Trust, Diversity, Credit Cards, and E-Commerce

Modern social scientists are in love with trust.  Economists, sociologists, and political scientists all eagerly explain that high-trust societies work, and low-trust societies don’t.  Trust is so beloved that many leftist social scientists have started to sound like social conservatives.  The most famous example is Robert Putnam, who reluctantly reports a clear trade-off between trust and diversity.  From the standpoint of trust, monocultural societies like Japan seem far superior to multicultural societies like the United States.

Strangely, though, this academic conversation has barely acknowledged an enormous social development: the rise of e-commerce.  At first glance, it seems like an enormous triumph of trust.  You go to a website and buy something sight unseen from a total stranger.  A few days later, you usually get what you ordered.  Quality is high.  Indeed, you’re usually happier with your internet purchase than you would have been if you’d driven down to the local shopping center or mall.

Given research on trust and diversity, you might expect e-commerce to flourish only in high-trust societies and/or sub-cultures.  But that’s not what we see.  Internet commerce is everywhere.  Firms neither know nor care if a customer comes from a high-trust culture.  If you want to buy, there’s only one question they really care about: What’s your credit card number?

The reason is pretty obvious: Credit card companies provide something far superior to mere faith in your fellow man.  Namely: ironclad reputation.  Credit card companies have spent decades vetting and disciplining both vendors and card-holders.  As long as you play by the company’s rules, its ironclad reputation stands behind you.  Otherwise, you’re in big trouble.  A vendor that cheats customers gets kicked out of the network.  A customer who doesn’t pay his debts loses his account and his credit rating.  If you have no credit rating to lose, the system lets you buy your way in with a pre-paid credit card.

How important have credit cards been for e-commerce?  Well, consider these two scenarios:

1. The whole world has Danish levels of trust, but credit cards don’t exist.

2. The whole world has American levels of trust, but credit cards do exist.

In which scenario would e-commerce be more likely to flourish?  Americans have already witnessed internet commerce explode in a scenario very similar to scenario #2.  Can anyone imagine e-commerce taking off in #1?  (Danish comments are especially welcome ).

Thomas Jefferson famously remarked, “Were it left to me to decide whether we should have a government without
newspapers, or newspapers without a government, I should not hesitate a
moment to prefer the latter.”  Reflecting on e-commerce makes me want to add: “Were it left to me to decide whether we should have trust without credit cards, or credit cards without trust, I should not hesitate a
moment to prefer the latter.”  When intermediaries are supremely trustworthy, you don’t need to cross your fingers and hope your fellow man chooses to treat you right.  You don’t need to know if you and the vendor have a culture in common.  As long as VISA vouches for both sides, it’s all good.

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