July 26 2003

Social capital is beating a retreat from economic fundamentalism, writes Ross Gittins.

The Productivity Commission’s release of a research paper on “social capital” this week has met with raised eyebrows.

What are the hardest of the hard-nosed economic rationalists doing dabbling in such a warm and fuzzy topic?

Social capital is a quite new and trendy concept, invented by sociologists and such-like suspects. It refers to such intangibles as social norms, networks and trust (and is not to be confused with “human capital”, a much older and less controversial concept that refers to the education, training and skills possessed by the workforce).

The first point to make is that there’s been an explosion of research into social capital in the past decade or so. And, in taking this research seriously, the Productivity Commission is in respectable company. It’s been the subject of major studies by the World Bank and the OECD.

Even so, I think the PC’s interest in the topic is significant. It’s a partial retreat from the economic fundamentalism of earlier times.

It’s a (belated) recognition that there’s a lot more to life – and even a lot more to the efficient functioning of the economy – than just the factors highlighted by the economists’ traditional neo-classical model.

To anyone with eyes to see, the events of the past decade or so – the failures as well as the successes of micro-economic reform, the difficulties faced by the ex-communist “transition” economies, the Asian financial crisis and the recurring asset price bubbles – leave little doubt that conventional economic thinking fails to capture a range of important factors.

And while economists pride themselves on the “rigor” of their analysis – which often means reducing everything to mathematical equations – they can take the pursuit of rigor to irrational lengths.

It’s not rational, for instance, to assume away the non-rational behaviour of others. (I’m often amazed at how economists experience the illogical and emotion-driven decision-making that abounds in their own lives and homes without imagining it has any bearing on what they do at the office.)

And anyone who thinks the things we can’t touch or measure accurately can safely be ignored isn’t a rigorous thinker, he’s a fool.

So let’s see what the PC has to teach us about the importance of social capital.

This quote from a World Bank report explains a lot of it:

“The social capital of a society includes the institutions, the relationships, the attitudes and values that govern interactions among people and contribute to economic and social development.

“Social capital, however, is not simply the sum of institutions which underpin society, it is also the glue that holds them together. It includes the shared values and rules for social conduct expressed in personal relationships, trust and a common sense of ‘civic’ responsibility that makes society more than just a collection of individuals.”

Boiling that down to a neat definition, social capital refers to the social norms, networks and trust that facilitate co-operation within or between groups.

So social capital may be a less than totally concrete concept but, to anyone but the trained economist, its significance in helping determine the way the world works is common sense.

Unpacking further, “social norms” are informal rules that condition behaviour in various circumstances. Specific social norms include giving up your seat to an old lady on the bus, and not littering.

More generalised norms would include tolerance, behaving honestly and helping those in need. And an over-arching norm is “reciprocity” – “do unto others as you would have them do unto you”.

A “social network” is an interconnected group of people who usually have an attribute in common. For example, they may like a particular sport or share the same occupation or religion.

At a more micro level, families and groups of friends will exhibit the characteristics of a network. Different groups often have their own set of social norms and levels of mutual obligation between group members.

“Trust” is simply the level of confidence that people have that others will act as they say or are expected to act, or that what they say is reliable.

But “social trust” refers to the general level of trust in a society – for example, how much you can trust strangers, or firms or organisations that you’ve had no previous dealings with.

Research is confirming what you’d expect: that the presence of social capital generates a range of benefits to society.

The first is that it reduces “transaction costs”. When you have high levels of trust, you don’t need to spend as much on security, insurance policies or writing watertight contracts.

People who are well-connected socially are more likely to know someone who possesses the knowledge or skills they need, thus reducing their “search costs”. And a high proportion of jobs are found through contacts rather than impersonal job ads or employment agencies.

In the workplace, mutual trust between employer and employees reduces the costs of supervision and allows more flexible work practices. Everyone works like navvies when the heat’s on, but when it’s off the boss lets you go to a dental appointment or arrive a bit late or work at home.

The second benefit from social capital is that it hastens the spread of knowledge and innovation. The more connected the community is, the more easily people will be able to pass information around and the more people this information is likely to reach.

The third benefit comes from the increase in co-operative and socially-minded behaviour. Contrary to the economists’ assumption, self-interest isn’t the only beneficial motivation.

The fourth gain from social capital is what the PC calls “individual benefits and associated social spill-overs”. People with a wide network of friends, acquaintances and group affiliations may experience greater life enjoyment, a sense of belonging and enhanced self-esteem.

Individuals who develop a wide network of contacts also tend to have better career prospects and higher income. There is also evidence that being socially connected improves individuals’ health and longevity.

“In summary,” the PC says, “evidence from a range of studies suggests that well-connected individuals are more likely to be ‘hired, housed, healthy and happy’ than those with few social connections.”

Has the penny dropped yet? Despite its words, I’m not sure it ever really dropped for the PC.

Taking the report as a whole, it seems to be saying: much to our amazement, we’ve discovered that this soppy social capital stuff is actually important to the efficiency with which the economy produces goods and services. So we’d better start taking this mush seriously.

But if that’s what you think, you’ve missed it. The real point is that people find living in a society with high social capital more intrinsically satisfying. Observing social norms, being part of social networks and living in a trustworthy society are more significant as ends in themselves than as means to the accumulation of more stuff.

So every time micro reform destroys social capital to make the economy more efficient, it may be destroying more wellbeing than it’s creating.

And government energy devoted to increasing efficiency might do more to enhance wellbeing if it were devoted to increasing social capital.

Ross Gittins is the Herald’s Economics Editor.\

http://www.smh.com.au/articles/2003/07/25/1059084207012.html