Impact of Social Capital on the Economy


Social capital is harder to define than human or physical capital.  At its simplest, social capital is the level of trust and cooperation in a society as a whole, but these are hard to measure directly.  Low levels of crime, violence, and corruption; high trust in government; willingness to help other people; and high levels of cooperation, volunteerism, and membership in voluntary organizations:  all of these correlate with the intuitive notion of social capital, and can be used as proxies for it, but measuring them is hard and constructing a meaningful “social capital index” from them is even harder.

However, it’s demonstrably true that, whatever definition or measure one uses for social capital, it is vital to the smooth functioning of an advanced economy.   As crude as they are, indexes of social capital consistently correlate well with levels of economic productivity and growth.  One obvious question is whether wealth causes high social capital or high social capital causes wealth, and the answer appears to be that both are equally true.  The relationship is a reinforcing loop, not simple one-way causation:  high levels of social capital help generate prosperity, which reinforces high levels of social capital, and so on.

But that same loop can also reinforce the negatives:  societies with low levels of trust and cooperation have a hard time generating wealth, and continued poverty undermines trust and cooperation.  What this means is that it is dangerous for a wealthy society to allow levels of social capital to slide, because – once lost – it tends to create a vicious circle that it makes it very hard to regain lost ground.

congress approval rating

And that’s what has been happening to the US over the last few decades, particularly in the area of trust in government, creating an increasingly dysfunctional political environment.  The ways in which America’s store of social capital has dwindled have distorted and slowed down our economy, all the while making it harder and harder to fix any of the problems that we’re dealing with.

Over the last thirty years, the decline in confidence in government, and particularly in Congress and the Federal government has been precipitous.  It directly reflects the increase in corruption of politics and a growing belief that politicians care only about what large donors want, and are willing to waste taxpayers’ money without regard for the common good.

As wasteful spending rises, essential spending gets crowded out and government becomes less efficient, less effective, and less fair.  As government regulations become increasingly unrelated to the common good, and increasingly related only to who has which senators and congressmen in their pockets, government regulators lose any sense of moral direction and increasingly roll over for powerful interests.  An expectation of corruption builds up, in which a newcomer feels like a sucker for not taking the opportunity to get rich.  After all, “everyone else is doing it.”  And once such an expectation is created, it is remarkably stubborn and can hang on for decades or generations in spite of valiant efforts to reform the system.


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