Social capital: Basic concepts

2.1. Defining social capital

Since Loury (1977) introduced it into modern social science research and Coleman’s (1988) seminal study placed it at the forefront of research in sociology, the term so­cial capital has spread throughout the social sciences and has spawned a huge literature that runs across disciplines.

While conceptual vagueness may have promoted the use of the term among the social sciences, it also has been an impediment to both theoretical and empirical research of phenomena in which social capital may play a role.^[405] In order to anchor our discussion of social capital, we need a substantive definition. We begin our search by listing a number of definitions that have been proposed by some of the most influential researchers on social capital. We begin with Coleman (1990) who defines social capital as

... social organization constitutes social capital, facilitating the achievement of goals that could not be achieved in its absence or could be achieved only at a higher cost (p. 304).

Putnam, Leonardi and Nanetti (1993) provides a similar characterization,

... social capital... refers to features of social organization, such as trust, norms, and networks that can improve the efficiency of society...

Both definitions emphasize the beneficial effects social capital is assumed to have on so­cial aggregates. According to these definitions, social capital is a type of positive group externality. Coleman’s definition suggests that the externality arises from social orga­nization. Putnam’s definition emphasizes specific informal forms of social organization such as trust, norms and networks. In his definition of social capital, Fukuyama (1997) argues that only certain shared norms and values should be regarded as social capital:

Social capital can be defined simply as the existence of a certain set of informal rules or norms shared among members of a group that permits cooperation among them. The sharing of values and norms does not in itself produce social capital, be­cause the values may be the wrong ones... The norms that produce social capital... must substantively include virtues like truth-telling, the meeting of obligations, and reciprocity (pp. 378-379).

Other definitions characterize social capital not in terms of outcome but in terms of rela­tions or interdependence between individuals. In later research, Putnam (2000) defines social capital as

... connections among individuals - social networks and the norms of reciprocity and trustworthiness that arise from them (p. 19).

Ostrom (2000) writes:

Social capital is the shared knowledge, understandings, norms, rules and expecta­tions about patterns of interactions that groups of individuals bring to a recurrent activity (p. 176).

In a similar vein Bowles and Gintis (2002) state:

Social capital generally refers to trust, concern for one’s associates, a willingness to live by the norms of one’s community and to punish those who do not (p. 2).

Finally, one finds in a recent book-length treatment, Lin (2001),

... social capital may be defined operationally as resources embedded in social networks and accessed and used by actors for actions. Thus, the concept has two important components: (1) it represents resources embedded in social relations rather than individuals, and (2) access and use of such resources reside with actors (pp.

From these definitions, we can distinguish three main underlying ideas:

(1) social capital generates positive externalities for members of a group;

(2) these externalities are achieved through shared trust, norms, and values and their consequent effects on expectations and behavior;

(3) shared trust, norms, and values arise from informal forms of organizations based on social networks and associations.

The study of social capital is that of network-based processes that generate beneficial outcomes through norms and trust.

By this definition social capital is always desirable since its presence is equated with beneficial consequences. This formulation is quite unsatisfactory from the perspective of policy evaluation [e.g., Durlauf (1999, 2002b), Portes (1998)]: if one denies the appellation of social capital to contexts where strong social ties lead to immoral or un­productive behaviors, there is nothing nontrivial to say in terms of policy. Presumably it is social structures, not their consequences, which can be influenced by policymakers. Unless we know under what conditions social structures generate beneficial outcomes, we cannot orient policy. We also note that the benefits that social capital generates for one group may disadvantage another, so that the combined effect on society need not be positive. We come back to this issue later.

The three main ideas outlined above often appear intertwined in the mind of their proponents so that one in isolation would probably not be considered social capital. For instance, there are many phenomena that generate positive (or negative) externalities. According to the definitions listed here, they would probably not be considered social capital unless they involve norms or trust. There appears to be more confusion as to whether all three parts of the definition are required for social capital. Norms and trust can be based on formal institutions such as laws and courts without reference to social networks.

From the perspective of empirical work, a definition of social capital limited to (1) and (2) is problematic. Things like ‘norms’ and ‘shared values’ are notoriously dif­ficult to measure. This has led some of the less rigorous work in this area to present evidence of a beneficial group effect as evidence of social capital itself, and conse­quently to conclude that social capital is good. This kind of circular reasoning is of course not satisfactory since it is ultimately tautological and is not falsifiable.

A definition of social capital suitable for rigorous empirical work must identify ob­servable variables that can be used as proxies for social capital [Portes (2000)]. Norms, trust, and expectations of behavior are very broad ideas that encompass no end of phenomena. Identifying a commonly acceptable set of proxies for social capital has therefore proved a formidable task and many different variables have appeared in em­pirical papers purportedly to measure it. Another problem has to do with the extent to which the variables used identify well-defined social influences - part (3) of our defini­tion. Adherence to norms can be induced for many reasons, including many that cannot be reasonably construed as social. Consequently, evidence of adherence to norms does not, by itself, constitute evidence of the importance of social networks. To the extent that social networks and associations are part of the definition of social capital, evidence must also be provided that trust and shared norms are achieved via social interaction based on interpersonal networks and associations.

2.2. The efficiency of social exchange

Perhaps a more fruitful approach for our purpose is to proceed by example, that is, to select one specific phenomenon and use it to illustrate how research on social capital can be organized. Much of the commonality in definitions of social capital and in ex­amples given by respective authors is the focus on interpersonal relationships and social networks and their effect on the efficiency of social exchange - whether the provision of a public good, as in Coleman’s work, or the better organization of markets, as in Granovetter’s. At the heart of the concept of social capital is the idea that positive exter­nalities cannot be achieved without some kind of coordination, i.e., there is coordination failure. Much of the interest in social capital stems from efforts to understand how so­cially efficient outcomes can occur in environments in which the sorts of conditions necessary for the classical First Welfare Theorem are not fulfilled. Efficiency of social exchange is thus a good vantage point around which to organize our assessment.

One important potential role for social capital concerns its ability to ameliorate po­tential inefficiencies caused by imperfect information. As Hayek (1945) was among the first to point out, information asymmetries are an inescapable feature of human society. As a result, exchange is hindered either because agents who could benefit from trade cannot find each other, or because, having found each other, they do not trust each other enough to trade. In either case, some mutually beneficial exchange does not take place. Similar principles apply to the provision of public goods. Search and trust are thus two fundamental determinants of the efficiency of social exchange. If we can finds ways of facilitating search and of fostering trust, we can improve social exchange.

There are basically two ways of achieving these dual objectives: via formal institu­tions (e.g., a stock exchange or a trading fair) or via interpersonal relationships (e.g., word-of-mouth communication of opportunities, repeated interactions which benefit both parties).

2.2.1. Social networks and search

The role of social capital in search can be illustrated by comparing US equity and labor markets. Given the existence of a stock market, it is very easy for a seller of stock to find a buyer at the market clearing price. This is not the case in labor markets where no equivalent institution circulates accurate and up-to-date information about jobs and workers. In his path-breaking study of the US labor market, Granovetter (1975) brought to light the role played by interpersonal relationships in channeling information about jobs and job applicants. A large proportion of jobs are allocated on the basis of per­sonal recommendation and word-of-mouth. This can be understood as an endogenous, spontaneous adaptation to the absence of a formal clearing house equivalent to the stock market.^[406]

As this comparison demonstrates, observing that social capital plays a role in markets does not, by itself, constitute evidence that social capital is necessary and should be nurtured. Depending on the circumstances, the development of formal institutions may be a superior alternative.

2.2.2. Social capital and trust

As argued in Fafchamps (2004), trust may be understood as an optimistic expectation or belief regarding other agents’ behavior. The origin of trust may vary.^[407] Sometimes, trust arises from repeated interpersonal interaction. Other times, it arises from general knowledge about the population of agents, the incentives they face, and the upbringing they have received [Platteau (1994a, 1994b)]. The former can be called personalized trust and the latter generalized trust. The main difference between the two is that, for each pair of newly matched agents, the former takes time and effort to establish while the latter is instantaneous.

In most situations, trusting others enables economic agents to operate more effi­ciently - e.g. by invoicing for goods they have delivered or by agreeing to stop hos­tilities. Whenever this is the case, generalized trust yields more efficient outcomes than personalized trust. The reason is that, for any pair of agents, generalized trust is estab­lished faster and more cheaply than personal trust. This observation has long been made in the anthropological literature on generalized morality. Fostering generalized trust can thus potentially generate large efficiency gains. How this can be accomplished, however, is unclear.

Clubs and networks are different concepts having to do with the structure of links among economic agents. Clubs describe finite, closed groupings. Networks describe more complex situations in which individual agents are related only to some other agents, not all. The term ‘network’ is sometimes used to describe the entire set of links among a finite collection of agents. Other times, it is used to describe the set of links around a specific individual. To avoid confusion, we refer to the second concept as a subjective network.

Among other things, clubs and networks can be used to describe the extent to which personalized and generalized trust exist in a population. Perfect generalized trust cor­responds to the case where all agents belong to a single club (or complete network) and trust all other members. Situations in which generalized trust exists only among sub-populations [say, Jewishdiamond dealers in New York, cf. Bernstein (1992)] could be described as small clubs. Situations in which individual agents only trust a limited number of agents they know individually can be described as a network.

From the above discussion, it is immediately clear that if trust is beneficial for economic efficiency, the loss from imperfect trust can be visualized as the difference between the actual trust network and the minimum network that would support all mu­tually beneficial trades. Following this reasoning, inefficiency is expected to be highest in societies where the trust network is very sparse [Granovetter (1995)]. Inefficiency is also large when subgroups who could benefit a lot from trading with each other are prevented from doing so by mutual isolation. This is true even if many links exist within each subgroup.

2.2.3. Social capital and public goods

In the preceding subsection we discussed the role of trust in fostering exchange. Trust is also an essential ingredient in the delivery of public goods. In many cases, the state can organize the provision of public goods by taxing individuals. Whenever this is true, trust is not essential. But there are many forms of public goods that cannot be harnessed through state intervention.

In his work on PTA run schools, for instance, Coleman (1988) shows that parental involvement in school affairs has a beneficial external effect on student achievement, probably because it leads children to believe their parents care about their education. Parental involvement, in turn, requires trust to reduce and solve interpersonal conflicts and to minimize fears of free-riding. In this example, the externality is a public good that cannot be harnessed by state intervention. Voluntary participation by parents is essential.

In poor countries, there are many situations in which the state could, theoretically, intervene to provide a public good, but where it is unable to do so because its tax base and its capacity to organize are limited. Collective action can serve as a substitute for the state. However, because collective action cannot rely on the coercive power of the state (e.g. the ability to tax and enforce contracts), it is much harder to set in motion. Two essential ingredients are then required: leadership and trust. A leader is required who is capable of convincing community members that they should voluntarily contribute to the public good. Trust is necessary to resolve conflicts among competing interests and to reduce fears of free-riding. Leaders can also help raise the level of trust in the community.

What the above discussion indicates is that delivering public goods via voluntary organizations depends critically on local trust and leadership. If these ingredients are absent, for instance after a civil war, then state intervention is likely to be much easier. Furthermore, good local leaders are rare. Projects that work well in one place because of strong local involvement need not be replicable elsewhere if local leaders are weak. Pilot projects of public good delivery through local communities may provide wrong signals if their placement is correlated with the presence of good local leaders who managed to attract the pilot project to their community.

2.3. Social capital and development

Much of the interest in social capital stems from the view that the absence of social capital represents one of the major impediments to economic development; Woolcock (1998) provides a wide ranging conceptual analysis of the role of social capital for de­veloping societies and economies; a range of applications of social capital to economic development are collected in Dasgupta and Serageldin (2000) and Grootaert and van Bastelear (2002). In fact, much of the current interest in social capital stems from the now classic book by Putnam, Leonardi and Nanetti (1993) which argues that northern Italy developed faster than southern Italy because the former was better endowed in so­cial capital - measured by membership in groups and clubs. One of the major claims in this literature is that social capital can facilitate the solution of collective action prob­lems.

However, when focusing on advanced societies, the effects of social capital on eco­nomic performance are less obvious. For example, Putnam (2000), focusing on the US experience since the 1950s, argues that social capital, defined as membership in for­mal and informal clubs, has declined monotonically since the 1950s. This is true for all states, all decades, and all measures of social capital. However, he finds no relationship between the speed of the decline of social capital and economic performance across US states or across time periods. Further, the relationship between social capital and socioeconomic outcomes is even harder to characterize when one looks at subperiods. For example, the 1990s were a period of rapid economic growth in the US yet it is also a period of rapid decline in social capital, at least based on the sorts of measures he uses. To be clear, Putnam does attempt to associate higher social capital with better socioeco­nomic outcomes, our point is that the relationship between the two for the United States is even at first glance relatively complicated.

The differences between the case of Italian regions and that of the United States is suggestive of how one might think about the relationship between development and social capital. One interpretation of these differences is that for the United States, gener­alized trust has improved over the period studied, so club membership has become less necessary.5 In contrast, the Italian experience relates to an earlier period in which gen­eralized trust may have been insufficient or incomplete and small clubs helped broaden the range of personalized trust. This raises the general possibility that clubs and net­works are important at intermediate levels of development. Their function is to broaden the range and speed of social exchange beyond the confines of inter-personal trust. But once a sufficiently high level of generalized trust has been achieved, clubs and networks are no longer necessary and wither away [North (2001)]. A similar kind of reason­ing can be followed for public goods. In undeveloped economies, the state is weak and under-funded. Consequently it cannot organize the delivery of all needed public goods. This is particularly true for local public goods or for public goods that require a modicum of voluntary involvement to limit free-riding (of which corruption is but one manifestation).

Social capital provides an alternative. Clubs formed for noneconomic purposes (e.g., religious worship) have leaders. In the absence of public good provision by the state, these leaders may decide to mobilize club members (e.g., the religious congregation) to provide missing public goods. History is replete with examples of faith-based organiza­tions intervening to build schools and clinics and to provide a variety of public services. Here, sharing a common religious fervor is the basis for trust and the religious hierarchy provides the necessary leaders. Some large secular organizations have adopted similar practices - e.g., political parties yesterday, nongovernmental organizations (NGOs) to- day.^[408] [409]

These issues have immediate implications for empirical work on social capital. The difficulty comes from the fact that first-best outcomes can in principle be achieved with­out paying attention to clubs and networks. Generalized trust in commercial contracts, for instance, can theoretically be achieved via laws and courts. Because of the possibil­ity that revenues may be collectively raised via taxation, public goods can in principle

be organized by the state at lower cost in terms of public mobilization and leadership skills. As North (1973, 1990) has argued, the rise of the Western world is precisely due to the invention of institutions that protect property rights and make the state more effective at delivering public goods. Clubs, networks, and community-based voluntary organizations can improve efficiency in economic exchange and public good delivery. But these are typically second-best solutions. The first-best approach is generally to develop well-functioning legal institutions and state organizations.^[410]

Whether or not social capital raises efficiency we therefore argue depends on the level of institutional development. Suppose that laws and courts are insufficient to ensure respect of commercial contracts. This situation can arise anywhere [Bernstein (1996)] but it is probably most severe in poor countries where many transactions are small and buyers and sellers are too poor for court action to yield reparation [Bigsten et al. (2000), Fafchamps and Minten (2002)].^[411] In such an environment, market exchange relies on a combination of personalized trust, legal institutions (e.g., to enforce large contracts and to punish thieves), and informal institutions (e.g., reputation sharing within business networks and communities). Whether or not social capital facilitates exchange can then be seen as a test of the strength and reach of formal institutions.

A similar line of reasoning holds for public goods. Public good delivery is best ac­complished when the power of the state to tax and mobilize resources is combined with trust and community involvement. The reason is that, without voluntarily accepted dis­cipline, government action is ineffective: taxes do not get paid, rules are not followed, civil servants become corrupt, and free riding reigns. Discipline in turn depends on the perceived legitimacy of government action and the degree of public involvement in the decision-making process. It also depends on identification with the political elites, sense of national urgency, and many other factors which are still poorly understood. The bottom-line, however, is clear: without some form of voluntary acceptance by the public, government efforts to provide public goods are likely to fail. Social capital is thus probably essential for public good delivery. But the forms it may take are likely to vary depending on local conditions, i.e., from generalized trust in government and formal institutions to interpersonal trust mobilized via clubs and networks.

2.4. Social capital and equity

We have argued that trust is essential to both economic exchange and public good de­livery. We have also argued that clubs and networks can facilitate search and provide an imperfect substitute to generalized trust: in the absence of generalized trust, it may be necessary to rely on clubs and networks. Unlike generalized trust, however, clubs and networks often have distributional consequences that may be quite inequitable. The reason is that, unlike generalized trust, clubs and networks only offer a partial or uneven coverage of society. If the benefits of social capital principally accrue to network mem­bers, those who happen to be included benefit from increased efficiency but those that are excluded do not. As Fafchamps (2002) and Taylor (2000) have shown, the creation of clubs or networks can even penalize nonmembers. This is because members of a club or network find it easier to deal with each other and, as a result, may stop dealing with nonmembers.^[412]

Clubs are least conducive to equity when membership is restricted to a specific group (e.g., men or whites) or when new members are not accepted (e.g., established firms only). Even when new members are accepted without restriction, historical events can shape the composition of clubs for decades whenever entry is slow. In this case, equal opportunity need not be realized because old members have enjoyed the benefits of membership for much longer. By extension, clubs are likely to have undesirable conse­quences on equity whenever (1) club membership is beneficial to members and (2) entry into the club is not instantaneous. Put differently, clubs raise equity concerns whenever they have real economic benefits.

The creation of clubs may thus reinforce polarization in society between the ‘in’ group and the ‘out’ group. Investing in social capital by promoting clubs can thus have serious equity repercussions. This is true even if we ignore the fact that certain clubs may collude to explicitly dominate or exclude others (e.g., the Ku Klux Klan). A simi­lar situation arises with networks because better connected individuals profit from their contacts [Fafchamps and Minten (2002)]. Social capital can be used by certain groups to overtake others, generating between-group inequality and political tension. To the extent that between-group inequality itself favors crime and riots and deters investment, promoting social capital by promoting specific groups may, in the long-run, be counter­productive.

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