Trust, Corruption, and the Cultural Foundations of Capitalism

Economists promote free market capitalism as the most advantageous system for human development. Notwithstanding the popularity of their rhetoric, capitalism remains a derisive term in the developing world. Transplanting promarket institutions to developing countries has failed to generate widespread support for capitalism. For capitalism to work in the developing world it must be aided by the right cultural infrastructure.

One obstacle to the growth of capitalism in the developing world is the paucity of trust. Trust makes it easier to do business by lowering transaction costs. When entrepreneurs trust each other, they are likely to collaborate and reap the fruits of innovation. In a trusting environment, businesspeople form lucrative deals before signing a contract, knowing that both parties will comply with the agreement. For instance, Macauley (1963) argues that entrepreneurs rarely depend on legal enforcement to solve disputes and in many cases actually fail to create contracts stipulating conditions with customers.

Institutions to protect property rights are weak or nonexistent in developing countries. The deficiency of such institutions limits one’s ability to create wealth and results in people thinking that wealth formation is a zero-sum game. As such, residents in developing countries are inclined to believe that entrepreneurs obtain their success by exploiting other people. People in the developing world, therefore, confuse capitalism with rent seeking. Hence building Western institutions in developing countries without changing the popular understanding of capitalism is unlikely to yield promising results.

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