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The hidden factor

What are the biggest non-economic factor that could drive economic prosperity and financial confidence?

The hidden factor

Here's a quote from a recent newspaper column I read: Banfield travelled to Chiaromonte, a town in southern Italy, to examine a question that had vexed historians for centuries. The north of the nation was dynamic and prosperous and had incubated the Renaissance. So, why was the south struggling along behind it? Unlike academic economists, Banfield did not look at innovation, technology or natural resources but ... he noticed an absence of something that he had taken for granted in his homeland: social trust. By this, he meant the willingness of people to put faith in new acquaintances.

Why was trust lacking? According to Banfield, this had been the reality for centuries, passed down from generation to generation. He told stories like the one in a novel set in southern Italy that tells of a father putting his six-year-old son on a high ledge. "Jump and don't worry: Daddy will catch you," the father says. When the boy jumps, the father allows him to fall to the ground. "Remember one thing," he tells his injured son. "In this life, never trust anyone."

At one level this may sound sage advice, but Banfield realised that when written into the fabric of a culture, this attitude is poisonous. It undermines the capacity of people to engage in mutually beneficial trade. It corrodes co-operation. People don't want to sign contracts. In short, the absence of social trust unravels almost everything that matters about a society. This insight is monumental because, although you would never know it from economics textbooks, it rings true across space and time.

As it says, the idea is that trust - a general level of social trust - is crucial for economic development. Societies that have a high level of trust become more prosperous. Of course, this may not be true. Such theories are hard to prove or disprove. Trust may appear in prosperous societies because it is a result of prosperity rather than its cause. However, the basic idea does appear to be sound when we look around us today.

I've sometimes written in these pages and on Value Research Online that savers must not implicitly trust financial intermediaries. Unless and until proven otherwise, we should assume that everyone is out to pick our pocket, metaphorically speaking. I've faced a substantial amount of criticism for saying this but have always stood by it based on my own experiences as well as those of many, many savers and investors. So do we live in a 'low-trust society', in the sense that is meant in the above quote? Surely, we all know we do.

Relatively few people will trust a completely unknown business and give them, say, any substantial amount of money in advance of a service, just to take a random example. When a business - large or small - promises you something, you have an innate level of scepticism about what they are claiming. Many times, you will not buy what could be useful goods or services simply because you have grown up with an attitude that you must never trust strangers.

This problem is especially acute in financial services, as well as the financial media. At Value Research, we may not be a financial services company, but we are definitely a financial media company. Not just that, our services and publications lead to direct financial decision making by our customers. For three decades, I have been acutely aware of the fact that we are in the business of trust. Our real product is the trust that we have built up over these decades. Our products sometimes have some rough edges, but our commitment to safeguard the trust of our customers is always 100 per cent.

Financial services companies, too, must build up trust on an extended timescale. After all, you have to give your money to someone else and typically, the reciprocal transfer will not happen till much later. Till then, all you can do is to wait and trust. Of course, there is an intermediary provider of trust in financial services, which is the government regulator. However, at the end of the day, it's the financial service providers themselves who have to build trust in their services. Unfortunately, we have had a continuous stream of events in all parts of financial services, including banking, stockbroking and even mutual funds, which lowers customers' trust. In many areas, consumers' trust is a common pool shared by all providers. Anything that lowers that level damages everyone.

Most financial service providers are under the impression that their product or service is whatever it literally is. They're wrong on this. Their product is just the trust of the customers - the willingness of the customers to turn up again and again at their doorstep, so to speak.

As for us at Value Research, as I said earlier, our products and services are run with all this in mind, with Value Research Premium being the latest example. Their primary ingredient put into this service is trust, which is something we have been doing for three decades now.