A (Social) Capital Idea!

December 5, 2008

by Sandy Ikeda

Over at The Austrian Economists Dave Prychitko writes:

I still have trouble with the concept of Social Capital. I know what it means. Peter Berger encouraged us to read and discuss Granovetter fifteen years ago, and we did. Enjoyed it, and thought it was a great breakthrough in understanding networks, tacit knowledge, expectations, coordination. But I don’t see why we Austrians should call it social “capital.” If those outside the school want to do so, fine. But should Austrians? I seem to be the only one who criticizes the social capital concept. Why do I hesitate? See, for example, Kirzner’s (or Lachmann’s) book. I know what they mean by the word capital. I know how it fits into higher-order goods, and so on. I’d like to see how “social capital” is “capital” in the Austrian sense of the term. Not by analogy, but by direct theory. How does it fit into our higher-order goods concept? How does it directly relate to interest and time preference? And so on.

I won’t try to address all of Dave’s concerns here, only the part about the appropriateness of the term and the Lachmann connection. He acknowledges Emily Chamlee-Wright contributions this issue. I have my own take, which I published here and especially here. (I’m sorry but I don’t have ungated vdersions.) This is the lead to the latter article:

While social capital plays a central role in the market process…, its meaning remains elusive. It is treated as both a factor of production and as consumption good. It has been viewed not only as a link in a social network but also as the network itself, the knowledge carried over that network, or the norms that support it. The virtue or vice of social capital is sometimes said to lie in the exclusivity it provides to a community and sometimes in the inclusiveness and openness it fosters. Considering the importance now placed on the concept by economists employing a market-process framework…, such looseness of meaning may be unhelpful and potentially confusing. The goal of this article is therefore to find an interpretation of social capital that may be particularly useful for understanding the entrepreneurially driven market process. It is not meant to be definitive for all uses of the concept.

So, I can agree with Dave if he’s referring to the rather loose way the term is often used, but I do think that “capital” is appropriate if one frames the concept in the right way and for a particular purpose in mind. In that article, I’m embarrassed to say, I should have but didn’t relate social capital to Lachmann’s capital concepts. Let me try to rectify that to a small degree.

As I understand Lachmann’s concepts, social capital rightly understood, would be a form of “structural capital” because of its emergent character, i.e., as a means of production that is not the result of an overarching plan. Jane Jacobs, who coined the term “social capital” in her 1961 book The Death and Life of Great American Cities (p. 138), uses it in the very similar sense of emergent networks of trust that enable communities to voluntarily engender safety and security. Jacobs then famously argues that safety generated in this unplanned way is the bedrock attribute of the dynamic economies of successful cities. Thus, social capital is capital in that it is an input into existing production as well as an element in the matrix within which new businesses can be formed.

On the other hand, what may confuse is that the quickie definition of capital that Austrians often use as “produced means of production” seems to imply deliberate planning or design. That kind of capital is what I think Lachmann would call “capital combinations,” which in many cases are deliberately created complementary (business or purely social) links between agents (e.g., wholesaler and retailer or two social acquaintances). Kirznerian entrepreneurs then draw on these links, and in particular the knowledge transmitted via Granovetter’s “weak links” from the larger the social-capital network, to discover profit opportunities.

I think I’ll stop here for now.

3 Responses to “A (Social) Capital Idea!”

  1. David Says:

    But can’t social capital be part of a plan as well? You may choose to relocate to a city that offers appropriate “knowledge externalities” (a form of social capital), because it complements the material and human capital that you own or rent. Likewise, people join social networks (from churches to scientific associations) because the judge these as productivity-enhancing complements (whether in market production or “household production.”

  2. sandyikeda Says:

    You are absolutely right, David. The decision to move to a particular location typically involves very consciously taking into account complementary networks that might enhance one’s productivity. That’s the main reason why some districts are so much more expensive than others. The real-estate mantra, “location, location, location” is a reflection of the differences in social capital from one place to another. (Caveat: There are different kinds of social capital and not all do a good job of promoting the entrepreneurial-competitive market process — that’s the thrust of my second article, above.)

    However, designing and implementing a complex network, and having it come out exactly as you expect it to, is impossible. Institutions like this blog, are in part shaped by the many unforeseeable individual acts of participation such as yours, and it’s our hope these these will over time form a social-capital network that somehow complements the work done by the thousands of mostly anonymous visitors to this site. So, ThinkMarkets can establish the blogging rules (which themselves may evolve in ways we can’t foresee), but the networks that emerge, and the ideas and value that they might help to generate, cannot be planned for ahead of time. The same holds true, of course, for the social cosmos outside of cyberspace.

    Well, that’s the best I can do in a short time in two paragraphs!

  3. smoron Says:

    In modern language, capital has so many meanings that it is meaningless. Marx was one of the worst. Labor was called variable capital, and every other expense of the firm was called constant capital.

    Now we have financial capital, human capital, social capital, and so on. It seems that everything good and lasting is called capital.

    The one thing economics desperately needs is a clear distinction between money, credit, and physical capital. Historically, Austrians have been better than most at makeing some distiction.

    Banks who are not blinded by econmoic theory are quite clear that interest is the price of credit and depreciation is the price of physical capital.


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