Anna Bernasek on the Economics of Integrity (Trust Quotes #6)

Anna Bernasek is author of the just-published book The Economics of Integrity

No stranger to the subject matter, she’s been a regular contributor to the Economic View column in the New York Times. She has been a staff writer covering finance and the economy at Fortune Magazine, TIME Magazine and Australia’s Sydney Morning Herald newspaper. She has frequently appeared as a guest commentator on broadcast media including CNN, CNBC, public television and NPR.

CHG: Welcome to the Trust Quotes series, Anna. Let’s lead with your book, if you don’t mind. What’s the central thesis of The Economics of Integrity? Or theses, if that’s too limiting?

AB: If there’s one thing I’d like readers to get out of my book, it’s that integrity—or trust if you prefer—is an economic asset. Once you understand that, you can think about the topic without being limited by the conventional idea that integrity is a personal virtue, and that it’s costly. If one approaches it in the right way, integrity isn’t a cost at all. It’s an investment opportunity, a way to build wealth. That’s very exciting because there’s no upper limit to how much trust—wealth—we can create. I think it’s the biggest opportunity we face.

CHG: You use several examples of inter-dependence to make your point about integrity; care to share one?

AB: Well, one of the points I try to make is that integrity—in the sense of trust and interdependence—is an abundant fact that is found literally in every aspect of our economy. For me, a good example is milk. There are about 15 people who are directly involved in making a gallon of milk. Think of the farmer, the vet, the milk hauler, lab technicians at the milk plant and so on.
If you include all the people who are indirectly responsible for making milk the number grows exponentially. When everyone does what they say they are going to do they all benefit. If one cuts corners or does the wrong thing it can hurt everyone in the chain. That’s why integrity is a shared asset. We share in the rewards of integrity but we also share in the risks.

CHG: What do you believe is the most controversial point you’re trying to make? Controversial, that is, compared to current received wisdom?

AB: Not everybody gets my ideas right away. There are two classic responses to my book, usually from people who haven’t read more than a few words of it. The first is what the heck am I talking about, can’t I just pick up the paper on any day and see that nobody has any integrity anymore? And the second is that, well, there’s nothing new here because we always knew that trust is important.

I would say this. To anybody who says we are lacking in integrity, you don’t need to think very hard to see that if we totally lacked trust in our institutions and fellow citizens the economy would be back in the stone age. We are where we are because generations upon generations have through trial and error, with great effort and sacrifice, bequeathed to us an advanced society where our wealth and our economy depends on an enormous stock of integrity.

It’s so ingrained that we take it for granted, and most people can only think of the defects in our collective integrity assets. I’m saying it’s there, it’s enormous, and it’s very important. It’s an opportunity, not a problem. Sure there are places to improve. But that’s the point—let’s do that and we’ll benefit.

To those who say there’s nothing new here, I have to admit that I didn’t exactly invent or discover trust and integrity. But in mainstream economics trust is treated in an offhand way. It’s typically an assumption on which an intellectual superstructure is then constructed. I’m saying something new: integrity is an asset, and therefore has the property of quantity. Not easy to measure, but still a quantitative subject. We can create it, invest in it, and diminish it as we choose. What I’m saying is that integrity is not just related to, but integral to wealth.

CHG: Are you using the terms ‘trust,’ ‘integrity,’ and ‘virtue’ to mean largely the same thing, or do you see particular relationships between them?

AB: I make a distinction between integrity in its colloquial sense and integrity as an economic asset. In ordinary conversation, integrity is a personal quality. That suggests personal ethics and morality, desirable and virtuous qualities in anyone. When I talk about integrity insofar as it relates to the economy, I am talking about relationships of trust.

In economic terms it doesn’t matter how pure your soul is if nobody knows about it. But if somebody respects you and trusts you, then you have something valuable. So I use the word integrity to describe a relationship of trust between persons or institutions. That trust is an economic asset and it’s very valuable. It underlies everything we do.

CHG: You write that the recent financial crisis was first and foremost a crisis of integrity. To what extent do you think we—government, business, the public—have learned this lesson (or not)?

AB: I think a lot of people recognize that what I’m saying makes intuitive sense. The issue for many people, and the reason I wrote the book, is that they don’t have the tools and concepts they need to think deeply about the problems we have experienced with integrity and about the solutions we need to go forward. It’s not going to cut it anymore to say that we need to deregulate financial markets and encourage financial innovation. But what is going to replace the rhetoric of deregulation? I think my book has some pretty good answers.

CHG: You’re a fan of disclosure in financial markets; how far can disclosure along take us? What else has to happen to increase trust in financial markets?

AB: Disclosure is probably the single most crucial step we can take. But it can’t happen in a vacuum. If there are no norms and guidelines, disclosure becomes an exercise in futility as enormous quantities of irrelevant information obscure what’s really going on. We need to get the important and relevant information out there in a fast, organized and convenient way.

But look at the tools we have now. The internet is the greatest tool ever invented to get this job done. And once we have norms and guidelines, we need to have accountability so that they aren’t just ignored. It’s a big job, no doubt, but the payoff is even bigger. We simply can’t go back to where we were before the crisis. It’s a broken system.

CHG: You’ve written recently about our health care situation, and the recently-passed legislation. If legislators had read, and absorbed, your book (it’s a hypothetical, I know), what would they have done differently?

AB: Just about everything, I’m sorry to say. There are a couple of key points that are hidden in plain view.
First, our existing system is grossly inefficient. On the whole we are paying way too much for health care and we’re not getting results. Second, our system is grossly unfair. Everybody is getting care, but not at the right time or place and certainly not at the right cost. That’s actually making people less well than they could otherwise be.

And along the way, a minority of people are being bankrupted or severely burdened financially in a way that literally adds insult to injury, while others–including caregivers, taxpayers and local communities–are bearing inappropriate burdens.

Every other developed nation—every one—has a better system. There are existing, proven, tested, popular solutions that are being ignored. The biggest travesty of the whole legislative process was the calumnious abandonment of single payer.

Only single payer moves us significantly forward. Everything else, no matter what desirable features it has (and there are a few positive things in the legislation) further entrenches a bad system and endangers not only our future health but our economic prosperity. The only thing I like about the recent law is that it is proof that change can happen. But it wasn’t the change we need.

CHG: I’ve often thought of brands as the corporate equivalent of personal trust. What is, in your view, the relationship between personal trust and corporate, or systemic, integrity? Can you have systemic trust without personal integrity?

AB: Personal integrity is a building block for corporate integrity. Of course you can imagine a situation where someone has a defect in personal integrity but it doesn’t affect their institution because it isn’t relevant to the institutional context. However, I don’t tend to think that’s the norm.

CHG: You talk about the DNA of integrity. Is integrity born, or can it be made? Can we develop integrity, or must it come with mother’s milk? How long does it take?

AB: Integrity can be created. And I think that’s what’s so exciting about it. I think a good example is eBay. From scratch eBay created an integrity system where buyers and sellers came together in a relationship of trust to create wealth. The more people heard about the good experience, the more people were encouraged to try eBay and it created a self-reinforcing system of integrity and wealth.
It can take decades to create integrity or it can literally happen overnight. It depends on whether the DNA of integrity is present (disclosure, norms and accountability) These three conditions together create integrity. They are present in eBay and they are present in other integrity systems like the NYSE.

CHG: Anna, it’s been a pleasure to have you share these thoughts with Trust Matters readers; thank you very much.

AB: Thank you!

This is number 6 in the Trust Quotes series.

The entire series can be found at:

Recent posts in this series include:
Trust Quotes #5: Neil Rackham
Trust Quotes #4: Peter Firestein on Trust, Character and Reputation
Trust Quotes #3: Dr. Eric Uslaner on the Nature of Trust

5 replies
  1. Frank Piuck
    Frank Piuck says:

    I thought this discussion was fascinating and profound, and very consistent with your work.  And I was very interested in what Ms. Bernasek said about the health care bill just passed until she talked about a Single payer as the missed opportunity.  I respectfully but profoundly disagree.

    The biggest problem in the preexisting system was degradation of Integrity.  The insurance companies and the health proferssionals distrust each other, and the system has gotten more bureuacratic and expensive as a result.  The nations malrpctice system compounds this.  The new legilstaion will make that worse, but if ms Bernasek thinks that a single payer system will fix it, I would appreciate her explaining how.  I don’t beleive it.  I think the solution is to make teh system responsive to the patients, not the payers.

  2. Frank Piuck
    Frank Piuck says:

    Second thoughts on my previous comment.  Upon rereading it was too much of a disagreement rather than a constructive request for amplification.

    I wish I had said that I was startled by Ms. Bernesek’s comments about a single payer system being better than the current one.    I would very much like to get a deeper understanding of why she believes that.  My reason for suprise at her assertion follow.

    Readers of this blog may agree with me that distrust between the insurance companies and the health providers is a cost driver.  Bureaucracy is a consequence of the absence of trust.  We hear often hear about insurance companies unfairly restricting what they will pay for, but I have personal experience that there is reason the insurance companies mistrust.  After one of the first checkups I had as an adult, the doctor offered to give me a diagnosis of a minor illness, so I could get my insurance company to pay for it.  It was a kindness to me, but an abuse of the system.  I have witnessed others.  But i don’t see how a signle payer system alleviates this.

    The Federal Government distrusts its vendors.  Having worked for two defense contractors, I saw a great deal of effort spent administering governement rules.   I never got to a position where I could determine how much of the total cost of our products was based on following government efforts to control cost, but I could see that it was a very large fraction.   We used government accounting systems that had to comply with government rules and which were subject to government audit.  If the rules changed we had to change the systems, and the changes had to be audited for compliance.    We negotiated our cost structure in advance, and we negotiated our profit margins in advance.   Some contracts were fixed price, some contracts were fixed profit.  These negotiations were included in our cost structure, and the negotioters were well paid.  We were blamed if we overran budgets, and considered corrupt if we came in under budget and therefore had higher profits.   It is a mathematical tautology that costs on one project would affect the overhead rates, and therefore the costs calculated by the accounting system on other contracts, but any deviation from a negotiated overhead rate was considered suspicious, and had to be justified to government auditors.  So a small contract could have a lower overhead than the negotiated rate beasue a large contract had an overrun.  If this happened it was  assumed to be nefarious until proven otherwise.    The goal of all this was integrity and cost containment, but these processes meaningfully raised the total cost to the government, and it did not increase trust, or product qualityand reliability.

    Given that a single payer system would cost the government considerably more than the entire defense budget, I cannot imagine that the same kind of bureaucracy would not arise in the health system.  There would be some savings from having consistent requirements, rather than the variety that the existing system requires, but the main drivers of bureaucracy would remain in place, or be increased.

    As another example, look at the administrative costs of federal aid to education, where the recipients are not private sector, but state and local governments.

    So my challenge to Ms. Bernasek is how do we increase the integrity of the health care system?  I hope she can persuade me that a single payer system will do so.

  3. anna bernasek
    anna bernasek says:

    Health reform is obviously a big topic. I won’t try to address the subject in a thorough  manner (very few people are prepared to do that!) but there are a number of key facts that cut through the noise. First, a single payer type system already exists in the US. It’s called medicare, and it works in my opinion and in the opinion of millions of medicare beneficiaries reasonably well. It’s not perfect by any means, and it has exactly the type of problems you refer to, but it exists and is in working order. And here’s the point: Medicare delivers a lot of care a lot more efficiently than the private insurance system.

    Second, most advanced countries have a single payer type of solution that provides universal health care. There are lots of intricacies, but the basic scenario is that everyone participates, everyone who is able pays (thru taxes or otherwise) and the government makes sure that the whole thing works and doesn’t get too expensive. And the point of that is: Those countries–every other major first world country–provide very good health care to everyone for half of what we are spending here. There are pluses and minuses in comparisons with the US, but the fact is that in Canada or Australia or Britain or France or Germany or Japan or … overall health is not worse and overall experience is not demonstrably worse while cost is lower.

    So there are lots of issues to manage in any system, but the integrity issue here is when policy types don’t acknowledge that there are existing solutions to our problem that are far better than what we have today. We would be better off copying any adavnced nation than continuing with our private insurance system. And then if anybody wants to improve on that, great! But it’s a fraud to say we can get there with incremental change to our current system. That’s not gonna do it.


  4. Charlie (Green)
    Charlie (Green) says:

    I really have no business commenting on this one; it’s not go a lot directly to do with trust.  But hey, it’s my blog, so I’ll exercise the prerogative to shoot my mouth off.

    Seems to me the two main arguments for single-payer are the absence of a profit override, and the elimination of the competitive instinct.

    As the elimination of a separate layer of profits, you can argue that private sector efficiency more than makes up for their profit margin, and maybe that’s right, maybe not.  Medicare does it a lot more cheaply, but there are economies available to Medicare that aren’t available elsewhere etc.  I’m not sure where that one comes out.

    The other one seems to me to be dispositive.  What we had just now was not health care reform, it was insurance reform, and I pretty much agree with Anna that if you’re going to have insurance, it’s going to be way more expensive and a hassle than single payer because of it.

    First I personally think it’s an outrage that we pass a law to cover 30 million citizens and a ton of citizenry complains that it costs money.  Of course it does!!  The question is whether it’s defensible as a society not to cover citizenry–every other modern country outside the US concluded yes long ago. 

    Second, covering everybody vs. letting off the healthy people simply makes it cheaper on the whole.  Yes, the healthy people who were previously non-insured pay more; just like someone living in a gated community with security guards may not need municipal police, but they have to pay anyway. 

    Third, the current system pits insurance company against insurance company: there is no incentive to cooperate by having shared systems, which is why every doctor’s office you see is still overflowing in paper.  The great virtue of a single-payer system, regardless of who runs it, is you get a single system.  What private sector industry can you imagine that still works off huge file folders of manila envelopes and asks you to write in longhand your name, phone, etc. every time you enter the system!  Enormous wastage there, because although we think it doesn’t make sense to have dozens of water companies, dozens of airports, dozens of armies, dozens of police forces, dozens of cable TV companies, somehow we still think it makes sense to have dozens of insurance companies offering health care.  No it doesn’t!  

    Well, there’s the limits of my knowledge, or ignorance, as they case may be.  Except I’ll add one more thing.

    I spent a couple weeks in Denmark a few weeks back, before the legislation passed, and in speaking to several Danish lawyers (who are very familiar with the US–we discussed neighborhoods in Brooklyn and San Francisco), and here’s what they had to say:

    "What is it with you Americans?  Even the most right-wing politician in Denmark would never think of getting rid of universal health care, it’s so obviously good.   How barbaric and uneconomic can you people be?"


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