Even among those who largely approve of the free market system, it is often assumed that there are some bleak trade-offs. In exchange for economic efficiency, we allow for the loss of particular industries (such as manufacturing) and the job loss that this incurs. But perhaps more pressing, many worry about the fracturing of our social fabric and the deterioration of social capital. And it’s not hard to see how one might arrive at this conclusion. Market societies imply market competition. And surely, cutthroat, winner-takes-all competition creates skepticism and distrust for those who participate in it. Competition fuels greed, leading to cut corners and shady business practices in order to get ahead. It seems only natural that this would be the outcome of a system built on the profit motive. When the bottom line is all that matters, trustworthiness goes out the window. Social trust is sure to crumble under the weight of such perverse incentives. Right?

　　But these assumptions, like many made about the market, are mistaken. And they are mistaken because they fundamentally misunderstand the nature of market competition. The factor that enables an entrepreneur or business to be competitive in a market economy is not of the might-makes-right variety. It’s not primarily about the lone-wolf genius of eccentric innovators (though that may play a role). And while efficiency matters, dishonest cost-cutting isn’t the way to market success either.

　　What makes a market actor competitive is the ability to identify and supply the wants and needs of society through persuasion. The entrepreneur’s insight, according to the late economist Don Lavoie, is not attributable to “his separateness from others but, indeed, to his higher degree of sensitivity to what others are looking for.” The successful entrepreneurs “are especially well plugged into the culture.” Lavoie called this the “capacity to read the conversations of mankind. … What makes entrepreneurs successful is their ability to join conversational processes and nudge them in new directions.”

　　A business competes with other businesses by pitching to consumers, “I can serve you better.” A business competes by trying to outserve its competitors. And if it doesn’t want to lose the trust of consumers, the business has to live up to its promises. Consider this story from an insurance adjuster-turned-professor. On the first day of the job, the regional vice president addressed the new employees. Acknowledging that “somewhat higher profits” could be made by selling customers more insurance than they really needed or paying claimants a little less than they were owed, the regional vice president nonetheless stated, “But your job is not to make us a profit. Your job is to keep our word.” And they kept their word by providing the goods and services they promised to provide at the quality they promised to provide them. Profits will come through trust in the brand.

　　This is why management expert Peter Drucker thought the “profit motive” was such an impoverished explanation for business activity:

　　Profit is not the explanation, cause, or rationale of business behavior and business decisions, but rather the test of their validity. If archangels instead of businessmen sat in directors’ chairs, they would still have to be concerned with profitability, despite their total lack of personal interest in making profits.

　　So profit is a necessary signal of the success of business activity. But it is not the ultimate purpose of business activity. The “one valid definition of business purpose,” according to Drucker, is “to create a customer.” Consumers “demand that business start out with the needs, the realities, [and] the values, of the customers” and “that business define[s] its goal as the satisfaction of customer needs.” Creating a customer is the result of creating value and engaging in mutually beneficial exchange. Or, as one group of business ethicists put it, “The business of business is business.” The entire process of market competition consists of discovering ways to serve society, persuading others to trust that you can serve them well, stewarding resources wisely in the name of that service, and then delivering satisfactory results. To be competitive in the market is to be trustworthy. The entire process is a trust-building exercise. And there is quite a lot of data to demonstrate this.

　　Competition Leads to Trust

　　A number of studies have found that greater economic freedom is associated with greater trust. But what about competition specifically? Using income as a proxy for market integration, one study looked at World Value Survey data between 1997 and 2001, covering about 80,000 people across 60 countries. It found that greater market integration (higher income) is associated with higher generalized trust. A measurement of competition—the ratio of the adjusted national investment price to the total price index—was then inserted into the mix. Rather than reducing trust, competition appears to reinforce the trust-producing mechanism for those well-integrated into the market. In other words, those participating and making money in the market trust more under competition. For the less integrated (lower income), however, competition has no real impact on their levels of trust (which, it should be noted, is quite different from it having a negative impact).

　　Similarly, research has shown that product-market competition increases both productivity and employee trust in managers. The authors argued that this is likely because the pressures of competition require firms to be more productive, which in turn requires management to rely on employee knowledge and skills. In order to tap into their employees’ productivity potential, managers have to gain employee trust. This comes from managers being more trustworthy and honest and establishing a good reputation among employees. And all this makes sense. High-quality, competitive firms tend to have high-quality, competitive managers. Management matters for firm performance and managing well includes trust.

　　However, one of the criticisms of the trust literature—one of the “deadly sins”—is that survey data and real-world behavior do not always match up. Contrary to what we might suspect, people tend to be more trusting and trustworthy in experiments than they let on in their survey answers. This suggests that experimental data may be a more accurate way to measure competition’s influence on trust.

　　One laboratory experiment placed participants into two different networks: partner networks—where a trusting relationship is built through repeated transactions—andstrangers networks—one-off transactions based on outside parties. Not surprisingly, buyers were highly discriminating based on seller reputation. It required a significant price difference to convince buyers to go with a less reputable seller. The experimenters then added competition to the mix, either through competitive prices or by allowing buyers to match with sellers based on reputation. Introducing either form of competition into strangers networks increased gains from trade by promoting trust and trustworthiness. Competition ended up erasing the advantages of partner networks over stranger networks. You read that correctly: competition erased the trust divide between well-known dealers and unknown ones; between acquaintances and strangers. The experimenters concluded “that competition is a powerful tool for promoting trust and trustworthiness in strangers environments. … With competition, the performance of strangers networks common to Internet markets is similar to the partners networks that are more prevalent to brick-and-mortar markets.”

　　It turns out that no measure of globalization—economic, social, or political—had a negative influence on trust.

　　A similar lab experiment found that both competition and information about reputations are important for trust and trustworthiness. When trustors lacked both reputation information and competitive options, trust, trustworthiness, and efficiency within the experiment were low. After competition and private information about the trustees’ reputations were introduced, the researchers found that trust and trustworthiness rates more than tripled and efficiency improved by a factor of ten! Half of the effects were attributed to private information about trustee reputations, while the other half was attributed to competition. When you have to compete for customers, keeping your reputation intact matters. And good reputations improve trust.

　　Cross-sectional firm data from the United States show a positive relationship between industry competitiveness and generalized trust among employees. However, to better establish a causal relationship, one set of researchers looked at the effects of banking deregulation. As one would expect, deregulation increased firm competition. Perhaps less expected, state trust levels began to track up following deregulation, even after controlling for a number of variables. Drawing on the German Socioeconomic Panel, the researchers tracked the generalized trust of individuals who changed industries. It turns out that those in more competitive industries had higher reported levels of trust. But perhaps more importantly, those individuals who moved to more competitive industries were more likely to increase their reported levels of trust. Instead of losing faith in humanity in the midst of high competition, these individuals gained more of it.

　　These same researchers also performed a number of laboratory experiments using a public goods game in which players contributed to a public pot that was then divided among participants. The games were played under both competitive and non-competitive conditions. In the games that featured competition, the amount that a participant received from the public pot was based not just on the combined personal and partner contributions, but also on the joint contribution of a randomly assigned group. “If, and only if, their joint contribution equaled or exceeded that of their comparator group, did they receive their share of the collective account.” Competition not only increased contributions, but it also increased reported generalized trust: those who faced high levels of partner and competitor contributions (higher competition) were more likely to answer affirmatively on generalized trust questions.

　　Even Global Competition Builds Trust

　　Some research suggests that global competition has a complicated relationship with generalized trust. In one study by sociologist Simone Polillo, international trade alone had no statistically significant effect on trust. But as more countries produce the same goods, international trade turns up the competitive heat on producers. Consequently, Polillo found that this kind of competition (what he calls “competition-by-role-equivalence”) decreases trust.

　　Yet, he also discovered an interesting contributor to trust: science. It turns out that the more a country contributes to global scientific knowledge, the greater the trust. Polillo hypothesized that this was because “science embodies a cultural vision of social progress.” And indeed it does, but here’s the thing: you don’t get science without a marketplace of ideas. It’s pretty difficult to contribute to global scientific knowledge without the exchange of ideas or institutional support. As the Cato Institute’s Johan Norberg has written, “The sharing of knowledge and goods … gave rise to science, which is built on exchange, criticism, comparison and accumulation of knowledge, and to technology, which is the application of science to solve practical problems.” The free flow of ideas through an array of social networks allowed for the diffusion of what economist Joel Mokyr has called “useful knowledge,” leading to unprecedented economic growth and the transformation of the world economy. You want science? You need markets.

　　But there’s more. A 2023 study on globalization analyzed the social trust of first- and second-generation immigrants in over 30 European countries. In order to rule out reverse causality of high-trust countries influencing the trust levels of immigrants, economists Niclas Berggren and Christian Bjornskov instead analyzed the globalization levels of the immigrants’ countries of origin. They found that free-market-friendly features such as low trade barriers and financial openness have a positive relation to social trust. It turns out that no measure of globalization—economic, social, or political—had a negative influence on trust. So maybe global competition isn’t tearing us apart like many claim.

　　Actual Trust-Killing Competition

　　Ironically, collectivist societies breed a far more skeptical, distrusting culture in which individuals are constantly competing in what they perceive to be a zero-sum game. And this isn’t just with outsiders. In-group social comparison and hierarchy are incredibly intense within collectivist societies. In these societies, individuals are more likely to withhold information from others as a means of gaining an advantage over competitors. Withholding information is more strategic than straight-up lying because it allows for plausible deniability while achieving the same results. There is also constant covert competition with and worry over “frenemies”: friends or family that are out to harm or undermine you (something that people in individualist cultures see as paranoia). Ladder-climbing and back-stabbing seem to be the norm in more collectivist societies.

　　An extreme example can be seen in North Korea, where self-criticism sessions are mandatory for citizens. The sessions involve confessions before peers of supposed personal guilt as well as public accusations of colleagues for alleged infractions against the Great Leader. It is “the Communist version of the Catholic confessional,” except that it is forced and demands constant policing of one’s neighbor. “No one was excused for shyness,” one defector wrote of her experience. “No one was allowed to be blameless.”

　　One might think this is due to the corruption or poverty that collectivist institutions produce. While these things certainly exacerbate the problem, regional differences in corruption and wealth within collectivist countries demonstrate that collectivism itself is the culprit behind the distrusting attitudes. This flies in the face of the romantic view of collectivist societies creating tight-knit, egalitarian communities through shared (read: nationalized) resources and traditions. Instead, it is more like being alone in a crowded room, constantly looking over your shoulder. If you want trust, collectivization is not the way.

　　Back in the 1980s, Senator Bernie Sanders defined socialism as “a vision of society where poverty is absolutely unnecessary” and “where international relations are not based on greed … but on cooperation.” Though poverty may be “unnecessary” in socialist societies, it sure is prevalent. And part of the reason is because cooperation is undermined by the lack of market competition. More market competition indicates that a greater number of businesses are seeking ways to provide goods and services for society. More conversations (as Lavoie put it) are being held and more reputations are at stake. More and more people are learning that they have to make good on their promises. When there is more competition, businesses have to learn how to serve people better. And this entails gaining the public’s trust through trustworthy actions.