What is social capital?

I am really delighted to be here in Ukraine. This is my first visit, and it’s a very hopeful country. And I felt wonderful hospitality. So, thank you, congratulations to the Economics Education and Research Consortium and very good luck to Kyiv School of Economic. I think it’s a wonderful idea for reasons, actually, that I will return to at the end of my talk. So, I really wish you all the best.

The topic that I want to address tonight is the one that, I think, is particularly important in post-communist states, which is a question of social capital and its by-product, which is social trust. I feel a little bit abashed speaking about social capital in a room that is largely full of economists, because economists have had a little bit of trouble with the concept that: a) does not have an agreed definition and b) is extremely difficult to measure. But, in fact, I was at a conference on social capital almost ten years ago at the World Bank that was attended by Ken Arrow and Robert Solo. And there were various papers and discussions and then, at the end of the conference Robert Solo, who is an economist, had a very unhappy look on his face, and he said: “Well, you know, I appreciate the fact that this is a very important issue in economics. But I just wish you could come up with another name, other than social capital. Because with other kinds of capital I know what it is, I know how to measure it, I know how to put it into models. But why can’t you call this “social relations” or something a little bit different? And I think it does reflect the fact that “social capital” is an attempt to use an economic metaphor for something that actually is quite complex. But, nonetheless, absolutely critical, I think, was understanding of contemporary economic life.

I will give you my definition of social capital: Social capital, in my view, are norms, informal norms or values that permit collective action when essentially among groups of people. This can be a smaller group as two friends helping each other to move their apartment or can be as large as a corporation or, in some cases, an entire society.

The great thinker, who really noticed social capital first was, probably, Alexus Tocqueville, a French aristocrat that wrote “Democracy in America”, probably one of the greatest analyses of American society. He did not use the term “social capital”. But he observed when he visited the United States in the 1830-s that the Americans exercise what he called an “art of association”, that is to say, in contrast to his native France he felt that Americans were able to come together in voluntary associations of all sorts: literary clubs, church societies, anti-slavery groups. And this permitted weak individuals to pull their action and was extremely important, in his view, for the success of American democracy. It was, as he put it, “a school of democracy”, or, as an economist might say, social capital in this form produced extra moralities, which made the democracy possible. And, I think, it was this insight that in a way led other scholars to think about this more intensely over the past couple of decades.

The ability to cooperate informally has important uses in the economy, in politics and in society as a whole. Let me just go through them. In economic life it is of course possible for people to cooperate using formal rules, contracts, the whole rule of law that we deem so important in the system of formal rules that create human collaboration. On the other hand, if people are honest, they exercise certain basic versions of reciprocity. They fail to be opportunistic when they have a chance. It dramatically reduces what economists call transaction costs. That makes the overall cost of doing business much lower and acts as a lubricant to the economy and improves the ability of people to work together as entrepreneurs for solving problems and for life. And even in the most developed, rule-of-law societies, like the United States the existence of social trust, I believe, is still actually crucial for reasons that I will come to shortly. In political life this ability to cooperate in civil society is again critical in making democratic government work. I think you can see right here in Ukraine the evidence of this. Because it is that ability to work together in political associations, in interest groups, non-governmental organizations, media, trade unions and in other forms of organization that keep government honest. If the democratic government does not have the scrutiny of outside groups and outside state structures it has really no reasons not to be corrupt and respond to the wishes of citizens and the like. And I think what would be delightful surprises of this early part of the 21st century was the fact that civil society, which many people, I think, in the United States thought was relatively passive in Ukraine suddenly came to life in the orange revolution. And this had a very important effect on the quality of democratic government, dramatically increasing the demand for accountability and, certainly, the ability to make the government much more transparent.

Finally, social capital has important uses in society itself. It is social capital that allows social groups, churches, non-governmental organizations to deliver social services, education, health, and all the kinds of social protections to the rest of the society without having to go to the government. And in the United States, in particular, the great many social services are offloaded from the state. And one of the reasons that the United States has a relatively low welfare statement compared to Western Europe, is because a lot of those social services are delivered directly by other parts of civil society. So, in all of these dimensions the existence of social capital is quite important.

It is, unfortunately, not something that is universal. For example, one of the famous studies of the area with low social capital, which has always been Sicily and Southern Italy, more generally, the great political scientist Edward Banfield in a study of a small town in Southern Italy in the 1950 invented the term which he called “amoral familism” to describe the social norms that were present there. He said that there is a norm that people share. The norm goes something like this: “You cooperate only with members of your immediate nuclear family, and you try to take advantage of everyone else. Because if you don’t do it to them first, they are going to do that to you”. And he noted that there was virtually an absence of civil society, of any kind of voluntary association in this village that he was studying, contrasted very strongly to Northern Italy, which had a much denser appearance of these kinds of groups.

This is an empirical fact that I think was very well documented by Robert Putnam of Harvard University about the reasons of differential performance of Northern and Southern Italy over the years. In many respects you can illustrate the impact of social capital in its recent distribution in different parts of the world through a number of examples. If you go to Asia, for example, because all of East Asia has been growing very rapidly over the last several decades. But the nature of growth in different parts of East Asia is, I think, highly distinctive, because of different elements of social capital. We tend to think about this region as a uniformly Confucian cultural area. But that’s actually is not true. And Japan in this respect, I think, is quite different from China. In China, I think, the essence of the social system of Confucianism is basically a kind of ideology about family that puts obligation and reciprocity towards members of the kin group above obligations to impersonal authority like the state. So, for example, in Traditional Chinese society, if your father commits a crime, the police knock on your door and say: “where is your father?” every traditional Confucian will tell you: “Do not turn your father in. Because obligation to your father is more important than your obligations to the state.” It’s quite interesting, the impact of this in terms of the organization of Chinese businesses, because, in many respects, in free market parts of East Asia — Hong Kong, Taiwan and marketized parts of the People’s Republic of China most of the businesses are, in fact, family businesses. Family businesses, of course, are the origin of business and entrepreneurship in virtually any society. But what is very interesting about these Chinese areas is that they tend to remain in form that these businesses take even if they grow larger. So in Hong Kong there is a long period from the 1950-s to the 1990-s when average size of the firm in Hong Kong actually fell, measured in terms of employees. And the reason for this is that in this cultural system it is relatively difficult for a family business to take on other members that are recruited simply for their professional, managerial skills and to trust these people as opposed to simply taking relatives who know you can trust for cultural reasons. So, for example, there is the third generation of a Chinese family, where the children study art history or something. At that point family business rather than consolidating into a professionally run hierarchy of business managers tends to fall apart and then be replaced by another family business that popples up from the bottom. This doesn’t mean that Chinese economy cannot grow, but industrial structure in this kind of a region tends to favour firms of relatively small scale. Completely different situation in Japan. Japan has never been a Confucian society. So, the obligations they can feel to impersonal state authorities are actually always greater than obligations to the family. So, in the same situation, when your father commits a crime, and the police want to know where he is in Japanese society, you turn your father in. Because your obligation to the state is more important than obligation to the family. And, in my view, one of the reasons that Japan at a relatively early state in its industrialization was able to develop very large scale corporations managed by hierarchies of professional managers was that deeply embedded cultural..., actually it was a kind of anti-nepotistic cultural bias not to give the company to the children rather than taking people that are chosen largely for their professional credentials. And this is why in the course of Japanese industrialization we had these companies like Mitsubishi, Mitsui, Sumotomo that grew from small family businesses and already by the end of the 19th century were very large, hierarchically managed companies. Now, this contrast between Japan and China is replicated in many other parts of the world. If you go to Latin America, for example as I do quite frequently, in virtually every Latin American economy you will find half to 2/3 of GDP under the control of a group of companies that are controlled by 10-20-30 leading families. And you will find again, as in China, a peculiar industrial structure, in which you have conglomerates that are made of businesses with no obvious synergies. They are travel agency, a steel company, a retailer — all brought together not by the fact that there is economic logic, but by the fact that they are all owned by different members of an extended family. And industrial structure is very much embedded into the political structure. It is the same list of companies that tend to run rather oligarchic politics of these societies.

(To be continued)