Social Capital vs Homo Economicus
It started as a buzzword, but the idea has been spreading, and if it sticks, it may transform the discipline of economics: social capital. A concept that got its start in sociology, social capital is beginning to filter into the field of economics, but it is a difficult concept to digest. For in order to make social capital theory work, one must entertain the subversive (to economists) notion that people care about each other.
Social capital theory begins with a rather commonplace idea: people’s social relations are important to them. Friendship, family, and associations such as clubs, colleges, choirs and city councils are important to people’s lives. They are important not only emotionally, but economically. In times of trouble, people turn to their friends and family for help. Friends share apartments and carpool to save money. And if you are looking for a job, do not forget that “it’s not what you know but who you know that counts.”
It is one thing to assert that social relations matter to people, but can they really be called a form of “capital?” Social capital theorists argue that this is the only way to do justice to the critical role that they play in helping the poor get by and the rich get ahead. The single mother who cannot pay the rent and moves in with her parents, or the mediocre Yale student who lands a high-powered job in his uncle’s firm, is deriving tangible material benefits from social relations. The examples, of course, go on and on.
One problem is that it is difficult to quantify social capital. This is the next challenge for social capital theorists. To make social capital look like a real form of capital, they will need to begin putting dollar values on “investments” in social capital, “dividends” from it, and “rates of return.” If they can succeed in doing this, it will be possible to place social capital alongside stocks and bonds. Economics has long been silent on social relations. Now it may have something to say about this huge category of human behavior.
But there’s a catch: the idea of social capital does not fit well with the self-interested “rational agent” that economics traditionally assumes.
Eighteenth-century economics culminated in a revolutionary insight. If people did just as they please and served only their own self-interest, the “invisible hand” of the market would orchestrate all their activities to serve the common good. Ever since, economists have designed models populated by “rational” agents whose objective is only to maximize their own welfare. Economists are in the business of designing, in Mark Twain’s words, “systems so perfect that people don’t have to be good.”
The invisible hand allows capitalism to be reassuringly amoral. If we can arrange the good society without placing any moral expectations in anyone, we will not be disappointed if people fail to live up to them. Economists have nothing against Mother Theresa. But they treat morals as a luxury that society can do without.
Yet the formation of social capital is inhibited if not made impossible when agents are self-interested. If my brother gets in trouble and needs to borrow $500 from me, I may lend it to him in the expectation that he may do the same for me when I get in trouble, i.e. the loan is an investment in social capital. Robert Putnam describes this as “generalized reciprocity.” People do good turns for each other, in the hope that somewhere along the line others will do a good turn for them. But how do I know my brother will pay me back, or help me out when I am in need? Is this really the best use for my money? The phenomenon of social capital is much more adequately explained if we introduce the assumption (obviously true) that affection or altruism makes people value other people’s happiness for its own sake.
This is why social capital is a subversive concept. If an individual’s wealth includes a lot of social capital, if, indeed, social capital comprises much of the wealth of nations, and if the formation of social capital depends on “moral” agents who are willing to share and help each other out, then the commonplace assumption that people serve only their own interests will have to be abandoned. Social capital is good news for moralists. But it is disturbing to economists, who find themselves with the wrong mental toolkit. Why do people care about each other? Economists will have to turn to sociologists, psychiatrists or theologians for that answer.