To trust each other again, we need to become more equal

From Adam Smith onwards, economists have recognised that trust is the glue that binds societies together. Nations in which people trust each other have stronger institutions, are more open, have less corruption, grow faster and are nicer places to live. Trust is notable by its absence in police states.

So it is a matter of concern that trust has become an increasingly rare commodity. In the US, there has been a precipitous drop in faith in the government. Almost four out of five Americans trusted Washington to do the right thing when Eisenhower and John F Kennedy were in the White House. Under Donald Trump, that has fallen to one in five. In Britain, Theresa May is trying to finesse a Brexit deal at a time when parliament is even less trusted than the banks. By a distance, the most trusted institution in the UK is the military. We don’t trust big business, we don’t trust the City, we don’t trust the newspapers – and we certainly don’t trust politicians.

Nor is this simply a reaction to the financial crisis of a decade ago, although it certainly has not helped that the supposedly perfect model of free-market capitalism constructed before the crash was based on erroneous assumptions and was operated – in many cases – by self-seeking crooks.

When Milton Friedman famously said it was the duty of corporate executives to make as much money as possible, he was careful to add the rider that they still had to play by the rules and abide by ethical customs. This was certainly not the case in Wall Street and the City of London in the early and mid-2000s – and the general public woke up to that fact.

But as the Pew Research Center has shown, faith in the US government was going down long before the demise of Lehman Brothers in 2008. Things improved during the Reagan and Clinton booms of the 1980s and 1990s, which shows that the state of the economy is a factor, but the long-term trend has been downwards for over half a century.

Similarly, faith in the UK political class was being chipped away at long before the sub-prime housing crisis exposed the flaws in the global financial system. Westminster sleaze under John Major, the war in Iraq (justified by Tony Blair’s “dodgy dossier”) and the MPs’ expenses scandal that undermined Gordon Brown’s government all played a part in poisoning the political well. In some parts of Britain, politicians have been viscerally loathed since the factories and pits were replaced by warehouses and call centres.

The link between trust and rising inequality was identified by the US political theorists Eric Uslaner and Mitchell Brown in the early 2000s. Where inequality was higher, the poor tended to feel powerless. Sensing that their views were not represented in the political system, they opted out of civic engagement. What’s more, according to Uslaner and Brown, people’s trust in one other rests on a foundation of economic equality. “When resources are distributed inequitably, people at the top and bottom will not see each other as facing a shared fate. Therefore, they will have less reason to trust people of different backgrounds.”

Way ahead of time, this pointed the way to the political earthquakes of 2016: Brexit and the election of Trump. Leavers mistrust remainers, and the feeling is mutual. Liberals on the east and west coasts of the US might as well live in a different country for all that they have in common with those struggling in the rust belt states.

It is not hard to see why this has happened. There has been a stupendous increase in pay at the top, which has only sometimes been justified. Economic performance, as demonstrated by growth rates, productivity increases and rates of investment, has deteriorated. The financial sector was allowed to exploit an “anything goes” regime to enrich itself. The recovery from the great recession was the least fair in modern history, with the bulk of the gains going to those at the top. Meanwhile, the message to the less well off was to get a better diet, pack up smoking, drink less and generally buck their ideas up. All things considered, it’s not surprising that voters in Britain did not buy George Osborne’s “we’re all in it together” shtick, nor that voters in the flyover states found Hillary Clinton a tad patronising.

In a recent speech to mark the opening of a new school of business and society at St Mary’s University, Andrew Bailey – the City’s regulator – put it this way. “In essence, the system that operated from the Great Depression until the 1980s relied on the legacy of the 1930s and an almost unstated code in society that the remuneration of senior executives should not increase beyond a quite limited multiple of average pay ... to breach this relationship would be viewed as ostentatious and breaking a norm that acted as a glue in society more broadly. I would go further and argue that this formed the basis of trust, with an expectation of future behaviour and a common value or ethic.”

This sounds right. A more permissive approach to top pay has led to a loosening of the bonds that hold society together. The argument that there is a trade-off between economic dynamism and less inequality doesn’t really wash. Innovators came up with great new ideas when societies were more equal. What’s more, there are countries that are both highly competitive and egalitarian.

Sweden is one such country. It has proved capable of growing just as quickly as the US, but with more generous welfare and longer life expectancy. It is no surprise to find that when Pew studied levels of trust across eight European countries, Sweden was the clear winner. If Britain and America want to rebuild trust and avoid shocks similar to those of the past two years, this is the model they should follow.

• Larry Elliott is the Guardian’s economics editor