Tuesday, July 12, 2011

Value social capital - don't put a price on it

Social capital is about the institutions, norms, laws and networks1 that help us to develop and also to develop the human, manufactured and financial capital. A very important aspect is that social capital is about trust between individuals. If trust is very low, it is hard to do even simple transactions. Do I dare to give you the money before I have the goods in my hand? Do you dare to give me the goods before you have the goods in your hand? It almost impossible to manage long-term businesses without trust. The transaction costs2 for even simple things become very high. Just think about the chain of trust (and supporting institutions) that is needed for cheques or credit cards to work. Not only do you have to trust that person, but also the banks, and within the banks each individual that has access to your account and the transaction and the whole legal system that is there if something is not right. Our political institutions and our trust in them is also an important side of the social capital. Another side of the social capital are the many civil society organisations which we establish to pursue joint agendas.. We create more social capital by working together and increasing trust and interdependency but also via the political system and the taxes we pay. A pension system is an interesting example of social capital. We put our future well-being into some kind of system where we will be dependent on the benevolence of future generations. Some might argue that this is about human capital but I would argue that the two most important functions of a pension system are that 1) there is a “contract" between the individual and society for the future livelihood of the individual and 2) that the people working today will take care of the pensioners of today. Those two components are exactly the difference between a pension system from the simpler and individually based idea of that I save for my future or that I raise enough kids to have my needs taken car of by them."Back of the envelope" calculations show that in 192 countries (except for a few raw materials exporters), human and social capital equals or exceeds natural capital and produced assets combined (Serageldin and Grootaert 1999).

I don't think the point in this is to try to "internalize" social capital losses and gains in prices of goods as little as I believe that this is doable for loss or gains in natural or human capital. And one can even take exception of the description of our human relations in terms of "capital" a term borrowed from economics. My point is just to show how extremely important our social relations are. And they are important for our economic activities, for our use of nature and even more for our well-being in general. Nurturing the social capital is taking care of our well-being. And in light of that, we should also be aware of that our society, through industrialism, consumerism and a capitalist ethic is replacing social capital with "things". But it is also interesting to note how popular new technologies are that are used for "relational" purposes. Just look at cell phones and facebook.

1My use of social capital is somewhat wider than often is the case as I include also most of the public sphere into the social capital, while some limit the meaning to refer more to civil society organisations. In my view, however, this is not correct. What is organised in the form of civil society, in the form of communities or by the state differs in different periods and culture and that the same institution, say upholding respect for business contracts, has been a regulated by civil society in one place and by law and the state in another doesn’t change its nature of being part of social capital. 

2A transaction cost is a cost incurred in making an economic exchange, i.e. an economic term, but it can be applied in a wider sense.

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