Nicholas Bloom: evaluation

Transcript context

…Over 20 years ago, your Stanford colleague Frank Fukuyama wrote a book on trust. He basically said, “Well, China will never have successful large firms in the way that Japan does because there’s not enough trust in Chinese society.” That seemed plausible at the time. Yet, obviously it’s turned out to be wrong. What did we miss about China? Since you emphasize trust and corruption and ability to delegate authority without too many bureaucratic checks and balances, ex ante, China seemed bad on all those things. Yet Chinese big business has done pretty phenomenally well. A lot of trust, I think, derives from rule of law. In China — again, this is getting sensitive into politics, but there’s rule of law around political systems, which I really don’t want to comment on. But there’s rule of law around things like contractual enforcement, which turns out to be important for trust between firms. If you, Tyler Cowen, set up a company and give me a contract for three years for providing ball bearings, I’m going to go and put a bit of money into R&D in improving and set up a process. If you then say after six months, “I’ve changed my mind. Can I sue you and get the money back? If I can effectively do it through the court system, I can trust you.” That’s maybe a kind of odd concept of trust. It’s not based in some cultural, religious thing. It’s based on the fact that the legal system works. If you look in, for example, the World Value Survey, which measures interpersonal trust, trust measured there is highly correlated with effectiveness of the legal system. Some of the lowest countries in the world, in terms of trust, are some of the African countries whereby the legal system’s in chaos because they’re undergoing civil war, and the highest countries are like Norway, Sweden, North America. Currently in China, the rule of law as applied to commercial contracts, I think, is reasonable. I am not an expert, but you don’t hear endless stories of scandals and corruption, at least as commercial contracts go. I think that’s what enables these large firms to grow. When we’ve collected survey evidence in reverse, we definitely don’t hear endless stories of managers ripping off firms and stealing ideas, which is a big problem. Just to reverse it around, what happens in countries with very weak legal systems where you can’t trust anyone is, you hire your family members. If I want to set up a company and I can’t trust any outsiders, I start to stuff it full of sons, daughters, brothers, brothers-in-law, sisters, sisters-in-law, aunts, uncles, et cetera. Now, that’s good because I can trust them, but the problem is, these people aren’t naturally the best managers to run the place. Of course, as I get bigger and bigger, I’m running out of good family members. Do I appoint a second cousin, or that pretty incompetent youngest son of mine? You can imagine the tradeoffs that are going on, but it means that, unless you have a proper legal system which generates trust, it’s very hard to grow large firms without professional managers. How do you think about trust and management in England versus trust and management in Scotland?…

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