Opening the economic mind

Several years ago, Francis Fukuyama announced the “end of history.” Now, in this much-needed and long-overdue book, he discusses what amounts to the “end of economics” in its present form, even though he does not use that phrase. It is not surprising that a book with such a theme has awaited an author of daring and literary charisma. That it is elegantly written is an added bonus. My only reservations arise from the single-mindedness that accompanies (perhaps necessarily) the boldness of this otherwise powerfully argued account.

Fukuyama’s core idea is by no means new, as the opening quotations from Tocqueville and Durkheim reveal. Society needs freely formed associations, secondary groups between the state and the individual or family, if it is to foster prosperity and realize progress.

The efficient working of a social system, whether measured in economic terms or not, depends upon transaction costs. These in turn reflect a society’s level of trust, which itself is largely a function of the moral structures with which a particular culture responds to the challenges of building cooperation. Thus transaction costs, and along with them economic behavior, are thoroughly embedded in the matrix of culture. This insight undermines one of the ramparts of the fiercely guarded fortress of economics, opening the way for an invasion by other disciplines.

The intellectual and social structure of the predominantly Anglo-Saxon science of economics has tended to inhibit multidisciplinary or interdisciplinary work, marginalizing such fields of inquiry as socioeconomics and economic anthropology. Yet economics by itself cannot adequately handle even so basic a problem as explaining why some countries are more prosperous than others. The social world displays too much complexity to be reduced to any single-cause model of determinacy, a complexity that impels both Fukuyama’s mighty efforts to enrich economics and my own dissatisfaction with his often single-minded approach.

Trust begins with a consideration of what the subtitle of Part I calls “the improbable power of culture in the making of economic society.” Here the author reflects on the capacity for community, seen as social or human capital, and its economic value, noting in passing the recently reported decline of this asset in the United States. He then reminds economics of some of its own largely forgotten foundations, ac-knowledging that free-market economics is about 80 percent correct in its account of things, but noting that the missing 20 percent typically includes the key cultural dimension. So, for example, “the same industrial policy that leads to utter disaster in Latin America may prove effective, or at least do no harm, in Asia” (p. 21). There is an unstated implication and perhaps a non sequitur here, for if history has ended with agreement on the optimality of democratic capitalism, as Fukuyama’s previous book maintained, this volume demonstrates a suspicious variety within that supposed consensus. In this regard, Fukuyama points out that many countries have had trouble moving to democracy and free markets. It is equally plausible that capitalism can flourish under conditions other than democracy.

In considering the role of scale and efficiency in organizing economic life, Fukuyama identifies “spontaneous sociability” as a key subset of social capital. In a statement that lies at the core of the book’s argument, he explains: “If people . . . trust one another because they are all operating according to a common set of ethical norms, doing business costs less. Such a society will be better able to innovate organizationally, since the high degree of trust will permit a wide variety of social relationships to emerge” (p. 27). Without shared norms and trust, a society must resort to formalization and a legal apparatus. Distrust therefore imposes a kind of tax on all forms of economic activity. Taken at face value this is convincing, but it omits the important consideration that economic growth relies upon crossing the threshold from a world of known people into a world of transactions with strangers. The only way this can be achieved on a large scale...