Trust: The Social Virtues and the Creation of Prosperity by Francis Fukuyama

From the Publisher

In his bestselling The End of History and the Last Man, Francis Fukuyama argued that the end of the Cold War would also mean the beginning of a struggle for position in the rapidly emerging order of 21st-century capitalism. In Trust, a penetrating assessment of the emerging global economic order "after History," he explains the social principles of economic life and tells us what we need to know to win the coming struggle for world dominance.

Challenging orthodoxies of both the left and right, Fukuyama examines a wide range of national cultures in order to divine the underlying principles that foster social and economic prosperity. Insisting that we cannot divorce economic life from cultural life, he contends that in an era when social capital may be as important as physical capital, only those societies with a high degree of social trust will be able to create the flexible, large-scale business organizations that are needed to compete in the new global economy.

A brilliant study of the interconnectedness of economic life with cultural life, Trust is also an essential antidote to the increasing drift of American culture into extreme forms of individualism, which, if unchecked, will have dire consequences for the nation's economic health.

Publishers Weekly

Fukuyama argues that a nation's economic strength is tied to its social unity, and that America is in danger of losing both. (June)

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On the Human Situation at the End of History

As we approach the twenty-first century, a remarkable convergence of political and economic institutions has taken place around the world. Earlier in this century, deep ideological cleavages divided the world's societies. Monarchy, fascism, liberal democracy, and communism were bitter competitors for political supremacy, while different countries chose the divergent economic paths of protectionism, corporatism, the free market, and socialist centralized planning. Today virtually all advanced countries have adopted, or are trying to adopt, liberal democratic political institutions, and a great number have simultaneously moved in the direction of market-oriented economies and integration into the global capitalist division of labor.

As I have argued elsewhere, this movement constitutes an "end of history," in the Marxist-Hegelian sense of History as a broad evolution of human societies advancing toward a final goal. As modern technology unfolds, it shapes national economies in a coherent fashion, interlocking them in a vast global economy The increasing complexity and information intensity of modern life at the same time renders centralized economic planning extremely difficult. The enormous prosperity created by technology-driven capitalism, in turn, serves as an incubator for a liberal regime of universal and equal rights, in which the struggle for recognition of human dignity culminates. While many countries have had trouble creating the institutions of democracy and free markets, and others, especially in parts of the former communist world, have slid backward into fascism or anarchy, the world'sadvanced countries have no alternative model of political and economic organization other than democratic capitalism to which they can aspire.

This convergence of institutions around the model of democratic capitalism, however, has not meant an end to society's challenges. Within a given institutional framework, societies can be richer or poorer, or have more or less satisfying social and spiritual lives. But a corollary to the convergence of institutions at the "end of history" is the widespread acknowledgment that in postindustrial societies, further improvements cannot be achieved through ambitious social engineering. We no longer have realistic hopes that we can create a "great society" through large government programs. The Clinton administration's difficulties in promoting health care reform in 1994 indicated that Americans remained skeptical about the workability of large-scale government management of an important sector of their economy. In Europe, almost no one argues that the continent's major concerns today, such as a high continuing rate of unemployment or immigration, can be fixed through expansion of the welfare state. If anything, the reform agenda consists of cutting back the welfare state to make European industry more competitive on a global basis. Even Keynesian deficit spending, once widely used by industrial democracies after the Great Depression to manage the business cycle, is today regarded by most economists as self-defeating in the long run. These days, the highest ambition of most governments in their macroeconomic policy is to do no harm, by ensuring a stable money supply and controlling large budget deficits.

Today, having abandoned the promise of social engineering, virtually all serious observers understand that liberal political and economic institutions depend on a healthy and dynamic civil society for their vitality. "Civil society" -- a complex welter of intermediate institutions, including businesses, voluntary associations, educational institutions, clubs, unions, media, charities, and churches -- builds, in turn, on the family, the primary instrument by which people are socialized into their culture and given the skills that allow them to live in broader society and through which the values and knowledge of that society are transmitted across the generations.

A strong and stable family structure and durable social institutions cannot be legislated into existence the way a government can create a central bank or an army. A thriving civil society depends on a people's habits, customs, and ethics -- attributes that can be shaped only indirectly through conscious political action and must otherwise be nourished through an increased awareness and respect for culture.

Beyond the boundaries of specific nations, this heightened significance of culture extends into the realms of the global economy and international order. Indeed, one of the ironies of the convergence of larger institutions since the end of the cold war is that people around the world are now even more conscious of the cultural differences that separate them. For example, over the past decade, Americans have become much more aware of the fact that Japan, an erstwhile member of the "free world" during the cold war, practices both democracy and capitalism according to a different set of cultural norms than does the United States. These differences have led to considerable friction at times, as when the members of a Japanese business network known as a keiretsu buy from one another rather than from a foreign company that might offer better price or quality. For their part, many Asians are troubled by certain aspects of American culture, such as its litigiousness and the readiness of Americans to insist upon their individual rights at the expense of the greater good. Increasingly, Asians point to superior aspects of their own cultural inheritance, such as deference to authority, emphasis on education, and family values, as sources of social vitality.

The increasing salience of culture in the global order is such that Samuel Huntington has argued that the world is moving into a period of "civilizational clash," in which the primary identification of people will not be ideological, as during the cold war, but cultural. Accordingly, conflict is likely to arise not among fascism, socialism, and democracy but among the world's major cultural groups: Western, Islamic, Confucian, Japanese, Hindu, and so on.

Huntington is clearly correct that cultural differences will loom larger from now on and that all societies will have to pay more attention to culture as they deal not only with internal problems but with the outside world. Where Huntington's argument is less convincing, however, is that cultural differences will necessarily be the source of conflict. On the contrary, the rivalry arising from the interaction of different cultures can frequently lead to creative change, and there are numerous cases of such cultural cross-stimulation. Japan's confrontation with Western culture after the arrival of Commodore Perry's "black ships" in 1853 paved the way for the Meiji Restoration and Japan's subsequent industrialization. In the past generation, techniques like lean manufacturing -- the process of eliminating buffers from the manufacturing process to facilitate feedback from the factory floor -- have made their way from Japan to the United States, to the latter's benefit. Whether the confrontation of cultures leads to conflict or to adaptation and progress, it is now vitally important to develop a deeper understanding of what makes these cultures distinctive and functional, since the issues surrounding international competition, political and economic, increasingly will be cast in cultural terms.

Perhaps the most crucial area of modern life in which culture exercises a direct influence on domestic well-being and international order is the economy. Although economic activity is inextricably linked with social and political life, there is a mistaken tendency, encouraged by contemporary economic discourse, to regard the economy as a facet of life with its own laws, separate from the rest of society. Seen this way, the economy is a realm in which individuals come together only to satisfy their selfish needs and desires before retreating back into their "real" social lives. But in any modern society, the economy constitutes one of the most fundamental and dynamic arenas of human sociability. There is scarcely any form of economic activity, from running a dry-cleaning business to fabricating large-scale integrated circuits, that does not require the social collaboration of human beings. And while people work in organizations to satisfy their individual needs, the workplace also draws people out of their private lives and connects them to a wider social world. That connectedness is not just a means to the end of earning a paycheck but an important end of human life itself. For just as people are selfish, a side of the human personality craves being part of larger communities. Human beings feel an acute sense of unease -- what Emile Durkheim labeled anomie -- in the absence of norms and rules binding them to others, an unease that the modern workplace serves to moderate and overcome.

The satisfaction we derive from being connected to others in the workplace grows out of a fundamental human desire for recognition. As I argued in The End of History and the Last Man, every human being seeks to have his or her dignity recognized (i.e., evaluated at its proper worth) by other human beings. Indeed, this drive is so deep and fundamental that it is one of the chief motors of the entire human historical process. In earlier periods, this desire for recognition played itself out in the military arena as kings and princes fought bloody battles with one another for primacy. In modern times, this struggle for recognition has shifted from the military to the economic realm, where it has the socially beneficial effect of creating rather than destroying wealth. Beyond subsistence levels, economic activity is frequently undertaken for the sake of recognition rather than merely as a means of satisfying natural material needs. The latter are, as Adam Smith pointed out, few in number and relatively easily satisfied. Work and money are much more important as sources of identity, status, and dignity, whether one has created a multinational media empire or been promoted to foreman. This kind of recognition cannot be achieved by individuals; it can come about only in a social context.

Thus, economic activity represents a crucial part of social life and is knit together by a wide variety of norms, rules, moral obligations, and other habits that together shape the society. As this book will show, one of the most important lessons we can learn from an examination of economic life is that a nation's well-being, as well as its ability to compete, is conditioned by a single, pervasive cultural characteristic: the level of trust inherent in the society.

Consider the following vignettes from twentieth-century economic life:

* During the oil crisis of the early 1970s, two automakers on opposite sides of the world, Mazda and Daimler-Benz (maker of Mercedes-Benz luxury cars), were both hit with declining sales and the prospect of bankruptcy. In both cases, they were bailed out by a coalition of companies with which they had traditionally done business, led by a large bank: Sumitomo Trust, in the instances of Mazda, and the Deutsche Bank, in the case of Daimler. In both cases, immediate profitability was sacrificed for the sake of saving the institution -- in the German case, to prevent it from being bought out by a group of Arab investors.

* The recession of 1983-1984 that ravaged America's industrial heartland also hit the Nucor Corporation very hard. Nucor had just entered the steelmaking business by building mini-mills using a new German continuous-casting technology. Its mills were built in places like Crawfordsville, Indiana, outside the traditional rust belt, and were operated by nonunionized workers, many of them former farmers. To deal with the drop in revenues, Nucor put its employees -- from the CEO to the lowliest maintenance worker -- on a two- or three-day workweek, with a corresponding cut in pay. No workers were fired, however, and when the economy and the company recovered, it enjoyed a tremendous esprit de corps that contributed to its becoming a major force in the American steel industry.

* In the Toyota Motor Company's Takaoka assembly plant, any of the thousands of assembly line workers who work there can bring the entire plant to a halt by pulling on a cord at his or her workstation. They seldom do. By contrast, workers at the great Ford auto plants like Highland Park or River Rouge -- plants that virtually defined the nature of modern industrial production for three generations -- were never trusted with this kind of power. Today, Ford workers, having adopted Japanese techniques, are trusted with similar powers, and have greater control over their workplace and machines.

* In Germany, shop foremen on the floor of a typical factory know how to do the jobs of those who work under them and frequently take their place if the need arises. The foreman can move workers from one job to another and evaluates them based on face-to-face dealings. There is great flexibility in promotion: a blue-collar worker can obtain credentials as an engineer by attending an extensive in-company training program rather than going to a university.

The common thread that runs through these four apparently unrelated vignettes is that in each case, economic actors supported one another because they believed that they formed a community based on mutual trust. The banks and suppliers that engineered the Mazda and Daimler-Benz rescues felt an obligation to support these auto companies because the latter had supported them in the past and would do so again in the future. In the German case, moreover, there was a nationalistic feeling that such an important trademark German name as Mercedes-Benz should not fall into non-German hands. Workers at Nucor were willing to accept severe cuts in their weekly pay because they believed that the managers who devised the pay cut plan were hurting as well and were committed to not laying them off. The workers at the Toyota plant were given immense power to stop the entire assembly line because management trusted them not to abuse that power, and they repaid this trust by using that power responsibly to improve the line's overall productivity. Finally, the workplace in Germany is flexible and egalitarian because workers trust their managers and fellow workers to a higher degree than in other European countries.

The community in each of these cases was a cultural one, formed not on the basis of explicit rules and regulations but out of a set of ethical habits and reciprocal moral obligations internalized by each of the community's members. These rules or habits gave members of the community grounds for trusting one another. Decisions to support the community were not based on narrow economic self-interest. The Nucor management could have decided to award themselves bonuses while laying off workers, as many other American corporations did at the time, and Sumitomo Trust and Deutsche Bank could perhaps have maximized their profits by selling off their failing assets. Solidarity within the economic community in question may have had beneficial consequences over the long run for the bottom line; certainly Nucor's workers were motivated to give their company an extra measure of effort once the recession was over, as was the German foreman whose company helped him to become an engineer. But the reason that these economic actors behaved as they did was not necessarily because they had calculated these economic consequences in advance; rather, solidarity within their economic community had become an end in itself. Each was motivated, in other words, by something broader than individual self-interest. As we will see, in all successful economic societies these communities are united by trust.

By contrast, consider situations in which the absence of trust has led to poor economic performance and its attendant social implications:

* In a small town in southern Italy during the 1950s, Edward Banfield noted that the wealthy citizens were unwilling to come together to found either a school or hospital, which the town needed badly, or to build a factory, despite an abundance of capital and labor, because they believed it was the obligation of the state to undertake such activities.

* In contrast to German practice, the French shop foreman's relations with his or her workers are regulated by a thicket of rules established by a ministry in Paris. This comes about because the French tend not to trust superiors to make honest personal evaluations of their workers. The formal rules prevent the foreman from moving workers from one job to another, inhibiting development of a sense of workplace solidarity and making very difficult the introduction of innovations like the Japanese lean manufacturing system.

* Small businesses in American inner cities are seldom owned by African-Americans; they tend to be controlled by other ethnic groups, like the Jews earlier in this century and Koreans today. One reason is an absence of strong community and mutual trust among the contemporary African-American "underclass." Korean businesses are organized around stable families and benefit from rotating credit associations within the broader ethnnic community; inner-city African-American families are weak and credit associations virtually nonexistent.

These three cases reveal the absence of a proclivity for community that inhibits people from exploiting economic opportunities that are available to them. The problem is one of a deficit of what the sociologist James Coleman has called "social capital": the ability of people to work together for common purposes in groups and organizations. The concept of human capital, widely used and understood among economists, starts from the premise that capital today is embodied less in land, factories, tools, and machines than, increasingly, in the knowledge and skills of human beings. Coleman argued that in addition to skills and knowledge, a distinct portion of human capital has to do with people's ability to associate with each other, that is critical not only to economic life but to virtually every other aspect of social existence as well. The ability to associate depends, in turn, on the degree to which communities share norms and values and are able to subordinate individual interests to those of larger groups. Out of such shared values comes trust, and trust, as we will see, has a large and measurable economic value.

With regard to the ability to form spontaneous communities such as those detailed above, the United States has had more in common with Japan and Germany than any of these three has with Chinese societies like Hong Kong and Taiwan, on the one hand, and Italy and France on the other. The United States, like Japan and Germany, has historically been a high-trust, group-oriented society, despite the fact that Americans believe themselves to be rugged individualists.

But the United States has been changing rather dramatically over the past couple of generations with respect to its art of association. In many ways, American society is becoming as individualistic as Americans have always believed it was: the inherent tendency of rights-based liberalism to expand and multiply those tights against the authority of virtually all existing communities has been pushed toward its logical conclusion. The decline of trust and sociability in the United States is also evident in any number of changes in American society: the rise of violent crime and civil litigation; the breakdown of family structure; the decline of a wide range of intermediate social structures like neighborhoods, churches, unions, clubs, and charities; and the general sense among Americans of a lack of shared values and community with those around them.

This decline of sociability has important implications for American democracy, perhaps even more so than for the economy. Already the United States pays significantly more than other industrialized countries for police protection and keeps more than 1 percent of its total population in prison. The United States also pays substantially more than does Europe or Japan to its lawyers, so that its citizens can sue one another. Both of these costs, which amount to a measurable percentage of gross domestic product annually, constitute a direct tax imposed by the breakdown of trust in the society. In the future, the economic effects may be more far-reaching; the ability of Americans to start and work within a wide variety of new organizations may begin to deteriorate as its very diversity lowers trust and creates new barriers to cooperation. In addition to its physical capital, the United States has been living off a fund of social capital. Just as its savings rate has been too low to replace physical plant and infrastructure adequately, so its replenishment of social capital has lagged in recent decades. The accumulation of social capital, however, is a complicated and in many ways mysterious cultural process. While governments can enact policies that have the effect of depleting social capital, they have great difficulties understanding how to build it up again.

The liberal democracy that emerges at the end of history is therefore not entirely "modern." If the institutions of democracy and capitalism are to work properly, they must coexist with certain premodern cultural habits that ensure their proper functioning. Law, contract, and economic rationality provide a necessary but not sufficient basis for both the stability and prosperity of postindustrial societies; they must as well be leavened with reciprocity, moral obligation, duty toward community, and trust, which are based in habit rather than rational calculation. The latter are not anachronisms in a modern society but rather the sine qua non of the latter's success.

The American problem starts with a failure of Americans to perceive their own society, and its historical communitarian orientation, correctly. Part I addresses this failure, beginning with a discussion of why recent arguments among certain thinkers miss a critical point about the cultural dimension of economic life. The remainder of this part will define more precisely what is meant by culture, trust, and social capital. It will explain how trust is related to industrial structure and the creation of those large-scale organizations vital to economic well-being and competitiveness.

Parts II and III deal with two major bridges to sociability, the family and nonkinship-based communities, respectively. There are four "familistic" societies detailed in part II: China, France, Italy, and South Korea. In each, the family constitutes the basic unit of economic organization; each has experienced difficulties in creating large organizations that go beyond the family, and in each, consequently, the state has had to step in to promote durable, globally competitive firms. Part III examines Japan and Germany, both high-trust societies, which, in contrast to the familistic societies of part II, have had a much easier time spawning large-scale firms not based on kinship. Not only did such societies move early to modern professional management, but they have been able to create more efficient and satisfying workplace relationships on the factory floor. Lean manufacturing, invented by the Toyota Motor Corporation, will be considered as one example of the organizational innovations possible in a high-trust society Part IV discusses the complicated problem of where to locate the United States in the spectrum of low- and high-trust societies. Where the American art of association came from, and why it has been weakening, are the chief issues taken up in this part of the book. Finally, part V will draw some general conclusions concerning the future of global society and the role of economic life in the broader scope of human activity.

Copyright © 1995 by Francis Fukuyama

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Chapter 1 On the Human Situation at the End of History

As we approach the twenty-first century, a remarkable convergence of political and economic institutions has taken place around the world. Earlier in this century, deep ideological cleavages divided the world's societies. Monarchy, fascism, liberal democracy, and communism were bitter competitors for political supremacy, while different countries chose the divergent economic paths of protectionism, corporatism, the free market, and socialist centralized planning. Today virtually all advanced countries have adopted, or are trying to adopt, liberal democratic political institutions, and a great number have simultaneously moved in the direction of market-oriented economies and integration into the global capitalist division of labor.

As I have argued elsewhere, this movement constitutes an "end of history," in the Marxist-Hegelian sense of History as a broad evolution of human societies advancing toward a final goal. As modern technology unfolds, it shapes national economies in a coherent fashion, interlocking them in a vast global economy The increasing complexity and information intensity of modern life at the same time renders centralized economic planning extremely difficult. The enormous prosperity created by technology-driven capitalism, in turn, serves as an incubator for a liberal regime of universal and equal rights, in which the struggle for recognition of human dignity culminates. While many countries have had trouble creating the institutions of democracy and free markets, and others, especially in parts of the former communist world, have slid backward into fascism or anarchy, the world's advanced countries have no alternative model of political and economic organization other than democratic capitalism to which they can aspire.

This convergence of institutions around the model of democratic capitalism, however, has not meant an end to society's challenges. Within a given institutional framework, societies can be richer or poorer, or have more or less satisfying social and spiritual lives. But a corollary to the convergence of institutions at the "end of history" is the widespread acknowledgment that in postindustrial societies, further improvements cannot be achieved through ambitious social engineering. We no longer have realistic hopes that we can create a "great society" through large government programs. The Clinton administration's difficulties in promoting health care reform in 1994 indicated that Americans remained skeptical about the workability of large-scale government management of an important sector of their economy. In Europe, almost no one argues that the continent's major concerns today, such as a high continuing rate of unemployment or immigration, can be fixed through expansion of the welfare state. If anything, the reform agenda consists of cutting back the welfare state to make European industry more competitive on a global basis. Even Keynesian deficit spending, once widely used by industrial democracies after the Great Depression to manage the business cycle, is today regarded by most economists as self-defeating in the long run. These days, the highest ambition of most governments in their macroeconomic policy is to do no harm, by ensuring a stable money supply and controlling large budget deficits.

Today, having abandoned the promise of social engineering, virtually all serious observers understand that liberal political and economic institutions depend on a healthy and dynamic civil society for their vitality. "Civil society" -- a complex welter of intermediate institutions, including businesses, voluntary associations, educational institutions, clubs, unions, media, charities, and churches -- builds, in turn, on the family, the primary instrument by which people are socialized into their culture and given the skills that allow them to live in broader society and through which the values and knowledge of that society are transmitted across the generations.

A strong and stable family structure and durable social institutions cannot be legislated into existence the way a government can create a central bank or an army. A thriving civil society depends on a people's habits, customs, and ethics -- attributes that can be shaped only indirectly through conscious political action and must otherwise be nourished through an increased awareness and respect for culture.

Beyond the boundaries of specific nations, this heightened significance of culture extends into the realms of the global economy and international order. Indeed, one of the ironies of the convergence of larger institutions since the end of the cold war is that people around the world are now even more conscious of the cultural differences that separate them. For example, over the past decade, Americans have become much more aware of the fact that Japan, an erstwhile member of the "free world" during the cold war, practices both democracy and capitalism according to a different set of cultural norms than does the United States. These differences have led to considerable friction at times, as when the members of a Japanese business network known as a keiretsu buy from one another rather than from a foreign company that might offer better price or quality. For their part, many Asians are troubled by certain aspects of American culture, such as its litigiousness and the readiness of Americans to insist upon their individual rights at the expense of the greater good. Increasingly, Asians point to superior aspects of their own cultural inheritance, such as deference to authority, emphasis on education, and family values, as sources of social vitality.

The increasing salience of culture in the global order is such that Samuel Huntington has argued that the world is moving into a period of "civilizational clash," in which the primary identification of people will not be ideological, as during the cold war, but cultural. Accordingly, conflict is likely to arise not among fascism, socialism, and democracy but among the world's major cultural groups: Western, Islamic, Confucian, Japanese, Hindu, and so on.

Huntington is clearly correct that cultural differences will loom larger from now on and that all societies will have to pay more attention to culture as they deal not only with internal problems but with the outside world. Where Huntington's argument is less convincing, however, is that cultural differences will necessarily be the source of conflict. On the contrary, the rivalry arising from the interaction of different cultures can frequently lead to creative change, and there are numerous cases of such cultural cross-stimulation. Japan's confrontation with Western culture after the arrival of Commodore Perry's "black ships" in 1853 paved the way for the Meiji Restoration and Japan's subsequent industrialization. In the past generation, techniques like lean manufacturing -- the process of eliminating buffers from the manufacturing process to facilitate feedback from the factory floor -- have made their way from Japan to the United States, to the latter's benefit. Whether the confrontation of cultures leads to conflict or to adaptation and progress, it is now vitally important to develop a deeper understanding of what makes these cultures distinctive and functional, since the issues surrounding international competition, political and economic, increasingly will be cast in cultural terms.

Perhaps the most crucial area of modern life in which culture exercises a direct influence on domestic well-being and international order is the economy. Although economic activity is inextricably linked with social and political life, there is a mistaken tendency, encouraged by contemporary economic discourse, to regard the economy as a facet of life with its own laws, separate from the rest of society. Seen this way, the economy is a realm in which individuals come together only to satisfy their selfish needs and desires before retreating back into their "real" social lives. But in any modern society, the economy constitutes one of the most fundamental and dynamic arenas of human sociability. There is scarcely any form of economic activity, from running a dry-cleaning business to fabricating large-scale integrated circuits, that does not require the social collaboration of human beings. And while people work in organizations to satisfy their individual needs, the workplace also draws people out of their private lives and connects them to a wider social world. That connectedness is not just a means to the end of earning a paycheck but an important end of human life itself. For just as people are selfish, a side of the human personality craves being part of larger communities. Human beings feel an acute sense of unease -- what Emile Durkheim labeled anomie -- in the absence of norms and rules binding them to others, an unease that the modern workplace serves to moderate and overcome.

The satisfaction we derive from being connected to others in the workplace grows out of a fundamental human desire for recognition. As I argued in The End of History and the Last Man, every human being seeks to have his or her dignity recognized (i.e., evaluated at its proper worth) by other human beings. Indeed, this drive is so deep and fundamental that it is one of the chief motors of the entire human historical process. In earlier periods, this desire for recognition played itself out in the military arena as kings and princes fought bloody battles with one another for primacy. In modern times, this struggle for recognition has shifted from the military to the economic realm, where it has the socially beneficial effect of creating rather than destroying wealth. Beyond subsistence levels, economic activity is frequently undertaken for the sake of recognition rather than merely as a means of satisfying natural material needs. The latter are, as Adam Smith pointed out, few in number and relatively easily satisfied. Work and money are much more important as sources of identity, status, and dignity, whether one has created a multinational media empire or been promoted to foreman. This kind of recognition cannot be achieved by individuals; it can come about only in a social context.

Thus, economic activity represents a crucial part of social life and is knit together by a wide variety of norms, rules, moral obligations, and other habits that together shape the society. As this book will show, one of the most important lessons we can learn from an examination of economic life is that a nation's well-being, as well as its ability to compete, is conditioned by a single, pervasive cultural characteristic: the level of trust inherent in the society.

Consider the following vignettes from twentieth-century economic life:

* During the oil crisis of the early 1970s, two automakers on opposite sides of the world, Mazda and Daimler-Benz (maker of Mercedes-Benz luxury cars), were both hit with declining sales and the prospect of bankruptcy. In both cases, they were bailed out by a coalition of companies with which they had traditionally done business, led by a large bank: Sumitomo Trust, in the instances of Mazda, and the Deutsche Bank, in the case of Daimler. In both cases, immediate profitability was sacrificed for the sake of saving the institution -- in the German case, to prevent it from being bought out by a group of Arab investors.
* The recession of 1983-1984 that ravaged America's industrial heartland also hit the Nucor Corporation very hard. Nucor had just entered the steelmaking business by building mini-mills using a new German continuous-casting technology. Its mills were built in places like Crawfordsville, Indiana, outside the traditional rust belt, and were operated by nonunionized workers, many of them former farmers. To deal with the drop in revenues, Nucor put its employees -- from the CEO to the lowliest maintenance worker -- on a two- or three-day workweek, with a corresponding cut in pay. No workers were fired, however, and when the economy and the company recovered, it enjoyed a tremendous esprit de corps that contributed to its becoming a major force in the American steel industry.
* In the Toyota Motor Company's Takaoka assembly plant, any of the thousands of assembly line workers who work there can bring the entire plant to a halt by pulling on a cord at his or her workstation. They seldom do. By contrast, workers at the great Ford auto plants like Highland Park or River Rouge -- plants that virtually defined the nature of modern industrial production for three generations -- were never trusted with this kind of power. Today, Ford workers, having adopted Japanese techniques, are trusted with similar powers, and have greater control over their workplace and machines.
* In Germany, shop foremen on the floor of a typical factory know how to do the jobs of those who work under them and frequently take their place if the need arises. The foreman can move workers from one job to another and evaluates them based on face-to-face dealings. There is great flexibility in promotion: a blue-collar worker can obtain credentials as an engineer by attending an extensive in-company training program rather than going to a university.

The common thread that runs through these four apparently unrelated vignettes is that in each case, economic actors supported one another because they believed that they formed a community based on mutual trust. The banks and suppliers that engineered the Mazda and Daimler-Benz rescues felt an obligation to support these auto companies because the latter had supported them in the past and would do so again in the future. In the German case, moreover, there was a nationalistic feeling that such an important trademark German name as Mercedes-Benz should not fall into non-German hands. Workers at Nucor were willing to accept severe cuts in their weekly pay because they believed that the managers who devised the pay cut plan were hurting as well and were committed to not laying them off. The workers at the Toyota plant were given immense power to stop the entire assembly line because management trusted them not to abuse that power, and they repaid this trust by using that power responsibly to improve the line's overall productivity. Finally, the workplace in Germany is flexible and egalitarian because workers trust their managers and fellow workers to a higher degree than in other European countries.

The community in each of these cases was a cultural one, formed not on the basis of explicit rules and regulations but out of a set of ethical habits and reciprocal moral obligations internalized by each of the community's members. These rules or habits gave members of the community grounds for trusting one another. Decisions to support the community were not based on narrow economic self-interest. The Nucor management could have decided to award themselves bonuses while laying off workers, as many other American corporations did at the time, and Sumitomo Trust and Deutsche Bank could perhaps have maximized their profits by selling off their failing assets. Solidarity within the economic community in question may have had beneficial consequences over the long run for the bottom line; certainly Nucor's workers were motivated to give their company an extra measure of effort once the recession was over, as was the German foreman whose company helped him to become an engineer. But the reason that these economic actors behaved as they did was not necessarily because they had calculated these economic consequences in advance; rather, solidarity within their economic community had become an end in itself. Each was motivated, in other words, by something broader than individual self-interest. As we will see, in all successful economic societies these communities are united by trust.

By contrast, consider situations in which the absence of trust has led to poor economic performance and its attendant social implications:

* In a small town in southern Italy during the 1950s, Edward Banfield noted that the wealthy citizens were unwilling to come together to found either a school or hospital, which the town needed badly, or to build a factory, despite an abundance of capital and labor, because they believed it was the obligation of the state to undertake such activities.
* In contrast to German practice, the French shop foreman's relations with his or her workers are regulated by a thicket of rules established by a ministry in Paris. This comes about because the French tend not to trust superiors to make honest personal evaluations of their workers. The formal rules prevent the foreman from moving workers from one job to another, inhibiting development of a sense of workplace solidarity and making very difficult the introduction of innovations like the Japanese lean manufacturing system. * Small businesses in American inner cities are seldom owned by African-Americans; they tend to be controlled by other ethnic groups, like the Jews earlier in this century and Koreans today. One reason is an absence of strong community and mutual trust among the contemporary African-American "underclass." Korean businesses are organized around stable families and benefit from rotating credit associations within the broader ethnnic community; inner-city African-American families are weak and credit associations virtually nonexistent.

These three cases reveal the absence of a proclivity for community that inhibits people from exploiting economic opportunities that are available to them. The problem is one of a deficit of what the sociologist James Coleman has called "social capital": the ability of people to work together for common purposes in groups and organizations. The concept of human capital, widely used and understood among economists, starts from the premise that capital today is embodied less in land, factories, tools, and machines than, increasingly, in the knowledge and skills of human beings. Coleman argued that in addition to skills and knowledge, a distinct portion of human capital has to do with people's ability to associate with each other, that is critical not only to economic life but to virtually every other aspect of social existence as well. The ability to associate depends, in turn, on the degree to which communities share norms and values and are able to subordinate individual interests to those of larger groups. Out of such shared values comes trust, and trust, as we will see, has a large and measurable economic value.

With regard to the ability to form spontaneous communities such as those detailed above, the United States has had more in common with Japan and Germany than any of these three has with Chinese societies like Hong Kong and Taiwan, on the one hand, and Italy and France on the other. The United States, like Japan and Germany, has historically been a high-trust, group-oriented society, despite the fact that Americans believe themselves to be rugged individualists.

But the United States has been changing rather dramatically over the past couple of generations with respect to its art of association. In many ways, American society is becoming as individualistic as Americans have always believed it was: the inherent tendency of rights-based liberalism to expand and multiply those tights against the authority of virtually all existing communities has been pushed toward its logical conclusion. The decline of trust and sociability in the United States is also evident in any number of changes in American society: the rise of violent crime and civil litigation; the breakdown of family structure; the decline of a wide range of intermediate social structures like neighborhoods, churches, unions, clubs, and charities; and the general sense among Americans of a lack of shared values and community with those around them.

This decline of sociability has important implications for American democracy, perhaps even more so than for the economy. Already the United States pays significantly more than other industrialized countries for police protection and keeps more than 1 percent of its total population in prison. The United States also pays substantially more than does Europe or Japan to its lawyers, so that its citizens can sue one another. Both of these costs, which amount to a measurable percentage of gross domestic product annually, constitute a direct tax imposed by the breakdown of trust in the society. In the future, the economic effects may be more far-reaching; the ability of Americans to start and work within a wide variety of new organizations may begin to deteriorate as its very diversity lowers trust and creates new barriers to cooperation. In addition to its physical capital, the United States has been living off a fund of social capital. Just as its savings rate has been too low to replace physical plant and infrastructure adequately, so its replenishment of social capital has lagged in recent decades. The accumulation of social capital, however, is a complicated and in many ways mysterious cultural process. While governments can enact policies that have the effect of depleting social capital, they have great difficulties understanding how to build it up again.

The liberal democracy that emerges at the end of history is therefore not entirely "modern." If the institutions of democracy and capitalism are to work properly, they must coexist with certain premodern cultural habits that ensure their proper functioning. Law, contract, and economic rationality provide a necessary but not sufficient basis for both the stability and prosperity of postindustrial societies; they must as well be leavened with reciprocity, moral obligation, duty toward community, and trust, which are based in habit rather than rational calculation. The latter are not anachronisms in a modern society but rather the sine qua non of the latter's success.

The American problem starts with a failure of Americans to perceive their own society, and its historical communitarian orientation, correctly. Part I addresses this failure, beginning with a discussion of why recent arguments among certain thinkers miss a critical point about the cultural dimension of economic life. The remainder of this part will define more precisely what is meant by culture, trust, and social capital. It will explain how trust is related to industrial structure and the creation of those large-scale organizations vital to economic well-being and competitiveness.

Parts II and III deal with two major bridges to sociability, the family and nonkinship-based communities, respectively. There are four "familistic" societies detailed in part II: China, France, Italy, and South Korea. In each, the family constitutes the basic unit of economic organization; each has experienced difficulties in creating large organizations that go beyond the family, and in each, consequently, the state has had to step in to promote durable, globally competitive firms. Part III examines Japan and Germany, both high-trust societies, which, in contrast to the familistic societies of part II, have had a much easier time spawning large-scale firms not based on kinship. Not only did such societies move early to modern professional management, but they have been able to create more efficient and satisfying workplace relationships on the factory floor. Lean manufacturing, invented by the Toyota Motor Corporation, will be considered as one example of the organizational innovations possible in a high-trust society

Part IV discusses the complicated problem of where to locate the United States in the spectrum of low- and high-trust societies. Where the American art of association came from, and why it has been weakening, are the chief issues taken up in this part of the book. Finally, part V will draw some general conclusions concerning the future of global society and the role of economic life in the broader scope of human activity.

Copyright © 1995 by Francis Fukuyama