Opinion
Trust and Risk in an Epochal Change
The 31st Plenary Meeting of the Círculo de Montevideo, held in Mexico City in mid-October, was particularly stimulating. Convened to discuss the civilizational change we are experiencing, it gave me the opportunity to take part in a panel devoted to trust and risk. In my remarks, I revisited some ideas I had presented at an earlier meeting of the Círculo, when we discussed trust in contemporary society and I was asked to reflect on the impact of conflicts. That reflection was subsequently developed in my article “The Impact of Conflicts and Fragmented Globalization,” published on this blog.
The Declining Effectiveness of Conventional Wisdom
On that occasion, I argued that one of the problems of our time was the declining effectiveness of conventional wisdom in anticipating the consequences of our decisions. For decades, we relied on relatively stable relationships among economic, political, and social variables. Those relationships did not eliminate risk, but they provided a framework for projecting outcomes with some degree of confidence.
When the discussions of the Círculo de Montevideo began thirty years ago, for example, we could expect that negotiating a trade agreement and reducing tariffs would increase trade, stimulate certain investment flows, and produce changes in labor markets and the productive structures of the participating countries. We could debate the magnitude and distribution of these effects, but we had some confidence in the relationships we used to estimate them.
Today, those relationships are less stable and their outcomes far less linear. Globalization may help narrow income differences between countries while, at the same time, increasing inequality within some of them. Barriers imposed by geopolitical tensions might suggest a process of deglobalization. Yet they often do not eliminate interdependence: they reorganize globalization, fragment it, and make it more selective.
We can observe similar phenomena in energy, technology, and finance. The problem is not simply that we must take more variables into account. It is that the relationships among the variables on which we built our predictions no longer appear to operate with their former stability. As a result, anticipating the consequences of our decisions has become more difficult.
From Risk to Radical Uncertainty
This problem has a significant intellectual history. In 1921, Frank Knight published Risk, Uncertainty and Profit, establishing a distinction that remains fundamental: risk refers to situations in which we can assign probabilities with a reasonable degree of confidence; uncertainty refers to those in which we cannot.
Almost a century later, John Kay and Mervyn King revisited and deepened that discussion in Radical Uncertainty, published in 2020. Their argument goes beyond the difficulty of measuring probabilities. They warn that, in many consequential situations, probabilistic models themselves do not adequately represent the reality we seek to understand. Adding numbers to those models may give us a false sense of precision without improving our ability to make decisions.
The distinction strikes me as fundamental. For Knight, the problem concerns our ability to measure risk. For Kay and King, the problem may be prior and more profound: how we represent the world and understand the processes that determine outcomes. It is, ultimately, another way of describing the declining effectiveness of our conventional wisdom.
How Can We Build Trust Without Predictability?
This transformation changes our relationship with trust. Historically, we trusted a public policy, an institution, a market, or even an international order because we knew its rules and assumed that they would enable us, within certain limits, to anticipate the consequences of our decisions.
But if we cannot assign reliable probabilities, predictability diminishes. And if our models do not even adequately represent the processes we are trying to analyze, we can no longer rely on predictability as the principal foundation of trust. The question we must therefore ask is how to build trust without predictability.
Institutions That Adapt Without Losing Their Purpose
Douglass North, a Nobel laureate in economics, defined institutions as humanly devised constraints that structure political, economic, and social interactions. Their function is to help create order and reduce uncertainty. This perspective, also connected to the intellectual tradition associated with Ronald Coase (1988), has been extraordinarily influential.
But how can we apply it when the environment changes faster than the institutions designed to organize it? Technological transformations, their effects on domestic politics, and their consequences for international relations confront us with this question every day.
In a relatively stable environment, clear rules and their continuity help us predict outcomes and place our trust in institutions. Under conditions of radical uncertainty, that function remains necessary, but it is no longer sufficient. An institution must also be able to recognize that reality has changed, acknowledge that some of its assumptions no longer hold, and adapt its responses without abandoning the purpose for which it was created.
This is a delicate balance. I am not proposing that we replace stable rules with the discretion of constantly shifting decisions. I am proposing that we combine institutional stability with adaptive capacity. In other words, preserve the principles while renewing the instruments.
Three Dimensions of the Same Challenge
At the level of democratic institutions, trust depends not only on respect for rules and procedures but also on their ability to respond competently to transformations that were not foreseen when they were designed. This requires improving citizen participation and decision-making mechanisms without abandoning the principles underpinning liberal democracy.
In the economic sphere, companies must add other equally decisive considerations to the traditional criteria of efficiency, costs, markets, and profitability: resilience, security, political risk, and strategic dependence. This new reality also demands practical instruments. A trade agreement, for example, could include dynamic review mechanisms allowing certain concessions to be adjusted in response to predefined events, rather than assuming that all conditions will remain constant.
Finally, at the international level, we must learn to organize interdependence in a more political, selective, and fragmented environment. Security shapes trade; geopolitics influences technology; and investment decisions also respond to strategic considerations. This reality invites us to consider geopolitical safeguard mechanisms capable of sustaining cooperation even when the conditions that made it possible change.
The Trust a New Order Requires
I do not believe it is especially useful to debate whether we are living through the most uncertain period in history. The Cold War, financial crises, and the pandemic remind us that we have experienced periods of enormous uncertainty. What matters is identifying the uncertainty relevant to each decision and recognizing the limits of our knowledge.
The emerging international order will probably be less uniform, with multiple centers of power, combining cooperation and rivalry. It will retain high levels of economic interdependence, alongside greater security considerations and technological transformations that will continue to test our institutions’ capacity to respond.
The challenge, therefore, is not simply to restore predictability in order to rebuild the trust we once knew. It is to develop a form of trust suited to a world in which our ability to anticipate events will necessarily be limited.
A form of trust that does not rest on the illusion that uncertainty can be eliminated, but on the strength of institutions capable of preserving their rules and purposes, learning from change, and adapting to it. Trust does not eliminate risk: it enables us to act when uncertainty cannot be eliminated.
Perhaps one of the central tasks of our time is precisely to build institutions we can trust, not because they can predict the future, but because we know they can act responsibly when the future unfolds differently from what we expected.
References
Knight, Frank H. (1921). Risk, Uncertainty and Profit.
Kay, John and King, Mervyn (2020). Radical Uncertainty: Decision-Making Beyond the Numbers.
North, Douglass C. (1991). “Institutions.” Journal of Economic Perspectives, 5(1), 97–112.
Coase, Ronald H. (1988). The Firm, the Market and the Law. Chicago: University of Chicago Press.
Magariños, Carlos (n.d.). “El impacto de los conflictos y la globalización fragmentada” [The Impact of Conflicts and Fragmented Globalization]. Personal blog. https://carlosmagarinos.com/es/el-impacto-de-los-conflictos-y-la-globalizacion-fragmentada/
