

Acknowledgments • xvii

A c k n o w l e d g m e n t s f o r t h e R e v i s e d E d i t i o n

As the acknowledgments to the first edition recorded, I have been tionally lucky to have enjoyed the help and advice of a large number ofpeople in writing this book Since the first edition appeared my debtshave multiplied so that I am now, intellectually speaking, distinctly sub-prime To record all of those from whom I have learned valuable lessonswould take many pages, so I shall just list here those who provided newreferences, made specific comments on the revised edition manuscript,

excep-or cexcep-orrected errexcep-ors in the text of the first These are Nicoletta Berardi,Samuel Bowles, Diane Coyle, Tyler Cowen, Kimmo Ericsson, David Fair-bairn, Xavier Freixas, Herbert Gintis, Charles Goodhart, Markus Haller,Angie Hobbs, Paul Hooper, Hillard Kaplan, Muriel Lacoue-Labarthe, LindaPartridge, Jean Pisani-Ferry, Jean-Charles Rochet, Bob Rowthorn, AliceSeabright, Diana Seabright, Jack Seabright, Stephen Shennan, Helen Wal-lace, Jacob Weisdorf, and David Wiggins Susan Hurley and Jean-JacquesLaffont are two friends who greatly inspired me when I was writing thefirst edition and whose shrewd advice I now sorely miss

Richard Baggaley has been an outstanding and consistently supportiveeditor, and Peter Dougherty’s backing for this project has been inspiringfrom the start Catherine Clarke is the wisest agent anyone could wishfor I am extremely grateful to Jon Wainwright of T&T Productions Ltdfor his patient and very shrewd copyediting, and to Dan Dennett for hiswonderfully generous foreword And my thanks go as always to Isabelle,Alice, Edmond, and Luke for their constructive criticism, patience, goodhumor, and love

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The Company of Strangers

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Trust and Panic: Introduction to the Revised Edition

S o c i a l T r u s t a n d F i n a n c i a l C r i s e s

Modern societies are fragile There are rare but dangerous momentswhen a fresh wind blowing suddenly from an unexpected quarter bringsapparently solid buildings crashing down Such collapses are no less dan-gerous when they involve the intangible structures of our social life: theinformal norms and formal institutions that ensure that trust takes theplace of mutual suspicion The collapse may be triggered from outside,

as in wartime, or it may be set off, more mysteriously, from within—

by some subterranean evolution of mutual attitudes that casts suddendoubt on the trust that was once taken for granted Whether the result

is an outbreak of physical violence or the collapse of an economy ofreciprocal exchange, understanding those underground developmentsand their sudden visible manifestation is one of the greatest challengesfor our ability to understand the world we live in

The financial crisis that began in 2007 was one of these eruptions

It came as a rude shock, not only to establishment policymakers whohad been congratulating themselves on a long period of stable eco-nomic growth throughout most of the world, but also to many work-ers, savers, and investors who had simply stopped worrying about theirfuture Within a few months the world saw the first run on a British banksince the nineteenth century, the first sustained fall in U.S house pricesduring the twenty years that systematic indices have been kept, a col-lapse of more than half in the value of shares traded on world stockmarkets, and the freezing-up of the interbank lending market Withintwo years there were losses on American loans estimated by the IMF atnearly 9,000 dollars per man, woman, and child in the United States,1and the most dramatic falls in output in the major industrialized coun-tries since the Great Depression What kind of a panic was this? Whatwere its subterranean causes, and what triggered their eruption into theopen air?

2 • Trust and Panic: Introduction to the Revised Edition

This book is about the trust that underpins our social life, and in ticular about what enables us to trust complete strangers with our jobs,our savings, even our lives It is also about what happens when thattrust breaks down, as it did recently in the world of banking and as ithas done at many times in our history, sometimes with terrifying conse-quences Historians and sociologists have long been fascinated by socialpanics,2and the more mysterious the causes the more fascinating theyhave found them What prompted societies throughout Europe from thefifteenth to the seventeenth centuries to decide that hundreds of thou-sands of people, many of them elderly and eccentric old women, were infact dangerous witches deserving of torture and execution? “Irrational-ity” is not an answer: if Newton and Locke could believe in witchcraft,intelligence and a scientific outlook were no defense against the panic.What prompted the Brazilian government in 1897, egged on by the pressand public opinion, to slaughter many thousands of the followers of thereligious mystic Antonio Conseilheiro, who had withdrawn to the remotesettlement of Canudos precisely so as to be out of the world’s way? Whydid thousands of Xhosa people respond in 1856 to the prophecy of ateenage girl named Nongqawuse by slaughtering hundreds of thousands

par-of their cattle, thereby provoking a famine that killed perhaps as much

as three-quarters of the population?3And (to cite a less violent examplethat has intrigued sociologists) why did the population of Orléans in May

1969 become convinced that a vast operation to kidnap young womenand force them into prostitution was being orchestrated by the own-ers of six dress shops in their city center?4There have been individualsprone to deranged and paranoid fantasies in all societies at all times forwhich we have records, but most large modern societies usually manage

to confine them, or at least their fantasies, to the margins Why do theysometimes overflow those margins and wash into the mainstream?The financial crisis of 2007 has not yet led to large-scale violence,although as the Great Depression of the 1930s may have had someresponsibility for World War II it would be foolish to engage in self-congratulation too early But this crisis is not just a panic like the others.The inhabitants of Canudos could have gone on living in peace more orless for ever if their fellow citizens had been willing to let them Nothingobliged the populations of early modern Europe to escalate with suchsavagery their suspicions of eccentricity among their unfortunate fellowcitizens Although fantasies of kidnapped women have surfaced regu-larly throughout history, there was no compelling reason for the citizens

of Orléans to succumb to them in 1969 But the financial crisis of 2007

Trust and Panic: Introduction to the Revised Edition • 3

did not just appear from nowhere out of a cloudless sky It took time

to develop, and it followed an unsustainable boom: the unraveling ofconfidence during the crisis can only be understood in the light of theslipshod architecture of that confidence Understanding why the boomwas unsustainable is the key to understanding the panic that followed It

is also the key to understanding how to build a sustainable architecture

to do It is like a foreign language we have learned to speak with suchassurance that we are all the more unnerved by our inevitable mistakesand the sometimes spectacular confusions to which these give rise Tounderstand why it is so unnatural, and why we have nevertheless learnedhow to trust strangers so commonly and so easily, we need to delve farback into our evolutionary past

a mere ten thousand years ago.∗No one could have predicted this iment from observing the course of our previous evolution, but it wouldforever change the character of life on our planet For around that time,after the end of the last ice age, one of the most aggressive and elu-sive bandit species in the entire animal kingdom began to settle down Itwas one of the great apes—a close cousin of chimpanzees and bonobos,and a lucky survivor of the extinctions that had wiped out several otherpromising branches of the chimpanzee family.5 Like the chimpanzee itwas violent, mobile, intensely suspicious of strangers, and used to hunt-ing and fighting in bands composed mainly of close relatives Yet now,instead of ranging in search of food, it began to keep herds and grow

exper-∗This is equivalent to about two and a half minutes ago on a twenty-four-hour clock

that began ticking when our evolution diverged from the rest of the animal kingdom.

4 • Trust and Panic: Introduction to the Revised Edition

crops, storing them in settlements that limited the ape’s mobility andexposed it to the attentions of the very strangers it had hitherto fought

or fled Within a few hundred generations—barely a pause for breath

in evolutionary time—it had formed social organizations of startlingcomplexity Not just village settlements but cities, armies, empires, cor-porations, nation-states, political movements, humanitarian organiza-tions, even internet communities The same shy, murderous ape thathad avoided strangers throughout its evolutionary history was now liv-ing, working, and moving among complete strangers in their millions

Homo sapiens sapiens is the only animal that engages in elaborate

task-sharing—the division of labor as it is sometimes known—between ically unrelated members of the same species.6 It is a phenomenon asremarkable and uniquely human as language itself Most human beingsnow obtain a large share of the provision for their daily lives from others

genet-to whom they are not related by blood or marriage Even in poor ruralsocieties people depend significantly on nonrelatives for food, clothing,medicine, protection, and shelter In cities, most of these nonrelativescrucial to our survival are complete strangers Nature knows no otherexamples of such complex mutual dependence among strangers A divi-sion of labor occurs, it is true, in some other species, such as the socialinsects, but chiefly among close relatives—the workers in a beehive or

an ant colony are sisters There are some cases of apparent tion between colonies of ants founded by unrelated queens, though theexplanation of this phenomenon remains controversial.7 There is littlecontroversy, however, about the comparative ease with which the evolu-tion of cooperation between close relatives can be explained: the mech-anism is known as the theory of kin selection.8 This theory has shownthat cooperation through a division of labor between close genetic rel-atives is likely to be favored by natural selection, since close relativesshare a high proportion of genes, including mutant genes, both good andbad.9But for a systematic cooperative division of labor to evolve amonggenetically unrelated individuals would be very surprising indeed, sinceindividuals with mutant genes favoring dispositions to cooperate wouldhelp others who had no such dispositions and offered nothing in return.And sure enough, cooperation through an elaborate division of laborbetween unrelated individuals has never evolved in any species otherthan man

coopera-Some species, it is true, practice a small degree of cooperation betweenunrelated individuals on very precise tasks.10 It has been seen amongsticklebacks, vampire bats, and lions, for example—albeit only in very

Trust and Panic: Introduction to the Revised Edition • 5

small groups.11 But these rudiments bear as much relation to the orate human division of labor between relatives, nonrelatives, and com-plete strangers as do the hunting calls of chimpanzees to the highlystructured human languages spoken all over the globe Nature is also

elab-full of examples of mutual dependence between different species—such

as that between sharks and cleaner fish (this is known as symbiosis).12But members of the same species occupy the same environment, eatthe same food, and—especially—pursue the same sexual opportunities;they are rivals for all of these things in a much more intense way thanare members of different species Nowhere else in nature do unrelatedmembers of the same species—genetic rivals incited by instinct and his-tory to fight one another—cooperate on projects of such complexity andrequiring such a high degree of mutual trust as human beings do

No solution to this puzzle can be found in evolutionary biology alone

Ten thousand years is too short a time for the genetic makeup of Homo

sapiens sapiens to have adapted comprehensively to its new social

sur-roundings If it were somehow possible to assemble together all yourdirect same-sex ancestors—your father and your father’s father and so

on if you’re male, your mother and your mother’s mother and so on

if you’re female; one for each generation right back to the dawn ofagriculture—you and all of these individuals could fit comfortably in

a medium-sized lecture hall.13 Only half of you would have known thewheel, and only 1 per cent of you the motor car But you would be farmore similar to each other—genetically, physically, and instinctually—than any group of modern men or women who might have assembledthere by chance It is true that a number of important genes have becomewidespread in human populations due to unusually strong selectivepressures over the last ten millennia: examples include genes for resis-tance to malaria in regions where that disease is endemic, for fair skinand hair in northwestern Europe, where sunlight is scarce, and for lac-tose tolerance—the ability to digest milk—in adults in parts of the worldwhere cattle and sheep were domesticated earliest.14 It is even likelythat the speed of human genetic evolution has been substantially fasterover the last ten millennia than it was beforehand, if only because wehave faced such challenging variations in our environments during thattime.15 Our bodies have also been profoundly affected by improvednutrition and other environmental developments over the centuries Still,except in some dimensions such as height and perhaps in skin color, thebiological differences between you and your furthest ancestor would behard to distinguish from random variation within the group If you are

6 • Trust and Panic: Introduction to the Revised Edition

reading this book in a train or an airplane, this means your most distantancestor from Neolithic times was probably more like you, biologically,than the stranger sitting in the seat next to you now

Yet evolutionary biology has something important to tell us all thesame For the division of labor among human beings has had to piggy-back on a physiology and a psychology that evolved to meet a far dif-ferent set of ecological problems These were problems faced by hunter-gatherers, mainly on the African woodland savannah, over the six orseven million years that separate us from our last common ancestorwith chimpanzees and bonobos Some time in the last two hundred thou-sand years or so—less than one-thirtieth of that total span—a series ofchanges, minuscule to geneticists, vast in the space of cultural potential,occurred to make human beings capable of abstract, symbolic thoughtand communication.16Just when they occurred involves difficult issues

of dating,17but since all human beings share these capacities the geneticchanges that made them happen probably occurred at least 140,000years ago But the first evidence of the new cultural capabilities to whichthey gave rise is found in the cave paintings, grave goods, and othersymbolic artifacts left by hunter-gatherer communities of anatomicallymodern man (Cro-Magnon man, as he is sometimes known), which are noolder than sixty or seventy thousand years—and most are much younger.These capabilities seem to have made a move toward agriculture andsettlement possible once the environmental conditions became favor-able, after the end of the last ice age Indeed, the fact that agriculturewas independently invented at least seven times, at close intervals, indifferent parts of the world suggests it was more than possible; it mayeven have been in some way inevitable.18These capabilities also enabledhuman beings to construct the social rules and habits that would con-strain their own violent and unreliable instincts enough to make societypossible on a larger, more formal scale And they laid the foundation forthe accumulation of knowledge that would provide humanity as a wholewith a reservoir of shared skills vastly greater than the skills available to

any single person But these cultural capabilities did not evolve because

of their value in making the modern division of labor possible Quite thecontrary: modern society is an opportunistic experiment, founded on ahuman psychology that had already evolved before human beings everhad to deal with strangers in any systematic way It is like a journey to theopen sea by people who have never yet had to adapt to any environmentbut the land

Trust and Panic: Introduction to the Revised Edition • 7

T h e A r g u m e n t o f T h i s B o o k

The chapters that follow explore what made this remarkable experimentpossible and why, against all the odds, it did not collapse They alsoexplore why it could collapse in the future, and what might be done toprevent that from happening Part I shows why the division of labor issuch a challenge for us to explain It looks at the way in which evensome of the simplest activities of modern society depend upon intri-cate webs of international cooperation that function without anyone’sbeing in overall charge On the contrary, they work through eliciting

a single-mindedness from their participants—a tunnel vision—that ishardly compatible with a clear and nonpartisan vision of the priorities

of society as a whole It seems hard to believe that something as plex as a modern industrial society could possibly work at all without anoverall guiding intelligence, but since the work of the economist AdamSmith in the eighteenth century, we have come to realize that this isexactly how things are Like medical students studying the human body,therefore, we have to understand and marvel at the degree of sponta-neous coordination displayed in human societies before we can evenbegin to investigate its pathologies This coordination comes about sim-ply because of a willingness of individuals to cooperate with strangers

com-in a multitude of small but collectively very significant ways

Part II looks at what makes such cooperation possible, given thepsychology we have inherited from our hunter-gatherer ancestors Theanswer consists of institutions—sets of rules for social behavior, someformal, many informal—that build on the instincts of the shy, murder-ous ape in ways that make life among strangers not only survivable butattractive, potentially even luxurious These rules of behavior have made

it possible for us to deal with strangers by persuading us, in effect, totreat them as honorary friends Some of the institutions that make thispossible have been consciously and coherently designed, but many havegrown by experiment or as the by-product of attempts to achieve some-thing quite different Nobody can claim they are the “best” institutionsthat human beings could ever devise They are simply the ones that hap-pen to have been tried, and that, given the psychology and physiology

of the creatures that tried them, happen to have survived and spread.19The explanation begins by showing how the division of labor can creategreat benefits for those societies that can make it work These benefitscome mainly from specialization, the sharing of risk, and the accumula-tion of knowledge But advantages to society as a whole cannot explain

8 • Trust and Panic: Introduction to the Revised Edition

why a division of labor evolved We also need to understand why viduals have an interest in participating A division of labor needs to berobust against opportunism—the behavior of those who seek to benefitfrom the efforts of others without contributing anything themselves Inother words, participants need to be able to trust each other—especiallythose they do not know This is particularly important as the cost of mis-placed trust can be high—the loss not only of economic resources but

indi-of our lives As the chapters indi-of part II describe, our most deadly tors on the African woodland savanna were not the big carnivores butother human beings20; levels of daily violence were dramatically higherthan they are in almost all parts of the modern world We are the descen-dants of those whose cunning and judgment helped them to survive thismurderous environment, so it is hardly surprising if our inherited psy-chology sometimes sits uncomfortably with our high-minded ideals.Nevertheless, social cooperation has been built, and on a scale unimag-inable to our ancestors It has done so through robust institutions: robust

preda-in that those who operate withpreda-in them can be trusted to do what othersexpect them to do Given the facts of human psychology, these institu-tions ensure that cooperation not only happens but is reliable enoughfor others to be willing to take its presence for granted, at least most ofthe time One such robust human institution will be described in detail:

it is the institution of money Another is the banking system We shalllook at the foundations of trust in financial institutions, and examine thedelicate balance between the natural incentives of individuals to signaltheir trustworthiness to others and the need for outside supervision toenforce trust Effective institutions rely on a minimum of outside super-vision, knowing that a little outside supervision can make natural incen-tives go a long way

As the recent financial crisis has painfully reminded us, such trust ininstitutions can often be seriously misplaced So what went wrong inthe recent banking crisis? The answer is that what went wrong was anunderstandable consequence of what, in most circumstances, goes right

An effective banking system allows most people, most of the time, not

to worry about what is happening to their savings, to leave judgmentsabout risk to others Like an autopilot, it allows people not to pay atten-tion even when they have a lot at stake That’s a very good thing: inthe complex modern world we would be overwhelmed if we really tried

to pay attention to every possible risk to our security and our ity But also, like an autopilot, an effective banking system can lull eventhose who are supposed to be on duty into nodding on the watch In

prosper-Trust and Panic: Introduction to the Revised Edition • 9

the end there was a banking crisis because too many people placed toomuch faith other people’s judgments about risk,21even though trustingother people’s judgments about risk—up to a point—is exactly what thebanking system allows us to do

The rest of part II develops this idea that human cooperation depends

on our adopting a kind of tunnel vision Not only does widespread socialtrust arise in spite of the limitations of people’s individual perspectives,

but it even requires tunnel vision in order to persist This is because the

most effective mechanisms for ensuring trust rely not just on incentivesbut on people’s internalization of values through education and training.This process entrenches commitment to professional values and at thesame time makes them resistant to change Codes of personal behaviorand professional ethics can therefore make individual acts of local coop-eration more reliable, while generating a degree of systematic blindness

to the more distant consequences of our actions Such blindness—tunnelvision—has dangers that are a natural by-product of its inherent virtues.Part II has therefore argued that we can understand why human beingshave proved capable of cooperating with strangers, thanks to institutionsthat build on their already evolved hunter-gatherer psychology Part IIIgoes on to look at global consequences—at what happens when humanbeings equipped with this psychology, and responding to the presence

of these institutions, come together in the mass Our mutual dence has produced effects that utterly surpass what any of the partic-ipants can have intended or sometimes even imagined The growth ofcities, the despoliation of the environment, the sophisticated function-ing of markets, the growth of large corporations, and the development

interdepen-of stocks interdepen-of collective knowledge in the form interdepen-of science and technology:all are part of the landscape of human interaction even though nobodyhas planned them to look the way they do, and all have contributed

to the dramatic historical improvement in the prosperity of mankind.But since nobody has planned them, we should not be surprised thatwhile some of them look encouraging, others look very troubling indeed.For instance, the growth of cities—the result of countless uncoordinatedindividual decisions about where to live and work—has led to some ofhistory’s most creative and innovative environments It has also pro-duced pollution and disease on an unprecedentedly concentrated scale.Cities themselves have often been able to organize collective action toovercome these by-products of their affluence, but only by living off ahinterland whose resources they exploit and to which they export theirwaste But the world as a whole cannot do as cities have done, for it has no

10• Trust and Panic: Introduction to the Revised Edition

hinterland The example of water, which we shall look at in detail, shows

us that problems of global pollution and resource depletion will proveextremely dangerous unless we can find ways of calculating and account-ing for the cost of the resources we use and the pollution we cause Forthis we need to draw on one of the other great unintended characteristics

of modern society: the capacity of markets to calculate prices that marize the information necessary for allocating resources in a world ofscarcity Markets, when they work well, have a remarkable ability to allowtheir participants—who may never even physically meet—to pool infor-mation about the scarcity of the goods and services they are exchanging

sum-It is precisely this kind of information that we need in order to treat ourlimited environmental resources wisely

Nevertheless, there are other aspects of the division of labor that kets on their own cannot effectively coordinate Many kinds of produc-tive activity take place inside firms, which represent islands of plan-ning and coordination—often also between strangers—in the sea ofunplanned market transactions around them What makes some activ-ities suitable for large firms, whose members are more anonymous toeach other, while others are suitable for small firms? The answer is thatsuccessful firms adapt to their economic environment by channelinginformation between people in a way that market transactions cannot

mar-do Information, and the spectacular accumulation of knowledge acrossthe centuries, is another of the remarkable by-products of modern soci-ety: how has it happened, what are its benefits, and what are its dan-gers? Finally, the last chapter in part III explores the paradox that asociety whose members are interconnected as never before can never-theless exclude some of its most vulnerable members—the unemployed,the poor, the sick

So, although part III will give us many reasons to be impressed bythe achievements of modern society, it will also show us urgent reasonsfor concern The persistence of desperate poverty in a world of plenty,the destruction of the world’s environmental assets, and the spread ofweapons of large- and small-scale destruction (resulting from the diffu-sion of information into the hands of those who would use it for aggres-sive ends) all call for conscious reflection on solutions, using that samecapacity for abstract reasoning that has created so many of the prob-lems in the first place So part IV looks at the institutions of collectiveaction—states, communities, and other political entities—and considerstheir virtues and their weaknesses in the face of the need to design col-lective solutions to the common problems of our species At first, it may

Trust and Panic: Introduction to the Revised Edition• 11

look as though we have abundant reasons to be optimistic For whilepart III indicated the daunting scale of these common problems, part IIhas already shown us that the emotional and cognitive capacities forcooperation, and for rational reflection on the proper uses to make ofthat cooperation, have a solid foundation in human evolution

Unfortunately, however, the human capacity for cooperation is edged It is not only the foundation of social trust and peaceful living butalso what makes for the most successful acts of aggression between onegroup and another Like chimpanzees, though with more deadly refine-ment, human beings are distinguished by their ability to harness thevirtues of altruism and solidarity, and the skills of rational reflection, tothe end of making brutal and efficient warfare against rival groups Whatmodern society needs, therefore, is not more cooperation but better-directed forms of cooperation The book concludes by asking just howoptimistic we can reasonably be, knowing that some of the very quali-ties that have made the great experiment of modern life possible are alsothose that now threaten its very existence Just how fragile is the greatexperiment on which our species set out ten thousand years ago? Andwhat can we do to make it less fragile now?

double-Understanding the delicacy of our social institutions and their roots inour evolutionary past helps us to think constructively about the press-ing problems of the world today Take globalization—one of those rareabstract nouns that can bring people out marching in the streets in theirhundreds of thousands The anxieties provoked by globalization are notnew but have been with us for ten thousand years—anxieties about pow-erful individuals and groups of whom we know little but who may intend

to do us harm or who may undermine our security and our prosperityeven if they have no intentions toward us of any kind Terrorism, too, is amodern name for a phenomenon that provokes in us an age-old fear: thatamong our enemies are numbered not only those who bear us personalgrudges but also those who do not know us or even care about us asindividuals at all Living with these fears requires us to deploy abstractreasoning in the service of institution-building, today as throughout thelast ten thousand years As our world has grown more complex, we nowhave to do more than create the simple local marketplaces where the firststrangers could meet in enough security to justify the risk of dealing witheach other We have to create a marketplace where tribes, corporations,and whole nations can meet in relative security and do the deals thatunderpin their collective prosperity But though the scale of the chal-lenges has grown, they retain much of their old character And the last

12• Trust and Panic: Introduction to the Revised Edition

ten millennia have shown repeatedly how those who have not learnedfrom their history may never notice their deficiency until, fatally, theyare pitted against adversaries who have

The argument of this book rests, therefore, on four pillars:

• First, the unplanned but sophisticated coordination of modern

industrial societies is a remarkable fact that needs an explanation.Nothing in our species’ biological evolution has shown us to haveany talent or taste for dealing with strangers

• Second, this explanation is to be found in the presence of

institu-tions that make human beings willing to treat strangers as honoraryfriends

• Third, when human beings come together in the mass, the

unin-tended consequences are sometimes startlingly impressive, times very troubling

some-• Fourth, the very talents for cooperation and rational reflection that

could provide solutions to our most urgent problems are also thesource of our species’ terrifying capacity for organized violencebetween groups Trust between groups needs as much human inge-nuity as trust between individuals

H o w T h i s B o o k D r a w s o n R e c e n t R e s e a r c h

This book draws together a large range of findings by scholars working

in history, biology, anthropology, and, especially, economics and nomic history The outline of the story told here is not new and in manyrespects has been part of the shared understanding of economists sincethe work of Adam Smith in the eighteenth century But the growing spe-cialization of disciplines has meant that many people outside profes-sional economics have not realized how directly our subject speaks tothe past and the future of our human species We are believed to dealonly in the rational skeleton of human life and to avoid addressing theflesh and blood it bears At the same time, some scholars working withineconomics are surprised to discover how starkly and expressively thewritings of other disciplines illustrate the dilemmas that we have been

eco-in the habit of studyeco-ing eco-in our often somewhat bloodless way

To help bridge this gap I have chosen to discuss economic argumentsusing as little economic terminology as possible and citing evidencedrawn mainly from outside economics—from history, biology, and othersources, including literary ones The endnotes are designed not just to

Trust and Panic: Introduction to the Revised Edition• 13

support the claims made in the text but also to give sources and gestions for further reading While the book’s individual chapters aredesigned to be read as self-contained essays, the prologues to parts II,III, and IV situate the chapters to come within a structured argument Epi-logues at the end of these parts link the themes that have been discussed

sug-to the more formal literature of economics They offer suggestions forfurther reading to those who would like to see the economic argumentsmade more explicit, to see the logical skeleton under the flesh

Finally, although this book examines the evolutionary origins of ourpsychology, it is not a work of evolutionary psychology as this iscommonly understood—meaning one that advances a set of particu-lar hypotheses about the way our current behavior exemplifies psycho-logical traits that evolved during our hunter-gatherer existence, hypothe-ses associated with such scholars as Leda Cosmides and John Tooby,some of whose research will be discussed in what follows.22AlthoughDarwin was clearly right when he wrote that “man still bears in his bod-ily frame the indelible stamp of his lowly origin,” we still know littleabout exactly how our lowly origin constrains our behavior today Two

facts stand out to a neutral observer about the behavior of Homo

sapi-ens sapisapi-ens: first, we are a species of social primate, and specifically a

great ape Most social primates live in environments characterized bysophisticated cooperation within groups and simultaneously by intensecompetition between groups, as well as competition between individu-als for the privilege of belonging to the most powerful groups Thoughthere is much variety in human behavior today, it would be astonish-ing if many of the ingredients of a primate psychology necessary fornavigating such an environment had not survived in our modern brains.However, the second striking fact about our behavior is that we haveshown ourselves capable of learning a whole new way of social livingsince those modern brains evolved This doesn’t just mean that we havebuilt a new environment populated by strangers; it means that our mostbasic behavioral responses to others are different from what they were

in the late Pleistocene world I don’t have to fight back an instinctiveterror before asking a stranger for a meal in a restaurant, nor do I have

to restrain myself by an effort of will from clubbing the waiter to deathonce his back is turned so I can seize the meal without paying He justmeekly serves me the meal and I just meekly pay the bill Just how manyother new tricks our old primate brains are capable of learning is one ofthe remaining mysteries to be tackled by modern psychological research

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P A R T I

Tunnel Vision

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a shirt of this kind today; I hardly knew it myself even the day before.Every single one of these people who has been laboring to bring my shirt

to me has done so without knowing or indeed caring anything about me

To make their task even more challenging, they, or people very much likethem, have been working at the same time to make shirts for all of theother 20 million people of widely different sizes, tastes, and incomes,scattered over six continents, who decided independently of each other

sup-presented with a report entitled The World’s Need for Shirts, trembling at

its contents, and immediately setting up a Presidential Task Force TheUnited Nations would hold conferences on ways to enhance internationalcooperation in shirt-making, and there would be arguments over whetherthe United Nations or the United States should take the lead The popeand the archbishop of Canterbury would issue calls for everyone to pulltogether to ensure that the world’s needs were met, and committees ofbishops and pop stars would periodically remind us that a shirt on one’s

back is a human right The humanitarian organization Couturiers sans

Frontières would airlift supplies to sartorially challenged regions of the

world Experts would be commissioned to examine the wisdom of ing collars in Brazil for shirts made in Malaysia for re-export to Brazil.More experts would suggest that by cutting back on the wasteful variety

mak-of frivolous styles it would be possible to make dramatic improvements

in the total number of shirts produced Factories which had achieved themost spectacular increases in their output would be given awards, andtheir directors would be interviewed respectfully on television Activistgroups would protest that “shirts” is a sexist and racist category and pro-pose gender- and culture-neutral terms covering blouses, tunics, cholis,kurtas, barongs, and the myriad other items that the world’s citizenswear above the waist The columns of newspapers would resound witharguments over priorities and needs In the cacophony I wonder whether

I would still have been able to buy my shirt

In fact there is nobody in charge The entire vast enterprise of ing shirts in thousands and thousands of styles to millions and millions

supply-of people takes place without any overall coordination at all The Indianfarmer who planted the cotton was concerned only with the price thiswould subsequently fetch from a trader, the cost to him of all the materi-als, and the effort he would have to put in to realize an adequate harvest.The managers of the German machinery firm worry about export ordersand their relations with their suppliers and their workforce The manu-facturers of chemical dyes could not care less about the aesthetics of myshirt True, there are certain parts of the operation where there is sub-stantial explicit coordination: a large company like ICI or Coats Viyella

Who’s in Charge?• 19

has many thousands of employees working directly or indirectly under

a chief executive But even the largest such company accounts for only atiny fraction of the whole activity involved in the supply of shirts Over-all there is nobody in charge We grumble sometimes about whether thesystem works as well as it could (I have to replace broken buttons on myshirts more often than seems reasonable) What is truly astonishing isthat it works at all.1

Citizens of the industrialized market economies have lost their sense

of wonder at the fact that they can decide spontaneously to go out insearch of food, clothing, furniture, and thousands of other useful, attrac-tive, frivolous, or life-saving items, and that when they do so, somebodywill have anticipated their actions and thoughtfully made such itemsavailable for them to buy For our ancestors who wandered the plains insearch of game, or scratched the earth to grow grain under a capricioussky, such a future would have seemed truly miraculous, and the possibil-ity that it might come about without the intervention of any overall con-trolling intelligence would have seemed incredible Even when adventur-ous travelers opened up the first trade routes and the citizens of Europeand Asia first had the chance to sample each other’s luxuries, their safearrival was still so much subject to chance and nature as to make it asource of drama and excitement as late as Shakespeare’s day (Imagine

setting The Merchant of Venice in a supermarket.)

In Eastern Europe and the countries that used to belong to the SovietUnion, even after the collapse of their planning systems, there has beenpersistent and widespread puzzlement that any society could aspire toprosperity without an overall plan About two years after the break-up ofthe Soviet Union I was in discussion with a senior Russian official whosejob it was to direct the production of bread in St Petersburg “Pleaseunderstand that we are keen to move towards a market system,” he told

me “But we need to understand the fundamental details of how such asystem works Tell me, for example: who is in charge of the supply ofbread to the population of London?” There was nothing naive about hisquestion, because the answer (“nobody is in charge”), when one thinkscarefully about it, is astonishingly hard to believe Only in the industri-alized West have we forgotten just how strange it is

C o o p e r a t i o n w i t h N o b o d y i n C h a r g e

This book is about the human capacities that have made such eration possible, about their advantages and their dangers One way to