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It is clear that the optimum level of trust in people is less than infinity. Afterall, trust that is not warranted by the trustworthiness of the other party can lead to grief.
One view, then, is that deceitful behaviour by politicians is not of itself a problem, provided that voters adapt their expectations accordingly. However, as Alan Mitchell noted in the weekend Finanical Review, the actions of leaders - whether political, business, sporting or others - has impacts beyond the immediate. Their behaviour influences societal norms and there may be a contagion effect, where untrustworthy behaviour in one part of life leads to untrustworthy behaviour elsewhere. As pointed out in the recent Productivity Commission report on social capital, to which Mitchell referred, trust is a commodity for which multiple equilibria exist - societies can get locked into low trust equilibria, such as in Russia; middling levels of trust, as in Anglophone countries; or high trust equilibria, as in the Scandanavian societies. And this has implications for economic performance because high levels of social capital and associated levels of trust reduce transactions costs, among other things. Why do markets work in Australia but not in Russia? Arguably because of the different levels of social capital that underpin interactions in those countries. Thus, lieing about Iraq, or the health of Sydney rail system, matters economically. One of the "cultural contradictions of capitalism" is said to be that markets, while relying on Smith's moral sentiments, do not regenerate them but in fact consume them. Whether this is wholly so or not, trust does matter and politicians who undermine it undermine long-term economic performance.
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