A Note On Capital

For this Highlight I’m taking a look at the other little note tucked away at the end of the Interlock page, the one about capital:

Throughout this website, I seldom (if ever) refer to the things most business-people think of as “capital”: cash, factories, farms, training, patents, research, vehicles, and so on.  This isn’t because I don’t believe in their importance, but rather because businesses and markets do a pretty good job of managing and replenishing their stocks of private capital.  Thus, the forms of capital that are discussed in the Interlock Project are not the forms that businesses are mostly concerned with. Instead, I focus on the stocks of public capital that no individual, business, or industry has the resources to seriously impact alone – the “national capital,” as it were.
I’ve divided my discussion of this national capital, and the parts of the Interlock that they contain, into three separate sections – human capitalphysical capital, and social capital – to help the reader in mentally organizing the different pieces of the Interlock.  Each is effectively its own miniature Interlock, with the domains within it highly connected to and heavily impacting one another, like so:
HCHuman capital is the collective term for the quality and quantity of a nation’s workforce – how many people there are who can work, and how well they can work and/or contribute to the nation and it’s economy.  In the Interlock Project, we are looking at four factors that impact human capital: Demography, education, health, and poverty.  
Physical CapitalPhysical capital is the sum of the natural and manmade resources in a nation.  This includes infrastructure (roads, bridges, railroads, ports, locks, airports, communication systems, water and sewer lines, pipelines, power generation and transmission systems, etc.), natural resources (like oil and gas, mineral deposits, timber, dependable rainfall, good agricultural land, clean air, clean water, fisheries, navigable rivers, etc), and the quality of the environment that we live in (the air we breathe, the water we drink, the ecosystems that we live as a part of and extract resources from).


Social capital consists of the immaterial things that bind people into communities and, ultimately, into a single nation.  It is the trust in one another and our leaders and institutions, the sense that the rule of law is real and will be applied justly and competently, the feeling that our tax dollars are being put to good use.  For the purposes of the Interlock, it also encompasses the relationships that we have with other nations and peoples, although this is not strictly part of the “national” social capital.
The purpose behind separating the Interlock into these silos and using this definition of capital is to ease communication and thinking about the whole of the Interlock.  It’s much easier to contemplate three interlocking clusters (four, including the economy), with three or four domains in each, than it is to keep twelve domains and all their interconnections in your head at once.  It’s also a lot easier to communicate the impact that tightly clustered domains have on another domain by actually putting a label on those clusters.
And if you look closely at the three diagrams and think about each of the directional links, you’ll see that the domains in each one of these clusters are, in fact, very tightly interlinked:  all of the potential arrows are present, representing fairly strong effects in both directions between each domain and its immediate neighbors.  This is not true, at least not to the same extent, of the relationships between pairs of domains in different clusters.  And this makes sense. The problems that affect what I’m calling human capital all affect the people who make up the society, so it makes sense that they would interact.  Problems affecting infrastructure all deal with the physical support system for the economy, so again it makes sense for them to be intertwined.  And the same is true for problems affecting social capital, which is generated and maintained by our institutions and our rules (overt and covert) for dealing with each other.

Relative importance

I address the three forms of capital as if they were equal, because they are all essential for maintaining a thriving economy and nation – neglect any of them enough and the economy slows down and starts to decline.  But some of them are more critical, more important to the proper functioning of the whole, than others.
This is best seen by looking at international examples where one or even two of these basic types of capital are or were severely lacking.  If you look at the historical record and at modern day case studies, the balance of evidence strongly suggests that it is social capital – the level of trust, cooperation, honesty, and civic-mindedness in a society – that is most essential for starting and maintaining the engine of economic and national growth.
The strange part is that most people rarely give social capital a thought in economic discussions, but the historical record is quite clear:  if a nation has strong social capital, the absence of human or physical capital can be overcome with time.  But the reverse is not true.  In the long run, a highly corrupt society, with low levels of trust and cooperation, will do badly in spite of a highly skilled population, good infrastructure, and a favorable physical environment.
In large part, this is a function of speed.  History suggests that social capital takes much longer to develop than either of the others, while physical capital can, in the right circumstances, be increased the fastest.  This has tempted many people to put physical capital first on the agenda in order to force rapid economic development in pre-industrial societies.  This so-called “Soviet” model of development was advocated and sponsored by the Soviet Union and had a wave of popularity in the Third World in the period between the 1950s and the 1980s.  Huge dams, mines, steel mills, and factories were built across Africa and Asia on the theory that they would jumpstart economic growth, which would cause education and prosperity to follow automatically.  Instead this simply led to the enrichment of corrupt elites and the rapid growth of the poor – and poorly educated – populations.
Many of these countries, like Egypt and India, are now struggling to build human and social capital and to escape the legacy of pervasive corruption.  We even have a nickname for the problems of development when it should be easiest, when a country has a wealth of natural resources to draw on.  By all rights, countries like Nigeria and Venezuela, with lots of oil, should be enormously rich.  Instead, they are typically “looted, polluted, and poor.”  Development experts call this “the resource curse.”
Even in countries where education has been emphasized along with infrastructure and industry, the dead hand of corruption has made economic progress difficult or impossible.  Most of the remnants of the Soviet Union itself – Russia, Ukraine, Kazakhstan, and so on – are examples of the difficulty of creating or maintaining a modern economy without the rule of law and the other elements that sustain high levels of social capital.
The caution for Americans is that social capital is also by far the hardest of the three to rebuild if it is allowed to deteriorate.  We have been letting all three forms of capital slowly fall apart in this country, but it’s the decline in the honesty and competence of our governments and institutions that should worry us the most.

This is essentially a complete rewrite of the article, and it pretty much covers everything I wanted to say on the subject, so I’m not going to go any more in-depth on it.  I will, however, point you towards the articles discussing the three forms of capital (which have themselves undergone a rewrite), if you’re interested in a more detailed discussion:

Human capital   Physical capital   Social capital

As always, if you have any thoughts you want to share on this, post something in the comments or send an email, and see the Participate page for other ways to contribute if you’d like to learn more about how to help improve the Interlock Project!



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