Weekend Reading: “Cultural Configurations” — A Pro-Growth Agenda is a Pro-Trust Agenda

By: Stephen J. Scott , Founder & CEO of Starling

“It is indeed difficult for ordinary citizens to acquire real political power and change the way their society works. But it is possible.”

During my undergrad years I was fortunate enough to spend some time studying abroad, at the University of York, in the north of England. In hindsight — as such things go — it proved to be a transformative experience; one that set my subsequent life course, very much so for the better.

Though difficult at the time, particularly impactful was the experience of being the odd man out. Among a predominantly British student body, I was the “bloody Yank.” These were the Reagan-Thatcher years and, amidst the progressive-liberal fervor typical of college students, being an American in those days put a bit of a target on my back. I’ve never been known for my shy and retiring demeanor, and my native tendency towards … umm … volume ... didn’t help matters any.

Fortunately, I wasn’t the only odd duck. 

A British Navy-brat — newly returned to England after a youth spent in Canada and Australia — was something of an insider-outsider among the lads. He took pity on me, brought me into his social circle, taught me to drink in full pints, and remains my best mate to this day. Another oddity in our shared social circle was a studious Turkish kid whom I wish I’d gotten to know a bit better. Last month, he won the Nobel Prize in Economic Sciences.

In Why Nations Fail: The Origins of Power, Prosperity, and Poverty (2012), Daron Acemoglu and his co-author James Robinson explain how nations thrive when prosperity is shared broadly across society, and how this in turn hinges on the viability of economic and political institutions. “The politics of institutions,” they write, “is central to our quest for understanding the reasons for the success and failure of nations.” Those newly elected should give the book a close read.

In my Weekend Reading post two weeks ago, I noted the Financial Times’ observation that, throughout the biggest election year in history, every incumbent governing party facing election in a developed country lost vote share.

It is unclear whether these electoral drubbings demonstrate voter discontent with their political institutions, with a seemingly entrenched and self-serving political class, or with both. But, across the world’s democracies, politicians are newly alive to the fact that they must deliver the economic goods to the masses or find themselves banished from the corridors of power.

It is thus unsurprising that the mantra of “safety and stability,” which has dominated the agenda among prudential bank regulators since the Financial Crisis, has been displaced by today’s mantra of “growth and competitiveness.” Proponents of either priority argue that their agenda is critical to trust in the financial sector. Both are right but, as ever, the Devil lurks in the details…

The Pro-Trust Agenda

“We work for organisations that perform a very special public task,” argued Klaas Knot , Financial Stability Board Chairman and President of the Dutch central bank, in a speech delivered earlier this month. “Keeping the financial system safe and sound.”

“People trust us,” Knot added. “If we breach that trust, it not only damages our organisation, it affects the entire financial system.” He is right. Indeed, recent research demonstrates that trust in the financial system has yet to fully recover in the 15-years since the Financial Crisis. And in a special report issued earlier this year, The Economist argued that the Crisis led to a continuing “fragmentation” of the global financial system, made worse by today’s geopolitical tensions.

“Banking rests on trust,” Acting Comptroller of the Currency Michael Hsu rightly argued before the U.S. House of Representatives Committee on Financial Services in a speech delivered last week. “Bank regulators serve as guardians of this trust,” Hsu insisted.

Central to their success in this role, however, is assuring that regulators are perceived as trustworthy by those whom they are meant to serve. “People need to believe that their bank and the banking system are working for them,” Hsu rightly added. Alas, it is not at all clear that they do.

“Although Americans are distrustful of Wall Street, they are similarly distrustful of the Wall Street regulators tasked with overseeing the industry,” the Cato Institute argued back in 2017. “48% have ‘hardly any confidence’ in either,” Cato added at the time. Following the bank collapses of 2023, both the regulators and the regulated have suffered yet another sharp decline in public trust. And not just in the United States and Switzerland, where events took place.

“The bank failures,” the Bank for International Settlements – BIS observed in an October 2023 report, “triggered a broader crisis of confidence in the resilience of banks, banking systems and financial markets across multiple jurisdictions.” 

It is not surprising, therefore, that banking sector overseers are now preoccupied with efforts aimed at restoring trust in the system — and in the people and organizations from which it arises.

For Stefan Walter , head of Swiss regulator Finma, this implies legislative changes that award his agency greater power to exercise more intensive supervisory oversight. For Erik Thedeen, head of the Swedish central bank and chairman of the Basel Committee on Banking Supervision, the necessary systemic confidence depends upon implementing more robust capital cushions.

For French and German bank regulators, system stability means overcoming “political paralysis” and achieving greater cross-border integration. Increasingly dominant voices in America, meanwhile, contend that multi-lateral institutions with the temerity to insist upon cross-border standards are a key contributor to political and economic malaise, and call for a U.S. withdrawal from such.

More power, or less? More rules, or less? More supervisory discretion, or less? More capital controls, or less? More integration, or less? Proponents of the “pro-trust agenda” can be found on either side of these contemporary divides. 

But who do we trust to provide answers?

Trust and Culture

Sadly missing from these debates is an appreciation for the way in which trust operates among real people, in real life, day-to-day. So, allow me some brief observations:

1) Trust is personal. “Trust is something that exists only between individuals,” the renowned evolutionary psychologist Robin Dunbar explained in our 2022 Compendium. “Even when those individuals are sometimes seen as an institution,” Dunbar added, “what we envision is not the institution but the individuals that make it up.”

2) Trust is holistic. We trust from the head and from the heart. The decision to place our trust in someone — or in those who people a given institution — has cognitive and affective components.

Working from our heads, we must have reason to believe that these people or bodies are both competent and reliable. A competent surgeon who can’t be relied upon to show up in time for my surgery is not trustworthy. Nor is the hospital that reliably employs incompetent surgeons.

Working from the heart, we also need to believe that the people and institutions in which we place our trust are honest in their dealings with us and benevolent in their motivations. 

The doctor who is competent and reliable, but who lied about attending medical school, does not inspire confidence. Nor does the honest doctor who explains why the black marketeers who regularly visit the clinic are so often delighted to find organs made suddenly available.

3) Trust is cultural. In a 2024 paper “Culture, Institutions and Social Equilibria,” Acemoglu and Robinson explore the role of culture in economic and political life.

They define culture as “patterns of beliefs, relationships, rituals, attitudes and obligations that furnish meaning to human interactions and provide a framework for interpreting the world, coordinating expectations and enabling or constraining behaviors.”

Rather than demanding that actors engage in any specific type of behavior, culture provides actors with “a set of justifications and associated choices” upon which their decisions to act are to be based, Acemoglu and Robinson explain. 

Culture, that is — whether among whole peoples, such as nations, and perhaps the authors intended also to imply within groups, like organizations — works to “affect, facilitate and legitimize certain types of behavior.”

But culture is fluid, and different “cultural configurations” abound. Any cultural configuration serves to summarize “the prevailing social meaning, political and social justifications, current social norms, and the set of condoned and discouraged behaviors” at work in a given context.

And because culture operates through a dynamic interplay with people and institutions of power and persuasion, culture may therefore be “transformed rapidly by political forces, institutions and new ideas.” 

Culture, that is, can be reset by “cultural entrepreneurs.”

It is consistent with these views to suggest that the accepted cultural configurations at work in a given context will either inspire or inhibit a readiness to find people and institutions trustworthy.

Indeed, Acemoglu and Robinson explain that “Cultural configurations provide justifications for different arrangements and institutions.” It seems reasonable to suggest that we are unlikely to place our trust in people or institutions lacking in such “justifications,” as Acemoglu and Robinson deploy the term. 

Rather, I think we would be more likely to conclude that people or institutions behaving in ways contrary to accepted justifications must do so either because they are incompetent, unreliable, dishonest, ill-intentioned or some combination of the foregoing.

People and institutions that behave in a manner contrary to accepted cultural configurations, in short, are likely to be seen as untrustworthy. Unless, that is, they are cultural entrepreneurs successfully engaged in establishing a newly acceptable cultural configuration…

A Pro-Growth Agenda

It seems clear from recent election results that we are experiencing a broad shift in cultural configurations, worldwide. “When there is a change from one cultural configuration to another,” Acemoglu and Robinson warn, “this can cause major cultural change, especially if the old and the new cultural configuration justify and support very different social arrangements.”

These shifts can occur with a startling suddenness. “Such discontinuous change can result either because certain relevant circumstances have changed (new economic opportunities, demographic changes, etc.) or because the balance of political power in society shifts (specifically, groups that are disadvantaged by the prevailing cultural configuration may gain strength),” they write. “It can also be the outcome of a process of cultural struggles…”

Across the globe socio-political discourse over the past decade has been fraught with “culture war” struggles that have resulted in ever increasing polarization and more deeply entrenched defense of views at the extremes. Amidst such vehement flux, it is almost inconceivable that cultural entrepreneurs would not emerge to tug restive populations in competing directions.

Nor should we imagine that the sedate world of banking sector regulation would be immune.

After the Financial Crisis, cultural configurations shifted to espouse the agenda of “safety and stability” that has shaped macro-prudential policymaking over the last 15-years. Today, cultural configurations have shifted yet again, and yesterday’s policy consensus has been displaced by today’s calls for a shift in policymaking that champions “growth and competitiveness.”

In the UK, for instance, Chancellor of the Exchequer Rt Hon Rachel Reeves , and Economic Secretary to the Treasury Tulip Siddiq have recently issued a “Call for Evidence” aimed at assuring that their Financial Services Growth & Competitiveness Strategy is being duly embraced by all those whom it addresses. “Growth is the number one mission of this government,” the document begins.

“As one of the UK's largest and highest productivity sectors, financial services has a fundamental role to play in delivering the growth mission,” the Call for Evidence continues. “The sector has not grown in real terms since 2010 and, at almost 10% of the UK economy, if we want the UK to grow then our financial services sector must be supported to grow.”

And lest the point be missed, “stability alone is not enough,” the Chancellor and Secretary insist. “We must ensure that government policy is creating the conditions for growth, looking across the range of relevant factors."

This includes the regulatory environment. “The Prime Minister has been clear that regulation should support growth and unlock investment, and our regulators have an important role in facilitating this.” While regulatory standards aimed at safety and stability are important, “we believe that it is possible to maintain high standards while seeking to minimise the compliance burden for firms and to make the regulatory framework easier to navigate,” the officials argue.

“The government itself also has an important role to play in financial services regulation,” they remind — along with a thinly veiled threat that marks British-English at its subtle finest. “This includes making decisions about what activities are subject to regulation and determining what powers and responsibilities the regulators have.” [emphasis added]. In power since only this past July, the new UK government is assiduously erecting a new cultural configuration.

Pro-Growth is Pro-Trust

In his 2019 book, Narrative Economics: How Stories Go Viral & Drive Major Economic Events, Nobel Prize-winning economist Robert Shiller writes, “If we do not understand the epidemics of popular narratives, we do not fully understand changes in the economy and in economic behavior.” Allowing us to better apprehend how “popular stories change through time to affect economic outcomes,” Narrative Economics equips us with a powerful policymaking tool.

If “the politics of institutions” reflect “patterns of beliefs” that “legitimize certain types of behavior,” as Acemoglu and Robinson suggest, then it seems consistent with Shiller that “cultural entrepreneurs” would deploy the power of narrative to erect a new “framework for interpreting the world, coordinating expectations and enabling or constraining behaviors.”

Responding to popular discontent with current economic circumstances, newly elected leaders across the world’s democracies are asserting a new narrative and a new cultural configuration that favors economic growth and competitiveness over safety and stability. As a policy goal, “safety and stability” is of course essential. As a narrative, however, it’s stale.

And because voters have lost trust in the post-Crisis cultural configuration, they have lost trust in the associated narrative — and in those who espouse it. Those continuing to do so will likely find themselves increasingly marginalized.

Rightly or wrongly so, today, a pro-growth agenda is a pro-trust agenda.

This piece first appeared in Starling Insights' newsletter on November 24, 2024. If you are interested in receiving our thrice-weekly newsletter, among many other benefits, please consider signing up as a Member of Starling Insights.