Market System - Importance of Trust

Importance of Trust

The degree of trust in a political or economic authority (such as a bank or central bank) is often critical in determining the success of a market. A market system depends inherently on a stable money system to ensure that units of account and standards of deferred payment are uniform across all players - and to ensure that the balance of contracts due within that market system are accepted as a store of value, i.e. as "collateral" of the holder of the contract, which justifies "credit" from a lender of cash.

Banks, themselves, are often described in terms of markets, as "transducers of trust" between lenders (who deposit money) and borrowers (who take it out again). Trust in the bank to manage this process makes more economic activity possible. However, critics say, this trust is also quite easy to abuse, and has many times proven difficult to limit or control (see business cycle), resulting in 'runs on banks' and other such 'crises of trust' in 'the system'.

However, market systems are usually flexible enough to be refined and have its detailed rules adjusted so as to regain the trust of participants relatively quickly - most market systems tend to degrade gracefully, with a few exceptions, e.g. hyperinflation, South Sea bubble, tulip boom, dotcom boom, depression, that are very damaging, but nonetheless relatively infrequent.