For millennia, the trust required for exchange of goods and services was based on personal relationships: family, friends, friends of friends or friends of the family. All this changed with the rise of modern capitalism. Markets (in finance, goods and services) began to operate based on trust in strangers, eliminating the need for personal relationships.
Deirdre McCloskey, in the first volume of her series on The Bourgeois Era, explains the importance of “trust in strangers” for the smooth functioning of capitalism.
Modern capitalism … was supported by, and supported in turn, a trust in *strangers* that still distinguishes prosperous from poor economies. ….
Trust and friendship, further, make possible speculative bubbles, from the tulip mania of the 1630s to the dot-com boom of the 1990s. The very fact of capitalism’s speculative instability, therefore, argues for an entirely new prevalence of belief in strangers. “Credit” is from *creditus*, “believed”. A business cycle based on pyramids of credit was impossible in the distrustful sixteenth century. The macroeconomy could in earlier times rise and fall, of course, but from harvest booms and busts, not from credit booms and busts. ….
On this theory the episodes of disorder and unemployment in capitalism from the 1630s in Holland and from 1720 in northern Europe arose from the virtues of capitalism, not from its vices, from its trustworthiness, not from its greed. To be more exact: the business cycle arose from trustworthiness breaking down suddenly in an environment of quite normal human greed for abnormal gain ….
Deirdre McCloskey, The Bourgeois Virtues: Ethics for an Age of Commerce (University of Chicago Press, 2006), pp 158-159.
With the rise of the internet, personal reputations are once again important for commercial transactions, but trust – though personalised – continues to be trust in strangers. Tim Harford, the FT’s ‘undercover economist’, has written a column on this development, which he refers to as a ‘hybrid model’.
One of the underrated achievements of the modern world has been to develop ways to extend the circle of trust by depersonalising it. Trust used to be a very personal thing: you would trust your friends or friends of friends. But when I withdrew €400 from a cash machine [while on holiday in Bavaria], it was not because the bank trusted me but because it could verify that my bank would repay the money. This is [modern capitalism] a cold corporate miracle.
Over the past few years, people have been falling in love with a hybrid model that allows a personal reputation to work even between strangers. One example is Airbnb, which lets people stay in the homes of complete strangers, a considerable exercise of trust on both sides. We successfully used it on another stop in our Bavarian holiday. Airbnb makes personal connections but uses online reviews to keep people honest: after our stay, we reviewed our host and he reviewed us. ….
Personalised trust has never been fairly distributed. When Harvard Business School researchers … conducted field experiments on Airbnb, they found that both hosts and guests were discriminating against racial minorities. Other researchers have found evidence of discrimination in places from Craigslist to carpools. New online tools are giving us the ability to treat faraway strangers as though they were neighbours — and we do, in good ways and in bad.
Tim Harford, “The meaning of trust in the age of Airbnb“, Financial Times Magazine, 10 August 2016 (metered paywall).