Social Capital - Asset or Liability?

(This is a reprint of an excerpt of an IMF Presentation from Francis Fukuyama presented in 1999)

I.  What is Social Capital?

While social capital has been given a number of different definitions, many of them refer to manifestations of social capital rather than to social capital itself. The definition I will use in this paper is: social capital is an instantiated informal norm that promotes cooperation between two or more individuals. The norms that constitute social capital can range from a norm of reciprocity between two friends, all the way up to complex and elaborately articulated doctrines like Christianity or Confucianism. They must be instantiated in an actual human relationship: the norm of reciprocity exists in potentia in my dealings with all people, but is actualized only in my dealings with my friends. By this definition, trust, networks, civil society, and the like which have been associated with social capital are all epiphenominal, arising as a result of social capital but not constituting social capital itself.

Not just any set of instantiated norms constitutes social capital; they must lead to cooperation in groups and therefore are related to traditional virtues like honesty, the keeping of commitments, reliable performance of duties, reciprocity, and the like. A norm like the one described by Edward Banfield as characterizing southern Italy, which enjoins individuals to trust members of their immediate nuclear family but to take advantage of everyone else, is clearly not the basis of social capital outside the family.¹

James Coleman, who was responsible for bringing the term social capital into wider use in recent years, once argued that it was a public good and therefore would be underproduced by private agents interacting in markets.² This is clearly wrong: since cooperation is necessary to virtually all individuals as a means of achieving their selfish ends, it stands to reason that they will produce it as a private good (see Section IV below). In Partha Dasgupta's phrase, social capital is a private good that is nonetheless pervaded by externalities, both positive and negative.³ An example of a positive externality is Puritanism's injunction, described by Max Weber, to treat all people morally, and not just members of the sib or family.⁴ The potential for cooperation thus spreads beyond the immediate group of people sharing Puritan norms. Negative externalities abound, as well. Many groups achieve internal cohesion at the expense of outsiders, who can be treated with suspicion, hostility, or outright hatred. Both the Ku Klux Klan and the Mafia achieve cooperative ends on the basis of shared norms, and therefore have social capital, but they also produce abundant negative externalities for the larger society in which they are embedded.

It is sometimes argued that social capital differs from other forms of capital because it leads to bad results like hate groups or inbred bureaucracies. This does not disqualify it as a form of capital; physical capital can take the form of assault rifles or tasteless entertainment, while human capital can be used to devise new ways of torturing people. Since societies have laws to prevent the production of many social "bads," we can presume that most legal forms of social capital are no less "goods" than the other forms of capital insofar as they help people achieve their aims.

Perhaps the reason that that social capital seems less obviously a social good than physical or human capital is because it tends to produce more in the way of negative externalities than either of the other two forms. This is because group solidarity in human communities is often purchased at the price of hostility towards out-group members. There appears to be a natural human proclivity for dividing the world into friends and enemies that is the basis of all politics.⁵ It is thus very important when measuring social capital to consider its true utility net of its externalities.

Another way of approaching this question is through the concept of the "radius of trust."⁶All groups embodying social capital have a certain radius of trust, that is, the circle of people among whom cooperative norms are operative. If a group's social capital produces positive externalities, the radius of trust can be larger than the group itself. It is also possible for the radius of trust to be smaller than the membership of the group, as in large organiza-tions that foster cooperative norms only among the group's leadership or permanent staff. A modern society may be thought of as a series of concentric and overlapping radii of trust (see Figure I). These can range from friends and cliques up through NGOs and religious groups.

Virtually all forms of traditional culture-social groups like tribes, clans, village associations, religious sects, etc.-are based on shared norms and use these norms to achieve cooperative ends. The literature on development has not, as a general rule, found social capital in this form to be an asset; it is much more typically regarded as a liability. Economic modernization was seen as antithetical to traditional culture and social organizations, and would either wipe them away or else be itself blocked by forces of traditionalism. Why should this be so, if social capital is genuinely a form of capital?

The reason, in my view, has to do with the fact that such groups have a narrow radius of trust. In-group solidarity reduces the ability of group members to cooperate with outsiders, and often imposes negative externalities on the latter. For example, in the Chinese parts of East Asia and much of Latin America, social capital resides largely in families and a rather narrow circle of personal friends.⁷ It is difficult for people to trust those outside of these narrow circles. Strangers fall into a different category than kin; a lower standard of moral behavior applies when one becomes, for example, a public officials. This provides cultural reinforcement for corruption: in such societies, one feels entitled to steal on behalf of one's family.

Traditional social groups are also afflicted with an absence of what Mark Granovetter calls "weak ties,"⁸ that is, heterodox individuals at the periphery of the society's various social networks who are able to move between groups and thereby become bearers of new ideas and information. Traditional societies are often segmentary, that is, they are composed of a large number of identical, self-contained social units like villages or tribes. Modern societies, by contrast, consist of a large number of overlapping social groups that permit multiple memberships and identities. Traditional societies have fewer opportunities for weak ties among the segments that make it up, and therefore pass on information, innovation, and human resources less easily.

¹Edward Banfield, The Moral Basis of a Backward Society (Glencoe, IL: Free Press, 1958).
²James S. Coleman, "Social Capital in the Creation of Human Capital," American Journal of Sociology Supplement 94 (1988): S95-S120.
³Partha Dasgupta, "Economic Development and the Idea of Social Capital," unpublished paper, March 1997.
⁴According to Weber, "The great achievement of ethical religions, above all of the ethical and asceticist sects of Protestantism, was to shatter the fetters of the sib." The Religion of China (New York: Free Press, 1951), p. 237.
⁵See Francis Fukuyama, Trust: The Social Virtues and the Creation of Prosperity (New York: Free Press, 1995), chapter 9.
⁶To my knowledge, the first person to use this term was Lawrence Harrison in Underdevelopment is a State of Mind: The Latin American Case (New York: Madison Books, 1985), pp. 7-8.
⁷Fukuyama (1999).
⁸Mark S. Granovetter, "The Strength of Weak Ties," American Journal of Sociology 78 (1973): 1360-80.
⁹For a fuller treatment of this issue, see Francis Fukuyama, The Great Disruption: Human Nature and the Reconstitution of Social Order (New York: Free Press, 1999), chapter 12.