SOCIALCAPITAL

What is Social Capital?

By analogy with notions of physical capital and human capital--tools and training that enhance individual productivity--"social capital" refers to features of social organization such as networks, norms, and social trust that facilitate coordination and cooperation for mutual benefit.

(Putnam, “Bowling Alone”, 1995)

Hour 1: Getting a Grip on the Concept

Introduction How Trust and Networks relate: Prisoner's Dilemma and Coordination GamesIs the term "Capital" appropriate?

Production FunctionsTechnology, Government, Human CapitalSocial Capital vs. Capital

Hour 2: Testing the Importance of Social Capital Measuring Social Capital La Porta et al.: Trust Levels in Different Nations Glaeser et al.: Why Individuals Join Associations

Hour 3: Families, Norms, and Social Outputs Families as part of social capital Social norms and how they are enforced Social outputs

Practice with linear regression Applying Putnam's social capital index to state data

Trust• Nucor cuts its workers, non-unionized to a 3-

day workweek during the 1982 recession. When the recession ends, morale is excellent.

• Toyota allows any of its workers to pull a cord and stop the assembly line.

• I leave a tip at the restaurant, its size varying depending on the service.

• A department store allows customers to return clothing they regret buying, no questions asked.

• Goldman Sachs pays much of its employees’ salaries as bonuses at the option of the company.

• Public restrooms supply toilet paper-- which nobody steals.

The Capital MetaphorEdmund Burke, to the French Revolutionaries:

``...the people of England well know that the idea of inheritance furnishes a sure principle of conservation and a sure principle of transmission,without at all excluding a principle of improvement. It leaves acquisition free, but it secures what it acquires.... You had all these advantages in your ancient states, but you chose to act as if you had never been molded into civil society and had everything to begin anew. You began ill, because you began by despising everything that belonged to you. You set up your trade without a capital.''

De Tocqueville, too, was reacting to the French Revolution when he wrote Democracy in America-- as well as in The Old Regime. Civil society underlies government and the economy. And civil society involves trust and associations.

Bowling Alone• From 1980 to 1993, the number of bowlers in America

grew 10 percent, but league bowling declined 40 percent.

• Nearly 80 million Americans went bowling at least once during 1993, about a third more than voted in 1994.

• Those who bowl in leagues consumer 3 times as much beer and pizza per person.

• What does this mean for civil society-- for government, the economy, crime, and illegitimacy?

• Robert Putnam:

• ``Bowling Alone: America's Declining Social Capital,'' Journal of Democracy, 1995

• Bowling Alone: The Collapse and Revival of American Community, 2000

Social Capital as Information Transmission

Both horizontal and vertical institutions help transmit information.

The bowlers learn about possible jobs, clients, school problems, etc.

Social Capital as Trust

Another part of social capital is trust: being able to rely on someone else without government sanctions for misbehavior.

Game theory is a useful way to view this. There are two relevant games:

1. The Prisoner’s Dilemma

2. The Coordination Game

Here goes the game theory material, form tex files.

The Production FunctionOutput= f(capital, labor, land)

Output = 5*capital.3 *labor .7 *land2

This function could be for an individual business, an industry, or a country.

The output could be bushels of corn, dollars of GDP, or prevention of crime.

Why do Production Functions Differ?

India and the United States would produce different outputs even if they used the same capital, land, and labor.

OutputUS = 9*capital.3 *labor .7 *land2

OutputIND = 4*capital.3 *labor .7 *land2

Output = X2*capital.3 *labor .7 *land2

1. Technology

2. Government

3. Human capital

4. Social capital

Human Capital Education is like capital investment.

It defers present consumption for future gain.

It explains much of why labor differs in productivity.

In modern economies, a large amount of wages is return to education.

This is an explanation for why Germany and Japan recovered so well from World War II (and why Japan grew so fast even before the war).

Social CapitalAre trust, associations, and institutions analogous to physical and human capital?

Like capital, they are durable and can rise and fall over time.

However:

1. Often social capital is a by-product, rather than a costly output.

2. Social capital often usually shows “use appreciation”, not depreciation.

3. Social capital usually cannot be sold, only rented in conjunction with labor.

4. When a person increases his social capital, that has spillovers onto other people.

A Counterexample

What about a business’s organization chart?

1. It requires time and labor to build a good organization.

2. It grows obsolete over time.

3. The company can be sold, and its main asset may be the organization, not its physical assets or its particular employees.

4. There are no “real” spillovers outside of the company.