The neglected economics of trust: the Bentham paradox and its implications - Special Invited Issue: Money, Trust, Speculation and Social Justice - Part 1: Trust, Confidence, and Crime

American Journal of Economics and Sociology, The, Oct, 1998 by Michael Perelman

Despite economists' methodological predisposition to atomistic analysis, society is an organism. So too is the economy. The very existence of credit, contracts, and even property depends upon either a strong state or voluntary acceptance of rules of the game.

We will now turn from Adam Smith to Jeremy Bentham, an enthusiast of laissez-faire and the inventor of the justly famous Panopticon. The two sides of Bentham seem even more different than the two books of Adam Smith, but they are not. I believe that the Bentham paradox - the fact that markets rely on a strong state to enforce voluntary contracts - is a basic contradiction of capitalism. Capitalism proclaims itself to be a voluntary system, but ultimately it is based on force, or at least the threat of force.

The Bentham paradox leads to another paradox, one that I call the paradox of trust. The strong state usually works to help the fortunate few gain advantages over the rest of society. As society becomes more unequal, the state must become still stronger to protect the wealth of the few.

Adam Smith seemed to be sensitive to the Bentham paradox. He warned that the working classes were possessed by "passions which prompt [them] to invade property, passions much more steady in their operation, and much more universal in their influence" (Smith 1976, V.i.b.2, p. 709). Smith feared that "in the poor the hatred of labour and the love of present ease and enjoyment, are the passions which prompt to invade property, passions much more steady in their operation, and more universal in their influence" (Smith 1976, V.i.f.50, pp. 781-82).

Consequently, government is necessary to protect the property of the rich (Smith 1976, p. 670ff). Smith even went so far as to teach his students: "Laws and government may be considered in . . . every case as a combination of the rich to oppress the poor, and preserve to themselves the inequality of the goods which would otherwise be soon destroyed by the attacks of the poor, who if not hindered by the government would soon reduce the others to an equality with themselves by open violence" (Smith 1978, p. 208; see also p. 404). Smith repeatedly noted that the purpose of the legal structure was to protect the rich from the poor (Smith 1976 709ff; and Smith 1978, pp. 209, 338, and 404). Ever the optimist, Smith also suggested that the Bentham paradox was transitory, since Smith expected that a market society would become increasingly egalitarian, at least enough so that the masses would see themselves as property owners. In this vein, he wrote, "Civil government supposes a certain subordination. But as the necessity of civil government gradually grows up with the acquisition of valuable property, so the principle causes which naturally introduce subordination gradually grow up with the growth of that valuable property" (Smith 1976, V.i.b.3, p. 710).

With an increasingly unequal distribution of income, the protection of property is becoming ever more expensive. This subject brings us into more direct contact with the economics of trust.