Image

Trust and Entrepreneurship


Photo: Getty Images

When it comes to business and the economy, the word trust has two—and to some people diametrically opposed—meanings.

Trust as a virtue in the marketplace means having confidence in the honesty, reliability, and integrity of market players. It speaks volumes about our free enterprise system that a stranger can walk into a small business, for example, that he has never patronized before, and yet generally trust that he will be served well, dealt with fairly, and will walk out the door with a product that does what it is supposed to do.

But trust also refers to a business organization whereby a group of trustees control one or more corporations. Trusts emerged in the latter half of the nineteenth century, and were accused of assorted market abuses, with antitrust laws emerging in response. Ironically, trusts came to signify, in popular terms at least, big bad business breaking trust (in the first sense) in the marketplace.

The virtue of trust is critical in a free-market economy, including for the risk taking —that is, entrepreneurship and investment—that drives economic growth forward. High degrees of trust must exist in the economic system, in the government, in businesses, and in consumers.

The entrepreneur needs to have trust in capitalism itself. While no outcome is guaranteed and the risks are formidable, the entrepreneur must trust that he will have a fair opportunity to pitch to investors and sell to consumers. Entrepreneurs and investors need to trust that their property will be protected and that they will have at least a shot at returns commensurate with their risk taking. Without such trust, an economy stagnates.

These foundational issues rely on whether we can trust government in its actions and its self-restraint. Can we count on the government to protect private property; maintain the currency; limit tax and regulatory burdens; enforce contracts; prosecute fraud; and leave production, price, and profit matters to competition and ultimately consumer decisions in the marketplace?

Indeed, it is most often when government fails to do its basic jobs, or reaches far beyond its core duties, that the economy falters. Weak property protections or the government actually usurping private property, runaway inflation, destructive levels of taxation or regulation, rampant crime, price controls, all rank as violations of trust by the government that undermine a market economy. Unfortunately, since government is guided so often not by principle but instead by politics, power, and pandering to various interests, politicians often do break that trust.

Fortunately, the private sector operates under a different set of incentives. No matter what one's ultimate motivation is, consideration must be given to others. In order to meet one's own needs and desires, one must first provide a good or service demanded by others. Failure to meet or create new demands, to be efficient, and to offer the best quality at the lowest price mean losses and eventually going out of business. The free-market system of incentives and competition fosters trust in business among consumers.

But we often do not think about the fact that trust must flow in the opposite direction as well. Businesses have to be able to trust consumers. What does this mean? Today, it's largely about abuse of the legal system. If entrepreneurs and businesses produce goods and services in an honest fashion, they should not expect to be sued. Yet that most certainly is not the reality for American businesses. Trust has been broken in recent times, as lawyers have unjustly brought frivolous lawsuits against honest businesses, with the courts shamefully allowing such lawsuits to proceed and the government sometimes even participating as a litigant, as when various local governments brought lawsuits against gun manufacturers.

According to Towers Perrin-Tillinghast, U.S. tort costs hit $260 billion in 2004. This equated to 2.22 percent of the GDP, compared to tort costs equaling 0.62 percent of the GDP in 1950. That's a 348 percent explosion in tort costs as a share of the GDP. And these costs do not include litigation avoidance costs, ranging from unnecessary and duplicative medical tests ordered by doctors as a defense against possible malpractice allegations, to the disappearance of certain products or whole industries from the marketplace because of high product liability costs.

In a June 1, 2006, story about small businesses being the target of unsavory lawyers, the New York Times noted:

Litigation costs for small businesses can prove disastrous, if not fatal, because the companies survive on thin profit margins and lack the infrastructure to handle lawsuits, according to the Small Business Administration. An average civil case can cost $50,000 to $100,000 to litigate through to a trial, according to an October study conducted by the Klemm Analysis Group for the association.

Lawsuit abuse most certainly represents a breakdown of trust in the marketplace.

When trust is shaken, we ultimately must take a look at the morals and values that underpin society itself. No doubt, the rise of secularism and spread of relativism have had their effects.

A rejection of God also means a rejection of his commandments, including the commandment “You shall not steal” (Exodus 20:15). Martin Luther offered the following explanation regarding this commandment: “We are to fear and love God, so that we neither take our neighbors' money or property … but instead help them to improve and protect their property and income.” With God and the moral imperative wiped away, however, this view can be easily replaced by the cynicism of what one can get away with without being caught by the customer, boss, shop owner, cashier, cop, or prosecutor.

Meanwhile, the phrase “I'll sue” has grown so commonplace that few seem to think twice about hauling others into court. St. Paul reprimanded members of the church at Corinth for bringing lawsuits against each other (1 Corinthians 6:7). As for responding to lawsuits, Jesus declared: “If anyone wants to sue you and take away your tunic, let him have your cloak also” (Matthew 5:40). This does not mean that we must suffer all abuses, but that lawsuits should be the rare exception and forgiveness the rule.

For many, the answers to receding lines of faith are expanding lines of government. But government action is not enough to secure trust. Eventually the required government enforcement in a society of lost trust would lead to a police-regulatory state, governmental abuse, and the loss of freedom. Even many Christians, however, go down the path of seeing big government as the answer to so many problems that come with a loss of trust. Yet, the psalmist wisely warns: “Put not your trust in princes” (Psalm 146:3). Christians should understand the sinful aspects of human nature, which are not suspended in government, but instead often are empowered through acquisition and concentration of power and by spending other people's money. When it comes to trust and the government, big is bad.

This brings us back to big in the market, namely, trusts. Were they really bad? An understanding of how the economy actually works and market developments in the nineteenth century tell a different tale about trusts than what many commonly believe today.

In his massive 1996 tome Capitalism: A Treatise on Economics , George Reisman explained that given the limitations of corporate law at the time, trusts were the means for accomplishing mergers. What were the actual results? Reisman notes that “the trusts played a major role in improving the efficiency of the economic system, and thus in raising the general standard of living… The era of the trusts was the era of America's most rapid economic progress and the transformation of the country into the world's foremost industrial producer and economic power.”

So, the trusts of the nineteenth century actually did not break trust in the marketplace. Instead, they were rather fantastic examples of entrepreneurs who served consumers well. A sober assessment of their impact points to fulfillment of the trust placed in entrepreneurs.

In the end, Jesus instructs: “Trust in God” (John 14:1). From that trust comes a love and respect for our fellow man that creates the trust necessary for us to fulfill our work, our callings, in this life.