The Rational Optimist: How Prosperity Evolves

That trade began as a bilateral and personal affair seems plausible. In the nineteenth century among the Yir Yoront aborigines, in northern Australia, each man’s family camp had at least one highly valued stone axe. The axes all came from a quarry jealously guarded and systematically worked by the Kalkadoon tribe at Mount Isa, 400 miles to the south, far beyond the Yir Yoront lands, and they passed through the hands of many trading partners to reach the tribe. Each older man had a trading partner to the south whom he met once a year in the dry season at a ceremonial gathering. In exchange for a dozen sting-ray barbs, to be used as spear tips, he received an axe. In turn he had obtained some of the barbs from his other trading partner to the north – to whom he gave an axe in return. Another 150 miles to the south, the exchange rate was different: one axe for one barb. There were arbitrage profits all along the chain.

So perhaps the first steps to trade with strangers began as individual friendships. A woman could trust her daughter who had married into an allied band within the same tribal grouping. Then perhaps the woman’s husband could learn to trust his son-in-law. The alliance between the bands in the face of a common enemy allowed the barrier of suspicion to be breached long enough for one to discover that the other had a surplus of stone for making axes, or of sting-ray barbs for making spear tips. Gradually, step by step, the habit of trade began to grow alongside the habit of xenophobia, complicating the ambitions of men and women.

Most people assume that long-distance trade among strangers and the very concept of the market was a comparatively late development in human history, coming long after agriculture. But, as the Australian aborigines suggest, this is bunk. There is no known human tribe that does not trade. Western explorers, from Christopher Columbus to Captain Cook, ran into many confusions and misunderstandings when they made first contact with isolated peoples. But the principle of trading was not one of them, because the people they met in every case already had a notion of swapping things. Within hours or days of meeting a new tribe, every explorer is bartering. In 1834 in Tierra del Fuego a young naturalist named Charles Darwin came face to face with some hunter-gatherers: ‘Some of the Fuegians plainly showed that they had a fair notion of barter. I gave one man a large nail (a most valuable present) without making any signs for a return; but he immediately picked out two fish, and handed them up on the point of his spear.’ Darwin and his new friend needed no common language to understand the bargain they were agreeing. Likewise, New Guinea highlanders, when first contacted by Michael Leahy and his fellow prospectors in 1933, gave them bananas in exchange for cowrie shells. Pre-contact, the New Guineans had been trading stone axes over large distances for a very long time. In Australia, baler shells and stone axes had been crossing the entire continent by trade for untold generations. The people of the Pacific coast of North America were sending seashells hundreds of miles inland, and importing obsidian from even farther afield. In Europe and Asia in the Old Stone Age, amber, obsidian, flint and seashells were travelling farther than individual people could possibly have carried them. In Africa, obsidian, shells and ochre were being traded long distances by 100,000 years ago. Trade is prehistoric and ubiquitous.

Moreover, some ancient hunter-gatherer societies reached such a pitch of trade and prosperity as to live in dense, sophisticated hierarchical societies with much specialisation. Where the sea produced a rich bounty, it was possible to achieve a density of the kind that normally requires agriculture to support it – complete with chiefs, priests, merchants and conspicuous consumption. The Kwakiutl Americans, living off the salmon runs of the Pacific North West, had family property rights to streams and fishing spots, had enormous buildings richly decorated with sculptures and textiles, and engaged in bizarre rituals of conspicuous consumption such as the giving of rich copper gifts to each other, or the burning of candlefish oil, just for the prestige of being seen to be philanthropic. They also employed slaves. Yet they were strictly speaking hunter-gatherers. The Chumash of the Californian channel islands, well fed on sea food and seal meat, included specialist craftsmen who fashioned beads from abalone shells to use as currency in a sophisticated and long-range canoe trade. Trade with strangers, and the trust that underpins it, was a very early habit of modern human beings.

The trust juice

But is trade made possible by the milk of human kindness, or the acid of human self-interest? There was once a German philosophical conundrum known as Das Adam Smith Problem, which professed to find a contradiction between Adam Smith’s two books. In one he said that people were endowed with instinctive sympathy and goodness; in the other, that people were driven largely by self-interest. ‘How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortunes of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it,’ he wrote in Theory of Moral Sentiments. ‘Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour,’ he wrote in The Wealth of Nations.

Smith’s resolution of the conundrum is that benevolence and friendship are necessary but not sufficient for society to function, because man ‘stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons’. In other words, people go beyond friendship and achieve common interest with strangers: they turn strangers into honorary friends, to use Paul Seabright’s term. Smith brilliantly confused the distinction between altruism and selfishness: if sympathy allows you to please yourself by pleasing others, are you being selfish or altruistic? As the philosopher Robert Solomon put it, ‘What I want for myself is your approval, and to get it I will most likely do what you think I should do.’

This ability to transact with strangers as if they were friends is made possible by an intrinsic, instinctive human capacity for trust. Often the very first thing you do when you meet a stranger and begin to transact with him or her, say a waiter in a restaurant, is to smile – a small, instinctive gesture of trust. The human smile, the glowing embodiment of Smith’s innate sentiment of sympathy, can reach right into the brain of another person and influence her thoughts. In the extreme case, a baby smiling causes particular circuits in its mother’s brain to fire and make her feel good. No other animal smiles in this way. But even among adults, a touch, a massage, or, as experiments have shown, a simple act of financial generosity, can cause the release of the hormone oxytocin in the brain of the recipient, and oxytocin is the chemical that evolution uses to make mammals feel good about each other – whether parents about their babies, lovers about their mates or friends about their friends. It works the other way, too: squirting oxytocin up the noses of students will cause them to trust strangers with their money more readily than those who receive a placebo squirted up their noses. ‘Oxytocin is a physiologic signature of empathy,’ says the neuro-economist Paul Zak, who conducts these experiments, ‘and appears to induce a temporary attachment to others.’

In 2004 Zak, together with Ernst Fehr and other colleagues, conducted one of the most revealing experiments in the history of economics, which showed just how specific the trusting effect of oxytocin is. They recruited 194 male students from Zurich (the experiment must not be done with females, because if one happens to be pregnant without knowing it, oxytocin might trigger labour) and made them play one of two games. In the first game, the trust game, a player called the investor is given twelve monetary units and told that if he hands some of it over to another player, the trustee, that amount will be quadrupled by the experimenter. Thus if he hands over all twelve units, the trustee will receive forty-eight. The trustee may pay some of it back to the investor, but has absolutely no obligation to do so. So the investor risks losing all his money, but if he can trust the trustee to be generous, he might stand to make a good profit. The question is: how much will the investor hand over?

The results were remarkable. Investors who receive a squirt of oxytocin up their noses before the experiment begins hand over 17 per cent more money than those who receive a squirt of inert saline solution up their noses, and the median transfer is ten units rather than eight. The oxytocin investors are more than twice as likely to hand over the full twelve units as the controls. Yet oxytocin has no such effect on the back transfers offered by the trustees, who are just as generous without oxytocin as with. So – as animal experiments have suggested – oxytocin does not affect reciprocity, just the tendency to take a social risk, to go out on a limb. Moreover, a second game, identical to the first except that the generosity of the trustees is randomly decided, shows no effect of oxytocin on the investors. So oxytocin specifically increases trusting, rather than general risk-taking. As with lovers and mothers, the hormone enables animals to take the risk of approaching other members of the species – it ‘links the overcoming of social avoidance with the activation of brain circuits implicated in reward’. It does this partly by suppressing the activity of the amygdala, the organ that expresses fear. If human economic progress has included a crucial moment when human beings learned to treat strangers as trading partners, rather than enemies, then oxytocin undoubtedly played a vital role.

People are surprisingly good at guessing who to trust. Robert Frank and his colleagues set up an experiment in which the volunteer subjects had conversations in groups of three for half an hour. After that, they were sent to separate rooms to play, with their conversation partners, the prisoner’s dilemma game (in which each player must decide whether to cooperate in the hope of a mutual gain or defect in the hope of a selfish gain if the other player cooperates). First, though, each player filled in a form not only saying how she would play with each partner, but also predicting what strategy each partner would adopt. As so often in this game, three-quarters of subjects said they would cooperate, reinforcing Smith’s point that people are innately nice (economics students, who have been taught the self-interested nature of human beings, are twice as likely to defect!). Remarkably, the subjects were very good at predicting who would cooperate and who would defect: people who were predicted to cooperate did so 81 per cent of the time, compared with 74 per cent for the group as a whole. People who were predicted to defect did so 57 per cent of the time, compared with 26 per cent for the group as a whole. Most people, says the economist Robert Frank, can think of an unrelated friend who they would trust to return to them a wallet that had been lost in a crowded concert. Conversely, people acutely remember the faces of those who cheat them.

Thus, the entire edifice of human cooperation and exchange, upon which prosperity and progress are built, depends on a fortunate biological fact. Human beings are capable of empathy, and are discerning trusters. Is that it, then? That human beings can build complicated societies and experience prosperity is down to the fact that they have a biological instinct that encourages cooperation? If only it were that simple. If only the arguments of Hobbes and Locke, of Rousseau and Voltaire, of Hume and Smith, of Kant and Rawls, could be brought to such a neat and reductionist conclusion. However, the biology is only the start. It is something that makes prosperity possible, but it is not the whole explanation.

Besides, there is still no evidence that any of this biology is uniquely developed in human beings. Capuchin monkeys and chimpanzees are just as resentful of unfair treatment as human beings are and just as capable of helpful acts towards kin or group members. The more you look at altruism and cooperation, the less uniquely human it appears. Oxytocin is common to all mammals, and is used for mother-love in sheep and lover-love in voles, so the chances are that it is available to underpin trust in almost any social mammal. It is necessary, but not sufficient to explain the human propensity to exchange. On the other hand, it is highly likely that during the past 100,000 years human beings have developed peculiarly sensitive oxytocin systems, much more ready to fire with sympathy, as a result of natural selection in a trading species. That is to say, just as the genes for digesting milk as an adult have changed in response to the invention of dairying, so the genes for flushing your brain with oxytocin have probably changed in response to population growth, urbanisation and trading – people have become oxytocin-junkies far more than many other animals.

Moreover, finding the underlying physiology of trust does little to explain why some human societies are much better at generating trust than others. As a broad generalisation, the more people trust each other in a society, the more prosperous that society is, and trust growth seems to precede income growth. This can be measured by a combination of questionnaires and experiments – leaving a wallet on the street and seeing if it is returned, for instance. Or asking people, in their native tongue, ‘generally speaking, would you say that most people can be trusted, or that you cannot be too careful in dealing with people?’ By these measures, Norway is heaving with trust (65 per cent trust each other) and wealthy, while Peru is wallowing in mistrust (5 per cent trust each other) and poor. ‘A 15% increase in the proportion of people in a country who think others are trustworthy,’ says Paul Zak, ‘raises income per person by 1% per year for every year thereafter.’ This is most unlikely to be because Norwegians have more oxytocin receptors in their brains than Peruvians, but it does suggest that Norwegian society is better designed to elicit the trust systems than Peruvian.

It is not at all clear what comes first: the trust instinct or trade. It is most unlikely that the oxytocin system fortuitously mutated into a sensitive form, which then enabled human beings to develop trading. Much more plausibly, human beings began tentatively to trade, capturing the benefits of comparative advantage and collective brains, which in turn encouraged natural selection to favour mutant forms of the human mind that were especially capable of trust and empathy – and even then to do so cautiously and suspiciously. I shall be amazed if the genetics of the oxytocin system do not show evidence of having changed rapidly and recently in response to the invention of trade, by gene-culture co-evolution.

The shadow of the future

A trillion generations of unbroken parental generosity stand behind a bargain with your mother. A hundred good experiences stand behind your reliance on a friend. The long shadow of the future hangs over any transaction with your local shopkeeper. He surely knows that in making a quick buck now by ripping you off he risks losing all future purchases you might make. What is miraculous is that in modern society you can trust and be trusted by a shopkeeper you do not know. Almost invisible, the guarantors of trust lurk beneath every modern market transaction: the sealed packaging, the warranty, the customer feedback form, the consumer legislation, the brand itself, the credit card, the ‘promise to pay the bearer’ on the money. When I go into a well-known supermarket and pick up a tube of toothpaste of a well-known brand, I do not need to open the package and squirt a little toothpaste on to my finger to test that the tube is not filled with water; I do not even need to know that the shop is subject to laws that would prosecute it for selling false goods. I just need to know that this big retailing company, and the big company that made the toothpaste, are both keen to keep me coming back year after year, that the shadow of reputational risk hangs over this simple transaction, ensuring that I can trust this toothpaste seller without a moment’s thought.

There is a vast history behind the trustworthiness of a tube of toothpaste, a long path of building trust inch by inch. Once that path is trodden, though, trust can be borrowed for new products and new media with surprising ease. The remarkable thing about the early days of the internet was not how hard it proved to enable people to trust each other in the anonymous reaches of the ether, but how easy. All it took was for eBay to solicit feedback from customers after each transaction and post the comments of buyers about the sellers. Suddenly every deal lay under the shadow of the future; suddenly, every eBay user felt the hot breath of reputation on his neck as surely as a Stone Age reindeer hide salesman returning to a trading place after selling a rotten hide the year before. When Pierre Omidyar founded eBay, few believed as he did that trust between anonymous strangers would prove easy to create in the new medium. But by 2001, fewer than 0.01 per cent of all transactions on the site were fraud attempts. John Clippinger draws an optimistic conclusion: ‘The success of trust-based peer organizations such as eBay, Wikipedia, and the open-source movement, indicates that trust is a highly expandable network property.’ Perhaps the internet has returned us to a world a bit like the Stone Age in which there is no place for a fraudster to hide.

That response would be naïve. There is plenty of innovative and destructive cyber-crime to come. None the less, the internet is a place where the problem of trust between strangers is solved daily. Viruses can be avoided, spam filters can work, Nigerian emails that con people into divulging their bank account details can be marginalised, and as for the question of trust between buyer and seller, companies like eBay have enabled their customers to police each other’s reputations by the simple practice of feedback. The internet, in other words, may be the best forum for crime, but it is also the best forum for free and fair exchange the world has ever seen.

My point is simply this: with frequent setbacks, trust has gradually and progressively grown, spread and deepened during human history, because of exchange. Exchange breeds trust as much as vice versa. You may think you are living in a suspicious and dishonest world, but you are actually the beneficiary of immense draughts of trust. Without that trust the swapping of fractions of labour that goes to make people richer could not happen. Trust matters, said J.P. Morgan to a congressional hearing in 1912, ‘before money or anything else. Money cannot buy it…because a man I do not trust could not get money from me on all the bonds in Christendom.’ Google’s code of conduct echoes Morgan: ‘Trust is the foundation upon which our success and prosperity rest, and it must be re-earned every day, in every way, by every one of us.’ (And, yes, one day people will probably look back on Google’s founders as robber barons, too.) If people trust each other well, then mutual service can evolve with low transactional friction; if they do not, then prosperity will seep away. That is, of course, a large part of the story of the banking crisis of 2008. Banks found themselves holding bits of paper that told lies – that said they were worth far more than they were. Transactions collapsed.

If trust makes markets work, can markets generate trust?

A successful transaction between two people – a sale and purchase – should benefit both. If it benefits one and not the other, it is exploitation, and it does nothing to raise the standard of living. The history of human prosperity, as Robert Wright has argued, lies in the repeated discovery of non-zero-sum bargains that benefit both sides. Like Portia’s mercy in The Merchant of Venice, exchange is ‘twice blest: it blesseth him that gives and him that takes.’ That’s the Indian rope trick by which the world gets rich. Yet it takes only a few sidelong glances at your fellow human beings to realise that remarkably few people think this way. Zero-sum thinking dominates the popular discourse, whether in debates about trade or in complaints about service providers. You just don’t hear people coming out of shops saying, ‘I got a great bargain, but don’t worry, I paid enough to be sure that the shopkeeper feeds his family, too.’ Michael Shermer thinks that is because most of the Stone Age transactions rarely benefited both sides: ‘during our evolutionary tenure, we lived in a zero-sum (win-lose world), in which one person’s gain meant another person’s loss’.

This is a shame, because the zero-sum mistake was what made so many -isms of past centuries so wrong. Mercantilism said that exports made you rich and imports made you poor, a fallacy mocked by Adam Smith when he pointed out that Britain selling durable hardware to France in exchange for perishable wine was a missed opportunity to achieve the ‘incredible augmentation of the pots and pans of the country’. Marxism said that capitalists got rich because workers got poor, another fallacy. In the film Wall Street, the fictional Gordon Gekko not only says that greed is good; he also adds that it’s a zero-sum game where somebody wins and somebody loses. He is not necessarily wrong about some speculative markets in capital and in assets, but he is about markets in goods and services. The notion of synergy, of both sides benefiting, just does not seem to come naturally to people. If sympathy is instinctive, synergy is not.

For most people, therefore, the market does not feel like a virtuous place. It feels like an arena in which the consumer does battle with the producer to see who can win. Long before the credit crunch of 2008 most people saw capitalism (and therefore the market) as necessary evils, rather than inherent goods. It is almost an axiom of modern debate that free exchange encourages and demands selfishness, whereas people were kinder and gentler before their lives were commercialised, that putting a price on everything has fragmented society and cheapened souls. Perhaps this lies behind the extraordinarily widespread view that commerce is immoral, lucre filthy and that modern people are good despite being enmeshed in markets rather than because of it – a view that can be heard from almost any Anglican pulpit at any time. ‘Marx long ago observed the way in which unbridled capitalism became a kind of mythology, ascribing reality, power and agency to things that had no life in themselves,’ said the Archbishop of Canterbury in 2008.

Like biological evolution, the market is a bottom-up world with nobody in charge. As the Australian economist Peter Saunders argues, ‘Nobody planned the global capitalist system, nobody runs it, and nobody really comprehends it. This particularly offends intellectuals, for capitalism renders them redundant. It gets on perfectly well without them.’ There is nothing new about this. The intelligentsia has disdained commerce throughout Western history. Homer and Isaiah despised traders. St Paul, St Thomas Aquinas and Martin Luther all considered usury a sin. Shakespeare could not bring himself to make the persecuted Shylock a hero. Of 1900, Brink Lindsey writes: ‘Many of the brightest minds of the age mistook the engine of eventual mass deliverance – the competitive market system – for the chief bulwark of domination and oppression.’ Economists like Thorstein Veblen longed to replace the profit motive with a combination of public-spiritedness and centralised government decision-taking. In the 1880s Arnold Toynbee, lecturing working men on the English industrial revolution which had so enriched them, castigated free enterprise capitalism as a ‘world of gold-seeking animals, stripped of every human affection’ and ‘less real than the island of Lilliput’. In 2009 Adam Phillips and Barbara Taylor argued that ‘capitalism is no system for the kind-hearted. Even its devotees acknowledge this while insisting that, however tawdry capitalist motives may be, the results are socially beneficial.’ As the British politician Lord Taverne puts it, speaking of himself: ‘a classical education teaches you to despise the wealth it prevents you from earning.’