Regulation and distrust

People living under the yoke of corrupt governments tend to want … more government regulation. It's a vicious cycle: in trusting societies, people act civilly and expect less government interference. In distrustful societies, people act selfishly and expect tighter regulation. But more government corruption leads to less-trusting societies, and citizens will generally "prefer state control to unbridled production by uncivil firms" – even when they know their leaders are crooked.

In their newly released study, NBER researchers found that government regulation was negatively correlated with social capital, and they attempted to explain this highly significant correlation with a model that turns on the idea that investment in social capital makes people both more productive and more civic. Moreover, it explains the correlation between regulation and distrust.

Most immediately, it predicts that distrust influences not just regulation itself, but the demand for regulation. Using the World Values Survey, researchers showed – both in a cross-section of countries and in sample of individuals – that distrust fuels support for government control over the economy:

What is most interesting about this finding is that distrust generates demand for regulation even when people realise that the government is corrupt and ineffective.

They prefer state control to unbridled production by uncivil firms.

The most fundamental implication is that culture (as measured by distrust) and institutions (as measured by regulation) co-evolve; culture shapes institutions, and institutions shape culture.

Unfortunately, it is very difficult to test this prediction of the model using instrumental variables, since many exogenous factors that influence trust might also directly influence regulation, and vice versa.

Furthermore there are 2 major problems with the data: the relationship between the findings and research on legal origins and the assumption that accumulation of social capital is largely decentralised because it takes place in families. But overall, the analysis points to a broad complementarity between social capital and free market economics, which remains to be explored, say the researchers.

Source: Editorial, Jackboot Junkies, The Atlantic, November 2008; based upon: Philippe Aghion, et al., Regulation and Distrust, National Bureau of Economic Research, July 3, 2008.

For text: http://www.theatlantic.com/doc/200811/quick-study

For NBER text: http://www.economics.harvard.edu/faculty/shleifer/files/NBER_Regulation%20and%20Distrust.pdf

For more on Regulatory Issues: http://www.ncpa.org/sub/dpd/index.php?Article_Category=38

FMF Policy Bulletin/ 18 November 2008