Confidence and the erosion of confidence: Economic functions and effects

“Trust” or likewise “confidence” (the term preferred in this paper) are notions which have received considerable attention by economists in the last 8-10 years. In this contribution, much emphasis is put on the understanding what we really mean by “confidence”, what the differences between optimism and confidence are and how the onset of confidence can possibly be explained. Also, we analyze the economic effects of a lack of or the erosion of confidence. The paper intends to provide a comprehensive view on the major effects of confidence on economic growth, the business cycle, its relation to income distribution, etc. Finally, the contribution of confidence to social capital is discussed and the erosion of confidence within, between and towards business enterprises as a consequence of the widespread scandals in the US and other industrialised countries at the beginning of the new millennium is portrayed.