Christopher B. Corey’s clients — at least at first — are strangers, regardless of whether they contact his e-commerce company from Colombia or from across town. There is, however, one important factor making it possible for these unfamiliar parties to immediately forge mutually productive relationships: money.
“There’s a binding understanding among all businesses and clients,” says Corey, “that people perform services in exchange for money. It’s true for me and for the plumber who comes to fix your sink. But it’s an understanding that people take for granted. Everyone is skeptical about a relationship until the money changes hands and then, there’s an instant trust.”
The idea of money generating trust — rather than perhaps a decay of human morals — is a long-time mantra for Corey. But it’s now proven true in a series of economic experiments. When researchers at Chapman University created two economies in a lab — one in which the entire fabricated society would benefit by giving away valuables and another relying on a currency for such exchanges — it was the paying-people who were willing to trust new people.
“Voluntary cooperation or mutual support is difficult in a society of strangers,” says Gabriele Camera, a professor at Chapman. “As groups grow in size, you need the use of money.”
At first people in Camera’s lab had to rely on the reciprocation of favors when deciding whether to award “points” to an unknown person. In the lab’s barter society, partnerships of two people were likely to help each other — and did so 70 percent of the time. But once the group grew to four people, only half the players gave graciously. Once there were eight people, cooperation dwindled to 30 percent. When groups numbered 32 people, there was barely any collaboration at all.
The introduction of even meaningless tokens — let’s remember, American dollars are backed mostly by our general consensus that they’re worth something — had two effects. First, the exchange of tokens meant a person didn’t have to worry about whether a stranger would one day reciprocate. The money provided immediate comfort and allowed people to easily forge new, lucrative deals.
But at the same time, the currency ruined small partnerships. While groups of two prospered most in a favor-based world, the currency crowded out social support and caused small groups to earn less.
That means, says Camera, that while a growing economy needs money, we might keep a favor-based system when asking something of our kids or close friends (such as whether they might help with our kids). “In situations where interaction can be based on trust,” says Camera, “you don’t need to monetize the transaction.”
For Jonathan Morduch, economics professor at New York University, it’s a well-researched phenomenon that came to life at the daycare center his kids attended. When parents were charged a small late fee for pickups after 5 p.m., such as $1 per minute, they wouldn’t worry about the clock — and opt to pay the fine. But the absence of a financial penalty promoted on-time pick up more effectively, since parents were concerned about inconveniencing the people who care for their kids all day. “When we put a price on stuff, it changes the nature of the relationship,” says Morduch.
And while money is most certainly empowering and important, says Christine Desan, a Leo Gottlieb law professor at Harvard University, it’s still necessary for societies to manage relationships with money. One stark example is the unmonitored lending policies that, in part, led to the national real estate crash. And societies might do well restricting certain transactions — such as limiting political contributions, she says.
“It’s not an ‘on-off’ switch, she says. “Once you have a public resource to make exchanges, there are many decisions on how to design and manage it.”
And with the trust money fosters also comes deception. This month, four organizations — including The Children’s Cancer Fund of America Inc. — claiming to use funding for cancer patients actually lined officers’ pockets, bilking donors out of $187 million, according to charges brought by the Federal Trade Commission. The commission is also requiring the return of more than $3 million to consumers who believed testimonials from TriVita Inc. promising its cactus-based drink would treat a variety of health problems.
But there are often red flags that could alert us to scams, says Chuck Harwood, regional director for the FTC. When shopping online, make sure the company has an actual physical address, not just a post office box; otherwise it’s pretty hard for you (not to mention law enforcement) to track it down, he says. Make sure a charity’s donations are tax deductible, a status you can check online at irs.gov. Don’t use payment methods that are difficult to reverse, such as wire transfers, electronic checks or debits.
Prices that seem unusually low — perhaps half of what’s listed elsewhere — with no explanation should make us suspicious. And a seller who makes promises should be willing to put them on paper. Offers that won’t be available later and require decisions immediately might be better left on the table.
“Problems occur when people allow themselves to be enticed by an offer that doesn’t make sense,” says Harwood. “None of these means you definitely walk away, but it does mean you should ask more questions.”
This is an occasional column by Miamian and former U.S. government economist Brett Graff, who edits www.thehomeeconomist.com. Follow her at @BrettGraff or contact her at email@example.com.
Money may bring trust, but it’s still important to keep an eye out for red flags. Chuck Harwood of the Federal Trade Commission offers these tips.
▪ If you’re dealing with a company and can’t figure out where it’s located, remember law enforcement might have the same problem. Even internet companies should have a physical address.
▪ Weight-loss products that promise you’ll slim down without making changes in diet or exercise are usually not backed by scientific studies.
▪ Don’t make transactions that are difficult to reverse, such as electronic checks, debits or wire transfers, in case the product doesn’t function as planned.
▪ Beware of prices seeming unusually low, without any explanation.
▪ Don’t work with any seller who makes oral promises but declines to put them in writing.
▪ Be wary of charities claiming that “all the money benefits the program.” Most have fundraising and programming costs.
▪ Never feel forced to make a decision immediately. Offers that aren’t available later aren’t usually worth taking.