Categories
Books

How integrity creates wealth

We hear so much about people who become wealthy as a result of selfish conduct, sharp business practices or outright fraud that is seems astonishing for someone to claim that wealth is in fact built on integrity. But that is what Anna Bernasek does in her book The Economics of Integrity. She illustrates in a clear and compelling way how great a role trust and trustworthiness play in everyday transactions in a developed country.

Every time you buy milk at the supermarket, you are placing an enormous amount of trust in a large number of people who are complete strangers, including farmers, transporters, processors and retailers. If any one of these decided to cut some corners for short-term financial gain, thousands of people could suffer, as indeed occurred in China not so long ago when milk supplies became contaminated. It would be impossible for most people to purchase food at reasonable prices if the suppliers did not voluntarily act in a trustworthy manner. The author goes on to describe how integrity is a key factor in many other aspects of business including our financial systems.

Although the author does not mention this, she has identified a key reason why only some countries are wealthy, whereas most remain poor. In Western countries, transaction costs are very low because you can take it for granted that the products you buy will work properly, be safe to use, and carry the guarantee of the manufacturer named on the label. In many poorer countries, transaction costs are very high because you have to test things for yourself, and trade mark forgery is prevalent. This does not mean that people in poorer countries are any less honest than people in wealthy countries; it merely means that poorer countries have not yet developed the business norms and consumer protection regulations necessary to ensure low transaction costs. This is a key reason why poverty cannot be “solved” just by sending money; poverty can only be solved when a high-trust low-transaction-cost environment is created.

I found the author’s arguments about legislating for integrity a little less compelling. Wealth is generated when the participants in the marketplace voluntarily conduct themselves with integrity. It is necessary to have laws, but laws work best if people obey them freely, without having someone looking over their shoulder all the time. Policing is costly, and there is a trade-off between the benefits of good behaviour and the cost of policing.

This is in my opinion an excellent book. It is quite short, but very interesting to read. I highly recommend it. A video review of this book is now available at my new site, BusinessLessons.org.