Published On: April 11, 2024Categories: articleTags:

Trust is one of the key drivers of successful economies. As the well-known economist and Nobel Laureate Kenneth Arrow famously wrote: “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted over a period of time

Trust and economic growth

The positive correlation between trust and economic growth (GDP) is well-established. Intuitively this makes sense, transacting with someone you don’t trust is costly, inefficient, and risky. Often there is more at stake than the value of the transaction itself and accounting for all potential scenarios in a contract is not only costly, it is often impossible. Therefore, many transactions between partners that don’t know each other never happen. As a result, most of our systems are internally optimised but externally inefficient (hat-tip to Joss Colchester for this insight), coordination between entities (companies, individuals, different parts of the government or even countries) is often poor or non-existent.

“Most of our systems are internally optimised but externally inefficient.”

Trust

Although trust is positive, it is also a limiting factor to coordination and some transactions or claims have such high consequences that trust alone is insufficient. Facilitating coordination between entities that don’t necessarily know or trust each other can be a great catalyst for economic growth. Indeed we see that many businesses center around this very proposition. Amazon facilitates transactions between third-party resellers and buyers, facilitated by control mechanisms such as reviews. Uber does the same for ride-hailing and drivers. AirBnB for homeowners and vacation-goers. In essence, all follow the very simple principle of reducing the search and transaction costs between entities that don’t necessarily know or trust each other, reputation mechanisms help reduce the (incentives for) cheating. Yet, all of these examples revolve around relatively low-stakes transactions in a peer-to-peer or business-to-customer setting.

Cross-company coordination

Coordination of activities across company-borders is much less common, even though the most pressing challenges for many businesses lie outside the boundaries of their organisation. Whether it is protecting intellectual property rights for ASML, making slave-free chocolate by Tony’s Chocolonely or ensuring that batteries are actually produced with recycled cobalt by Apple. All require coordination across organizational boundaries. Yet, a key challenge is that they require reliable information of and effective incentives for activities an individual company has no direct control over. Many of our traditional tools and ways of thinking are particularly inept to handle those types of challenges.

The solution? A system thinking approach paired with decentralised technology. System thinking helps us effectively understand a system and change it by identifying the leverage points with which to intervene in the system. Once an effective leverage point is found, small changes can lead to disproportionate results. Decentralised technology offers the tools – such as a shared digital infrastructure – to coordinate. Allowing companies to collaborate without handing over control and establishing a shared immutable audit trail to provide a reliable information base on which to operate. Curious to hear more? Reach out to us through the comments or a message.

Reach out to us through www.warrenbrandeis.io or through our LinkedIn page.