Welcome back to our course on Corruption. This is Week 2 Lecture 3. And today, we're going to talk about corruption and trust, the large-scale societal effects of corruption with respect to trust. Corruption affects trust in at least two ways. First corruption causes confusion, particularly with respect to democracy and markets. And second, corruption decreases levels of something called generalized trust, and we'll talk about that. First let's talk about confusion. Now remember, just a couple of lectures back, we talked about the profound changes in the world in the 1950s and 1960s, and then again in the 1980s and the 1990s. A lot of what this change involved was a change in regime, change in how governance is structured. And for many of these places, particularly in the 1980s and 1990s, the change was to democracy, or at least in name to democracy. So, a large number of people all around the world found themselves, sometimes unexpectedly, living in what was called a democratic system. But there was a problem and that problem was, through no fault of their own. These people had no basis on which to evaluate whether this really is a democracy, whether this really is a market system. We can compare it to someone who's never seen and never known anything about a tiger and a horse. Now that person could be introduced to this creature, this beast, and told this is a horse. And this person may have read or may have been told that a horse is something that you can go put a saddle on and ride away. Or something that you can put a harness on and it will pull a carriage or pull you plow. And this person who's been told by someone who should know, this is a horse, may walk up to this beast and try to put a saddle on it and ride it away. Or maybe try to put a harness on it and have it pull a plow. And if this happens, again through no fault of this person's, this person is in for at the very least, a disappointing surprise. The same thing seem to have happened with respect to democracy. Now we've talked again a couple of lectures ago about the huge increase in the frequency of corruption. And much of that increase occurred in this places that were undergoing transition. So, the people who lived in these places were told by people who should know, you now live in a democracy, this is a democracy, you have a market system. But what they were experiencing would best be described as a kleptocracy, or endemic corruption. And because, through no fault of their own, they had no basis for evaluating whether or not this was democracy, they believed the people who should know. They said this is democracy, it is a systematic robbery of us by people who have power or whom we have trusted. It is a systematic abuse of power and trust by those people for their benefit and not for the benefit of the system as a whole. Not surprisingly, people who lived in systems like that did not support democracy or markets. People like Cheryl Gray, in her research found that in fact the confusion of democracy with kleptocracy of markets with theft. Was one of the biggest reasons, the largest reasons, that people in central and eastern Europe, for example, did not support the transition to democracy or market systems or changed their support. Now you may ask, so what? So people don't support democracies or markets. Well, there actually is a very large social cost to this. Democracies, by their very nature, are participatory. Democratic government is a government in which people participate. And it is accountable in some way to the people who are governed by that democratic government. And therefore, when people don't support it, when they withdraw from the democracy It is no longer a democracy. And it becomes vulnerable to being changed into something other than a democracy. Something that may actually predate on the people in that system, may harm the people in that system. And that doesn't integrate well with the world in general. Similarly markets by their very nature are participatory. A market is a system in which a variety of people meet to exchange. If people aren't using that, they aren't meeting to exchange, it's no longer a market. And it too becomes vulnerable to being changed into something that harms the people in that system and that doesn't integrate well with the rest of the world. So a large social cost of corruption is imposed by the confusions created in these transition, emerging or changing economies. There's another way in which corruption inflicts costs to society with respect to trust, and that is that it decreases levels of trust. Now, trust is something that we rarely think of. Businesses in particular often fail to appreciate the value of trust, but trust is very important. When people trust the way that the system works, when they trust that it's going to work the way it's meant to. When they trust that people, particularly strangers are generally going to behave in a way that they should behave, that we hope they behave. When that happens, then transaction cost are lower, enforcement costs are lower, people from more relationship, people cooperate and therefore, innovate more. In fact, this kind of trust, which is called generalized trust is recognized as one of, if not the most critical aspect of economic and social development. Not surprisingly, corruption decreases generalized trust. I love being a professor here at Pen, I love academic research. And one of the best research projects I ever read was a long term project. In which a group of social scientists, mostly from Europe, proved their hypothesis that corruption decreases levels of generalized trust. Most people could have told them that, but they showed it empirically. Corruption decreases levels of generalized trust. When levels of generalized trust decrease, the costs of transactions increase. The incidence of cooperation decrease, innovation decreases, and society as a whole is less welloff. So, with respect to trust, corruption causes confusion, a decrease of support for democratization, decreases support for transitions to market economies. And corruption decreases overall levels of generalized trust, which therefore inhibits economic and social development. And inhibits the kinds of transactions that make people better off. Thank you very much, and I look forward to our next lecture.
