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    {\large {\bf The Idea of Social Capital } \\ }



 \bigskip



January 9, 2003 \\



\bigskip



Eric Rasmusen \\



\bigskip



{\it Abstract}

\end{center}



 This paper tries make sense of the concept of social

capital using game theory and production theory. It might become a

chapter in my book on social regulation, or I might just leave it in

this   form on the Web.



\noindent

 {\small \hspace*{20pt} Indiana University Foundation Professor,

Department  of Business Economics and Public Policy,

  Kelley School of

Business,Indiana University,  BU 456, 1309 E. 10th Street,

Bloomington, Indiana, 47405-1701.

Office: (812) 855-9219. Fax: 812-855-3354. Erasmuse@indiana.edu.

Php.indiana.edu/$\sim$erasmuse. Copies of this paper can be found at

Php.indiana.edu/$\sim$erasmuse/papers/social\_capital.pdf.    }



\noindent

 {\small I thank for their comments Margaret Polski, Thomas Lyon, and

participants in

workshops at Indiana University and the George Mason Law and Economic

Center

Institute, ``The Challenge of Civil Society''. }



%%-----------------------------%----------------



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\bigskip

\noindent

 {\it   Introduction }



	 ``Social capital''  has been a   popular  metaphor in the

1990's in not one  but three fields: economics, political science, and

sociology.  It is, of course, an old idea that society has built up a

stock of institutions that we should take care to preserve.

Edmund Burke takes  this as  his central idea in {\it Reflections on

the Revolution in

France}, where he says to the Revolutionaries, 

\begin{small}

\begin{quotation}

 ``...the people of

England well know that the idea of inheritance furnishes a sure

principle of conservation and a sure principle of transmission,

without at all excluding a principle of improvement. It leaves

acquisition free, but it secures what it acquires.... You had all

these advantages in your ancient states, but you chose to act as if

you had never been molded into civil society and had everything to

begin anew. You began ill, because you began by despising everything

that belonged to you. You set up your trade without a

capital.''\footnote{ Edmund Burke,{\it  Reflections on the Revolution

in France} (1790) \\ 

http:

//www.knuten.liu.se/$\sim$bjoch509/works/burke/reflections/reflections

.html (September 13, 2001).}

\end{quotation}

\end{small}



  But although previous generations may have

worried about   how  social capital links to economic output,   modern

economists left the topic alone  until the 1990's, and earlier

generations did not

have available the statistical tools that we do nowadays.  In this

essay I will try to explain  the idea of social capital and the

problems encountered in trying to use it.    I will not solve any of

those problems, but I hope to provide useful clarification.





 James Coleman stimulated  modern attention to social

capital with his 1990 magnum opus, {\it Foundations of Social Theory}

and his 1993 Presidential Address to the American Sociological

Association.\footnote{James Coleman, {\it Foundations of Social

Theory},   chapters

10-12 (Cambridge: Harvard University Press, 1990); James

Coleman, ``The Rational Reconstruction of Society: 1992

Presidential Address,'' {\it American Sociological Review}, 58:1-15

(February 1993).} He died in 1995,

however, and the figure now most associated with social capital is

Harvard University political science professor Robert Putnam.  The

theme of Putnam's work is the importance of civic associations--

associations of people who   live close to

each other and interact personally.  In the metaphor captured by the

title of his book and article, {\it

Bowling Alone}, if neighbors play in bowling leagues together  the

interaction is useful not only for entertainment but for the

discussion it naturally engenders about neighborhood affairs and for

the contacts it creates for later personal or civic profit.  If people

stop bowling in leagues and start

bowling alone 

they may enjoy the bowling just as much,  but society is

poorer. The amount of social capital has declined.\footnote{ Robert

Putnam, {\it

Bowling Alone: The Collapse and Revival of American Community} (New

York: Simon and Schuster, 2000);  Robert Putnam, ``Bowling Alone:

America's Declining

Social Capital,'' {\it Journal of Democracy, } 6: 65-78 (January

1995),

\\ http://muse.jhu.edu/demo/journal\_of\_democracy/v006/putnam.html

(11/25/01). Quoting from the article:  \\

 ``Between 1980 and 1993 the total number of bowlers in America

increased by 10 percent, while league bowling decreased by 40 percent.

(Lest this be thought a wholly trivial example, I should note that

nearly 80 million Americans went bowling at least once during 1993,

nearly a third more than voted in the 1994 congressional elections and

roughly the same number as claim to attend church regularly. Even

after the 1980s' plunge in league bowling, nearly 3 percent of

American adults regularly bowl in leagues.)''   }



 Social capital is not created by just any kind of association.  The

association does not have to be civic-minded--- bowling leagues are

not. But it has to be local, so people meet and discuss things other

than the association's immediate purpose. The Environmental Defense

Fund does not qualify, because it is too specialized, and its members

hire professionals (via their contributions) to do its work.  Nor does

an Internet bowling discussion list.  Its members from all around the

world may increase their bowling expertise, and even the spirit of

the  brotherhood of man, but they will not discuss whether their

neighborhood needs a traffic bump. More controversially,  social

capital theorists  suggest that  the association should  be collegial

rather than hierarchical (or ``horizontal'' rather than ``vertical'')

if it is to increase social capital, because  it is  in a collegial

organization that neighbors make the contacts  that have spillovers to

outside activities.\footnote{This is more controversial because   a

hierarchical organization can be very effective for addressing local

issues.   Catholic churches, for example, are often hierarchical,  but

the priest is for that very reason in a good position to rally his

congregation to solve any of a number of problems  not related to

church activities and  to act as a clearinghouse for community

information. }



	  In {\it Making Democracy Work: Civic Traditions in Modern

Italy}, Putnam demonstrates a strong correlation between the number of

civic associations in different regions of Italy and the quality of

their governments.\footnote{Robert Putnam with Robert Leonardi and

Raffaella Y. Nanetti,  {\it Making Democracy Work: Civic Traditions in

Modern Italy}     (Princeton, N.J. : Princeton University Press,

1993).

} The World Bank has become very interested in the implications  for

economic development, and has sponsored a number of studies

which show the importance of participation in

associations.\footnote{See the World Bank's ``Social Capital Home

Page,'' which contains a

survey of the literature and links to working papers  from inside and

outside the Bank. \\http://www.worldbank.org/poverty/scapital/

(11/25/01). } Perhaps

civic  associations are as important for the Third World as

 education and  technology.    But social capital is not just

important for developing countries.   In  {\it Bowling Alone}, Putnam

argues that participation in civic associations has declined

significantly over the twentieth century  in America, raising the

possibility of adverse effects on government, the economy, and social

ills. Francis Fukuyama, in his {\it The Great

Disruption},  gives close attention to the  decline in

social capital and   the surge in  social problems in the

1960's.\footnote{Francis Fukuyama,{\it The Great Disruption} (New

York: The Free Press, 1999). } Whether the decline in social capital

be

caused by television, the increase in the percentage of working women,

or some other cause, it has political relevance. 



	The more immediate task,    however, is  to pin down the idea

of  social capital  so we can use it properly. There is something

important out there, but what precisely is it? There is general

agreement that we  want to get at the idea that in some societies

people  give more cooperation to each other    and  inflict less  harm

than in other societies.  One approach is to  measure how much people

belong to civic associations. Another is to use surveys to measure how

much they trust other people.  Still another approach is to look at

variables such as crime rates.  We could measure one of these proxies

for social capital  and   see if it predicts   variable of interest

such as government quality or economic well-being.



Before measuring and predicting, however, let us backtrack to the

theoretical problem: what is social capital and why should it be

useful for anything?





\bigskip

\noindent

{\it Defining Social Capital}



 The first point to clear up is how the idea of ``social capital''

relates to the idea of simple ``capital''.  Let us start with why

economists find  ``capital'' a useful idea.



	Perhaps the most fundamental question in economics, from the

time of Adam Smith to the present,  is what produces wealth. The most

basic tool for addressing that question is the production function:

the relation between inputs and outputs. The classic production

function  is

$$

Output = f(Land, Labor, Capital)

$$

	This  equation may not look like much, but already it is

saying that if you wish

to know how much output there will be of the goods you care about, the

important thing is to find out how much land, labor, and capital you

have with which to produce it.  These three inputs  can represent

three very general classes of inputs.  Labor  denotes  human time and

effort, land denotes not just real

estate but natural resources generally, and capital denotes  goods

that are produced in order to

produce other goods in the future.





 At its simplest, the  production function is for an individual

enterprise, linking, for example, the amount of corn produced to the

acres of land, hours of labor, and number of tractors available to the

farmer. With some study, the economist could figure out the shape of

the function $f(\cdot)$ and give the farmer useful advice: ``If 

you sell

one of your tractors  and buy an extra 10 acres with the money, you

will end up producing more corn.''   The advice would be accurate to

the extent that the production function's shape and inputs were

conceived accurately and that nothing else important changed over

time.  The prediction would be wrong if the amount of seed corn had to

increase with the acreage, since seed corn was left out of our

production function; and it would be wrong if rainfall decreased

sharply, since that, too, was left out.



An aggregation production function could  also be found,  for the

entire corn  industry,by  adding

up the acres, hours, and tractors for all farmers.  This, too, could

lead to useful conclusions: ``If 10 percent fewer tractors are used 

but labor and land are unchanged,  corn  output will fall by 5

percent.''   Aggregating at the level of the industry, however,

reduces the sharpness of the production function.  Not all tractors

are identical. Not only are they different models, but they also

differ in how old they are. Our predictions will be wrong if the 10

percent  reduction in  tractors  consists of just the  oldest ones.



	One solution is  to disaggregate the concept of  capital

into different kinds of capital--John Deere tractors, Case tractors,

old tractors, new tractors, and so forth-- so that our production

function had   more than  the three arguments of capital, labor, and

land.  If possible, we would like to keep the production function

simple, however, since what we aspire to is a useful tool rather than

descriptive realism.  The common solution is different:

 to measure capital in terms of its

dollar value--- in this case, adding up the market values of all the

tractors used.  This comes closer to the business definition of

capital, which includes not just physical assets but also such things

as   cash  for day-to-day transactions and  inventories of

goods for   sale. These forms of capital  share the

property of being the result of someone's investment, of their having

refrained from consumption earlier so they could have more production

today.



    Using the idea of the aggregate production function, we can even

think about a national production function.  Gross domestic product--

measured as the value of everything produced and sold in the market--

is the output from a country's use of land, labor, and capital (it is

``gross'' because some of the   land and capital  gets used up in the

process  but we do not subtract it from GDP). We might apply

econometrics  to data to   estimate the US production function to be

$$ 

 Output_{US} = 9*capital^{.3}*labor^{.7}*land^2.

$$

  And so we can say that

for a country to have more GDP, it needs to have more labor, land, and

capital. 



   But that is false. The converse is true--   if a country has more

labor, land, and capital  we can

confidently predict that it   will have a bigger  GDP.   But one

country

  might have  much higher GDP than another country even if its  labor,

land,

and capital  is no higher.  We do not think that the United States

has more output than India  just because it has more inputs-- though

that does, of course, explain a sizable chunk of the difference.  And

if we applied the same econometric methods to Indian data we might

find our estimated production function was

$$ 

 Output_{India} = 4*capital^{.3}*labor^{.7}*land^2.

$$

  The two countries have different ``total factor productivity,'' or,

put more simply, they have different production functions.  That is

unsatisfactory, though.  It would be neater and help us explain the

world better if we had one production function that applied to all

countries, just as  it is better to have one function for falling

objects based on gravity and friction instead of a  different function

for each object based on its different friction level.   The two

functions above, for example, might tempt us to think that there is

some omitted fourth input, X, and a general function

$$ 

 Output  = X^2*capital^{.3}*labor^{.7}*land^2.

$$

  If all we do is call  call  ``the residual''  then we have not

advanced our knowledge at all.  Calling it ``social capital'' would be

no better without further evidence, since  without evidence  label is

less justified than ``being in North America,'' ``being too hot,'' or

any other casual guess supported by a conventional wisdom.   If we can

identify and measure $X$, however,  we would be able both to attach it

to a particular theory and to   make

predictions of output for other countries based on what we have

estimated using the U.S. and India data.



  

Economists have identified four other factors omitted from the

production function: technology,   government, human capital and-- we

will indeed come to it eventually--  social capital.\footnote{The

differences in productivity across countries and the degree to which

the difference is declining  is the subject of the ``convergence

literature''. A representative article  from this literature is

Andrew   Bernard and  Charles   Jones,  ``Comparing Apples to Oranges:

Productivity Convergence and Measurement Across Industries and

Countries,''

{\it 

  American Economic Review},   86: 1216-1238 (December 1996).}



	 India and the United States have different technologies in

the sense that people have different knowledge of how to turn inputs

into outputs. One way to look at this is that the two countries have

different production functions. Another way would be to view the two

countries as having different stocks of an  input called

``Technology''.



  The two countries also have different governments, where by

government I mean not just the politicians in place, or even the

constitutions, but all the laws, regulations,  and other government

policies.

Government plays a huge role in how   inputs translate into

outputs.  Rather than putting it in the production function, however,

economists ordinarily treat government policy as  a set of  outside

constraints.



  A third difference  between  India

and America is   education levels.  This is where  the  major

modification

has been made to

the trio of land, labor, and capital.  Education  looks a lot like

capital investment.  People reduce current consumption so they can get

schooling and increase their output later.  This increases the value

of their labor, but the effect is   more like that of an increase

in capital.  Investment in education reacts to stimuli much as

investment in physical capital. If interest rates rise, for example,

or borrowing becomes more difficult, we would expect less education to

be acquired, while if salaries of college graduates jump we would

expect to see more college graduates.   Thus, the idea of  ``human

capital'' has become standard in economics--- and, indeed, the value

of the human capital  in a country like the United States is much

greater than the value of the land. (Think of the  sum  total of land

rents versus

the  sum  total of the wage premia from grade school education on up!)

Theodore Schultz won the

Nobel Prize for his pioneering work on human capital, and the idea has

been widely accepted at least since his 1961 American Economic

Association Presidential Address.\footnote{Theodore Schultz,

``Investment in Human Capital,'' {\it American Economic Review} 51:

1-17 (March 1961).}



	If we are trying to predict a person's future earnings,

ignoring his

investment in human capital will lead us to underestimate the value.

Thisis true at the national level too.

Understanding  human capital, we are not so surprised that Germany and

Japan

recovered so quickly from the devastation of their physical capital in

the Second World War. The survivors had abundant human capital, even

though the factories had been  destroyed by bombing or made  obsolete

by the end of the demand for tanks and guns. 



  Finally we come to social capital.  Even if India had the same land,

labor, capital, human capital, and technology as the United States,

and even if we imported the  American government, would the two

countries

 have the same GDP?  The hypothetical is a hard

stretch, but most people think not. There are    difference

between countries that we have not yet captured. They are    related

to

such things as  the willingness of people to keep their promises,   to

risk being

taken advantage of by other people, and to refrain from using their

energies to take advantage of other people instead of producing for

themselves.   It is not even clear which way the effect  of social

capital would go.  American pride in our Tocquevillean heritage of

voluntary associations and Puritan work ethic makes us think we have

an advantage in social capital, but crime is also a massive problem

for us, one whose cost to the economy has been estimated at over one

trillion dollars per year.\footnote{ The estimate is from

David 

Anderson, 

  ``The Aggregate Burden of Crime,'' 

{\it Journal of Law and Economics}, 42: 611-642  (October 1999).}

 



	It is to the social component of productiveness that we put

the label

``social capital''. As with technology, one approach would be    to

say

that India and the United States have different production functions, 

while another is to say they have different levels of a variable

called  social

capital.  With respect to technology, economists have taken both

approaches, in different contexts. In theoretical models, it is common

to assume that firms have different cost functions when modelling, for

example, how they compete in output, but  in models of innovation it

is   common to assume that firms have technology levels that they seek

to increase.  In empirical models both approaches are also used.

Sometimes economists restrict themselves to estimating production

functions for a single country because international differences do

not permit aggregation, but sometimes they use data on patents to

compare countries' levels of innovation.     We would like to be able

to say with confidence that one firm, individual, or country has more

social capital than another  in analogy to having better technology,

but that leaves open the question of whether we can usefully measure

social capital as a single magnitude.    If we can-- so that social

capital is more like human capital than it is like government-- that

will permit  empirical work to use broad statistical analysis rather

than being restricted to case studies.



	The analogy between social capital  and  what we might call

``physical''  capital (to distinguish it from social and human

capital)  is based on

the idea that both are stocks rather than flows, and that they both

can either rise or fall over time. Think back to  Edmund

Burke: an institution is  something  durable that we inherit, but  it 

can also be improved or degraded over time  depending on how we take

care of it. On the other hand, there are three important differences

between social and physical capital.



	First, to increase physical capital

requires that we invest, refraining  from current consumption.  This

is not so clear for social capital, which is often a byproduct of

other activities. Social bonds--- whether from

associations, trust, or social norms--- tend to be created without

deliberate investment and to strengthen with use.  Physical capital

gets worn out with use (``depreciates''), but  social capital becomes 

worn out if it is {\it not} used. To be sure,  first

creating a social bond can be as costly as physical investment, and so 

people do speak of ``investing in friendships'',  but   we would not,

for example, expect as much of a fall in

social capital  as in physical or human capital if interest rates were

to rise.\footnote{Human capital also can have this feature

of ``use appreciation'', if I may coin a term.  Some skills are

learned on the job and are forgotten if they are not

practiced. Even physical capital can  have the feature. 

As a new mechanical device is used,  more is learned about how it

works, and often this knowledge can be written down, so it is capital-

specific rather than operator-specific. The learning curve is   about

capital as  well as labor.  }



	The second difference is that   social capital by its very

nature   has spillovers onto other people.    If I increase my social

capital by joining my neighborhood association, I have affected that

of all my neighbors  who are members too--- I hope  by increasing

rather than reducing the association's value.  Even the

neighbors who are not members benefit if the association becomes more

effective. On the other hand, if the association devotes itself mainly

to securing  city  funds, the spillover  onto the rest of the city

might well be negative.\footnote{ Recall that it is the {\it negative}

effects of associations that is the theme of much of the Chicago

School work on regulation and of Mancur Olson, {\it The Rise and

Decline of Nations: Economic Growth, Stagflation, and Social

Rigidities} (New Haven: Yale University Press, 1982).}



	These spillovers make social capital especially difficult to

measure. We cannot just add up    each person's  individual

social capital to find    aggregate social

capital, the method we use for physical capital. Part of the value to

me  of my social capital to me might be   that  it

helps me to take wealth from  from you, either by  crime or  by

government transfer.  Criminal   gangs  and rent-seeking lobbies are

social capital for

the  people who belong to them.  Nor is the  extent

to which my social capital helps you  part of my individual

social capital's value. When a neighborhood volunteer patrol prevents

a stranger  from being mugged, most of the value is to the stranger,

not to the person   patrolling.



 The third difference is that social capital, unlike physical capital,

is not traded in the marketplace. A person cannot go out and sell his

social capital.  In this  it is like human capital. Rather than

selling outright, the owner must rent it   out in conjunction

with his labor or combine it with capital to earn a return to self-

employment. Untangling how much of the return is owed to labor, how

much to human capital, and how much to social capital  is 

difficult.



  At the same time, the differences can be exaggerated.  A business's

organization is very much like physical capital. The business

consciously invests time and budget into making it. The organization

depreciates, becoming obsolete over time (if not with use). The firm's

value might be primarily its organizational form, not its material

assets or its employees. And there would not be any spillovers to

outside, except the pecuniary one of the firm having lower costs and

hence lower prices.



	One more point should be made in connection with social

capital and production functions. It could be that social capital is

important to output, but only because it affects other inputs. For

example, a high level of social capital in a country might lead to

more investment in physical capital because property rights are more

secure.  If that is the case, then social capital should not be an

independent argument in the production function, because its effect is

entirely captured by the levels of the other inputs. If social capital

is just an input into physical capital, without increasing the

productivity of a given level of capital, then it is very important to

economic growth, but it will  not  help explain that portion of growth

unexplained by capital, labor, and land.  As we will see later, the

work of Knack and Keefer (1997) suggests this may be the case.





	I have tried to  show why so many good scholars are intrigued

by the notion of social capital, and to relate it to the notion of

capital generally. Clearly there are  problematic differences, but

some  of the problems  also  arise in human capital  and have not

stopped it from being a   useful concept.   If we can come up with a

well-defined and

measurable variable for social capital, then our theory of how wealth

is produced will be much improved.       I have not yet  addressed

 how social capital is supposed to work, however.   Let us   now

proceed to that.





\bigskip

\noindent

 {\it  Social Capital as a Way to Transmit Information}



 	As the term is used in the economics literature, social

capital  has two functions: information transmission  and solving

prisoner's dilemmas. Information transmission is the simpler of these.

If Joe  talks with Tom, he has the opportunity to give Tom information

and to receive it too.   The information could be about a job opening,

a trick to make a computer work better, or a dishonest person to

avoid. Information is difficult to price, but   the solution is to

have a reciprocal relationship  in which  Joe is willing to pay the

time cost of telling things to Tom because Tom tells him enough things

in return to make it worthwhile.  Once Joe and Tom are talking, it is

very easy for them to give each other information, and the information

will make them both more productive. The biggest cost is    getting to

know each other in the first place, setting up the meetings, and

spending time in the meetings.   This is the investment in social

capital. Once that is done, the actual transmission of information is

practically costless.



 Information transmission   has

beneficial effects on third parties. Once he learns something from

Joe, Tom can pass it along to Sam.  Sam has thus obtained a benefit

from Joe, but Sam has no  direct opportunity to reciprocate. He does

have an indirect opportunity, because Sam can pass information to Tom,

who can pass it to Joe.  The spillovers are complicated, but this is

the kind of problem amenable to theoretical modelling by

economists.\footnote{See

Venkatesh Bala and  Sanjeev Goyal, ``A Noncooperative Model of

Network Formation,''

{\it Econometrica},    68: 1181-1229 (September 2000), which looks at

network formation as a game and tries to see whether networks shaped

like stars or wheels will arise naturally.}





\bigskip

\noindent

 {\it Game Theory and Social Capital}



 	What is probably more important than information transmission

as a

purpose  of social capital is to solve social  dilemmas.

 The social capital literature revolves around the idea that

societies in which more people  trust each  other  become  wealthier.

Game theory provides a useful framework for thinking about trust.

I will next  discuss the two games most important for

understanding social capital: the Prisoner's Dilemma  and  the

Coordination Game.



  In  the  Prisoner's Dilemma, two prisoners, named   Row and Column,

are being interrogated separately.  If both confess, each is sentenced

to eight years in prison; if both deny their involvement, each is

sentenced to one year. If just one confesses, he is released but the

other prisoner is sentenced to ten years.    Table 1  gives the

payoffs, with  arrows  showing  a

player's preference between actions. The payoffs are negative numbers

because more years in prison are worse for  a player-- his ideal in

this game is to come out with a payoff of 0.



\newpage



\begin{center}

{\bf Table 1:   The Prisoner's Dilemma}



 \begin{tabular}{lllccc}

  &       &             &\multicolumn{3}{c}{\bf Column}\\

  &       &             &   {\rm Deny}  &   & {\rm Confess}     \\

  &   &  {\rm Deny}      &     -1,-1 & $\rightarrow$  & -10, 0 \\

 & {\bf Row:} &&$\downarrow$& & $\downarrow$ \\

&  &       {\it   Confess}     &      0,-10  & $\rightarrow$  & {\bf -

8,-8} \\

\multicolumn{6}{l}{\it Payoffs to: (Row, Column) }

\end{tabular}

\end{center}



         Each player has a dominant strategy. Consider Row.  Row does

not know which action Column is choosing, but if Column chooses {\rm 

Deny}, Row faces a {\rm Deny} payoff of $-1$ and a {\rm Confess}

payoff of 0, whereas if Column chooses {\rm Confess}, Row faces a

{\rm Deny} payoff of $-10$ and a {\rm Confess} payoff of $-8$. In

either case Row does better with {\rm Confess}. Since the game is

symmetric, Column's incentives are the same. The

equilibrium is ({\rm Confess}, {\rm Confess}), and the equilibrium

payoffs are $(-8,-8)$, which is worse for both players than

$(-1,-1)$.  Sixteen, in fact, is the greatest possible combined total

of years in prison.







  Economists immediately think of the

  Prisoner's

Dilemma when they see people behaving in ways that hurt them all.

The game   crops up in many different

situations, including oligopoly pricing, auction bidding, salesman

effort, political bargaining, and arms races.  Consider fidelity in

marriage,

modelled

as a Prisoner's Dilemma in Table 2.  I chose numbers to represent the

ranking of payoffs, so the

man's payoff from Unfaithful  (5)  is  bigger than his payoff from

Faithful (4). In equilibrium, both players are Unfaithful, even though

they would both prefer ({\rm Faithful}, {\rm Faithful}).



\begin{center}

{\bf Table 2:   Marriage as a Prisoner's Dilemma}



 \begin{tabular}{lllccc}

  &       &             &\multicolumn{3}{c}{\bf Woman}\\

  &       &             &   {\it Faithful}  &   & {\it Unfaithful}

\\

  &   &  {\it Faithful}      &     4,4 & $\rightarrow$  & -5, 5 \\

 & {\bf Man:} &&$\downarrow$& & $\downarrow$ \\

&  &       {\it   Unfaithful} & 5, -5 & $\rightarrow$  & {\bf -2,-2

} \\

\multicolumn{6}{l}{\it Payoffs to: (Man, Woman) }

\end{tabular}

\end{center}



   Marriages do not always  or even usually  end up with both spouses

being unfaithful, any more than  conspirators in real life end up

always confessing to the police. The games in Tables 1 and 2  show

that the players  have a  problem, though. To solve it they need to

somehow change the rules of the game. That is where social capital

enters. Institutions and social norms    can change the rules.  The

love match, criticism from friends and relatives, moral education,

and laws against adultery are all ways different societies have tried

to change the   payoffs   in the Marriage Game  so that Faithful has a

higher payoff than Unfaithful.



	Table 3 shows civil society generally  as  a Prisoner's

Dilemma. Each citizen must decide whether to help his fellow-citizen

at some cost to himself, or hurt him. The game is exactly the same as

the Marriage Game except for the labels.   ``Help'' and `` Hurt''

represent the myriad of ways that people interact. They  represent

``Pay Taxes'' and `` Evade Taxes''; or ``Be Honest'' and ``Lie''; or

``Do Nothing'' and ``Steal''; or ``Donate'' and ``Do Nothing''; or

``Perform Your Contractual Duty'' and ``Breach''.



	 The contract setting illustrates an important effect of the

Prisoner's Dilemma: if it isn't solved, people will act to avoid the

game. Rather than contracts being made and always breached, they will

not be made in the first place. But that, too, is a loss.  Civil

society has contracted a little, and the people are acting more like a

collection of individuals, having lost the gains from cooperation.



 



\begin{center}

{\bf Table 3:   Civil Society as a Prisoner's Dilemma}



 \begin{tabular}{lllccc}

  &       &             &\multicolumn{3}{c}{\bf Citizen 2}\\

  &       &             &   {\it Help}  &   & {\it Hurt}     \\

  &   &  {\it Help}      &     4,4 & $\rightarrow$  & -5, 5 \\

 & {\bf Citizen 1:} &&$\downarrow$& & $\downarrow$ \\

&  &       {\it  Hurt} & 5, -5 & $\rightarrow$  & {\bf -2,-2

} \\

\multicolumn{6}{l}{\it Payoffs to: (Citizen 1, Citizen 2) }

\end{tabular}

\end{center}



   Changing the payoffs by means of social institutions is not the

only way to escape  the Prisoner's Dilemma. Another way is repetition

of the game. If the game is repeated indefinitely, then Citizen 1

might choose Help now in the hope that his charity will induce Citizen

2 to choose Help in the future.  Citizen 1 prefers a payoff of 4 in

each of many repetitions than   5 now but -2 in each of the future

repetitions.  If Citizen 2 thinks the same way, they will both choose

Help, and the dilemma is solved.



	It is a bit more complicated than that, of course. If Citizen

1 chooses Help in each repetition of the game and Citizen 2 does not

reciprocate, Citizen 1's strategy has backfired.  Citizen 1 needs to

use a strategy more like one of the following pair:



 

 



 \noindent

 {\bf The  Grim Strategy}\\

  {   1.  Start by choosing {\it Help}.\\

    2.  Continue to choose {\it Help} unless some player  has chosen

 $Hurt$, in which case choose $Hurt$ forever.}



 \noindent

 {\bf The Tit-for-Tat Strategy}\\

  {  1.  Start by choosing {\it Help}.\\

    2.  Thereafter, in repetition $n$ choose the action that the other

player chose in period $(n-1)$.}



 Both of these strategies have the properties of being nice--- they

start with Help---but retaliatory---they respond with Hurt if the

other player plays Hurt.  Tit-for-tat also has the   useful feature

of

being forgiving---if the other player goes back to playing Help, the

player using tit-for-tat goes back to playing Help too. If someone

choose  Hurt by accident occasionally, Tit-for-tat can restore

cooperation, which  the Grim Strategy cannot.



   The repetition solution to the prisoner's dilemma has two problems.

First, it requires   caring about the future.  If a player knows he is

approaching the  last repetition and   the other player will surely

start playing Hurt, he, too will play Hurt. Or, if the player cares

little enough for the future, he will prefer the present payoff from

Hurt to future gains from cooperation.



 The second problem is that the repetition solution depends on

expectations. If  Citizen 1 expects Citizen 2 to play Tit-for-Tat, he

is willing to play it himself. But if he expects Citizen 2 to simply

play Hurt every period, Citizen 1 will himself play Hurt. Thus, the

combinations    (Help, Help) and (Hurt, Hurt) can both result from

self-fulfilling expectations.



   The choice between the two equilibria of (Help, Help) and (Hurt,

Hurt) is, in fact, an example of the second game important for

understanding  social capital: Table 4's Coordination Game. Two

drivers

approaching each other  must choose whether to drive on the Right side

of the road or the Left.  The highest payoffs for both are if they

both drive on the Right.  I am imagining that they are both right-

handed and driving on the Right is best for right-handed drivers;

whether this is really true, I don't know. They also both have

positive payoffs, if not quite so high,  if they both drive on the

Left.  If one of them drives on the Right and the other on the Left,

however, they crash into each other, for payoffs of (-50,-50).







\begin{center}

{\bf Table 4:   The  Coordination Game}



 \begin{tabular}{lllccc}

  &       &             &\multicolumn{3}{c}{\bf Driver 2}\\

  &       &             &   {\it Right}  &   & {\it Left}     \\

  &   &  {\it Right}      &     2,2 & $\rightarrow$  & -50, -50 \\

 & {\bf Driver 1:} &&$\downarrow$& & $\downarrow$ \\

&  &       {\it  Left} & -50, -50 & $\rightarrow$  & {\bf 1,1

} \\

\multicolumn{6}{l}{\it Payoffs to: (Driver 1, Driver 2) }

\end{tabular}

\end{center}



     In the Coordination Game, unlike the Prisoner's Dilemma, there is

no

conflict between the players' interests. (Right, Right) is best for

both of them. But whether that pair of actions is

achieved depends on their expectations. If Driver 1 expects Driver 2

to choose Right, he will choose Right himself. But what if Driver 1

expects Driver 2 to choose Left? Then Driver 1 will choose Left. And

if Driver 2 knows Driver 1 has that expectation, Driver 2 will confirm

it by himself choosing Left. Thus, (Right, Right) and  (Left, Left)

are both equilibria. (A third equilibrium is for each to choose Right

with   probability 51/103, but I will not discuss that here.)



 The problem in the Coordination Game is thus to get desirable

expectations, which will be self-confirming once they are established.

Communication is an obvious way to do this.  The two players simply

talk to each other and agree that they will both choose Right. In some

settings, however---including two drivers  heading towards each other

at 60 miles per hour-- communication is not practical.    A convention

is needed. Custom might provide that convention, or a law, or even

just a proclamation by the  government or some private person.



	Return now to the repeated Civil Society As a Prisoner's

Dilemma, with

its multiple equilibria  of  (Help, Help)  and (Hurt, Hurt). The

problem is to get expectations right; the choice between the two

equilibria is a coordination game. Communication might solve it, or

convention. The difference is that  other features of the game---

repetition and caring for the future--- must also be present for there

to be multiple equilibria in the first place rather than just the

dismal (Hurt, Hurt) of the unrepeated game.



   Plato   did not  mention the

Prisoner's Dilemma in {\it The Republic},    but he was  attacking the

same problem.   Traditional philosophers of civil society thought

mainly about

solutions that changed the payoffs in the Prisoner's Dilemma when they

thought about how to get people to behave themselves--- moral

education, religion, and laws. The 1990's literature on social capital

is mainly about

solutions that increase repetition and communication. If people go

bowling with other people in their neighborhood, to use Robert

Putnam's celebrated example, they will have more incentive to help

each other and less incentive to hurt each other. Information about

who helps and who hurts will spread quickly, and nobody will want to

be excluded from a social network which both has   direct advantages

(the fun of bowling) and signals reliability (``they keep him on the

bowling team, so he must be a good guy'').



	Law is a simple way to deal with many prisoner's dilemmas. We

use criminal law to punish stealing and civil law to punish breach of

contract. But in many settings    it is too costly for a court to

determine who chose Help and who chose Hurt. That is even true to a

large extent for stealing and breaching. Thus, the other solutions are

crucial.\footnote{The classic reference on this is   Stewart Macaulay,

``Non-Contractual Relations in

Business,'' {\it American Sociological Review,} 28: 

    55-70 (February 1963). Macaulay points out that most business

relationships are based on trust and reciprocity rather than contracts

enforceable in court. See also  the more theoretical article of

Benjamin Klein \& Keith Leffler    ``The Role of Market

Forces

in Assuring Contractual Performance,'' {\it Journal of Political

Economy,}     89:   615-41 (August 1981), which shows how reputation

can be  based on  reciprocity. }      A society which has solved more

prisoner's dilemmas will be

happier and wealthier.  We can say that such a society is ``earning a

return on its social capital,''  and that a less successful society

``might do well to invest in social capital''.  The great problem is

to figure out how  such  investment can be undertaken.







\bigskip

   \noindent

 {\it Measuring Social Capital}



	 Having thought about why trust is useful, let  us now return

to

the

problem of measuring social capital.  Physical capital can be measured

in natural units such as number of tractors,though that does not allow

aggregation across types of capital. Or, it can measured using the

market value-- the dollar value of tractors.  In government statistics

and business accounting, it is measured  a third way: using investment

and depreciation. Each year the dollar value of new investment is

added to the existing dollar value of capital, and an estimate of the

amount of depreciation (based on the expected lifetime of the assets)

is subtracted. The investment/depreciation method  is not so accurate

as using market value, since it takes into account capital gains and

losses only crudely,   but it

is easier to measure.



	None of these three methods is well suited to  measuring

social capital.      Social capital has no natural  physical units. It

is not traded

in the marketplace (at least, not independently of a person's labor).

And  investment in it is not carried out by dollar purchases, and

often is not costly at all.  The  problem is not that social capital

does not

have a dollar value.  In theory, we could compare two societies and

say that Society X  would be willing to pay 200 billion dollars to

have as high a level of social capital as Society Y.  This is why

economists at the World Bank are so interested in social capital; if

they can find a way to spend money to increase it, they would be as

happy to do that as to build dams and roads. And there is some promise

in putting dollar values on individual social capital projects such as

setting up agricultural mutual-help associations.  But  I have not

seen  attempts

to measure an aggregate dollar value of social capital.\footnote{A

useful starting point would be to try to estimate the value of a

single business's social capital (or perhaps, ``organizational

capital''): the excess of its value over the value of its material and

informational assets. The market value of a company commonly differs

from its book value (estimated by the same investment/depreciation

method used in national income accounting),  but much of the

difference is due to capital gains and losses on assets, which would

have to be subtracted to measure social capital.}







    Another measurement approach, which I mentioned earlier,  is to

find  proxy variables that are correlated with

social capital.   Rather than

finding a dollar measure for social capital, we look for a proxy

variable, a variable   that takes high values when the level of social

capital is also high. Suppose the true production function for a

country is the one from our earlier example,

$$ 

 Output  = X^2*capital^{.3}*labor^{.7}*land^2,

$$

 where $X$ is indeed Social Capital.  Suppose, too, somewhat

whimsically,  that  we know that it  happens that in every country,

 $$

 X = a*B, 

$$

where $B$ is the number of bowling teams.   If we cannot measure $X$

and $a$ directly, but we can measure $B$, then the production function

could be rewritten as

$$ 

 Output  =  (a*B)^2*capital^{.3}*labor^{.7}*land^2,

$$

  We can use this new  production function to test whether social

capital indeed is our mysterious $X$.  If output rises with bowling

leagues, $X$ is social capital; if it does not, then $X$ is something

else such as technology.



 Care must be taken with this new production function. It is   not

literally true, in the sense that  if we used government policy to

increase    $B$, that would   increase output according to what the

function says.   The reason is that the  relationship $X=a*B$ would

change. It might happen that $a=50$  initially,  because bowling

leagues are 1/50 of social capital, but if we double the number of

bowling leagues, that will not double the rest of social capital. (If

it does, then our new function is indeed valid for making policy, and

$B$ is more than just a proxy.)  Instead, the multiplier $a$ will

change to be about 25.







 One  commonly used  variable   is drawn from the General Social

Survey, which every year or two has asked   1,500 to 3,000 people in

the United

States      the  number of types of associations to

which   they belong.\footnote{National Opinion Research Center, {\it

General Social

Survey}, annual    from 1975 to 1991, biennial from 1994 to 2000,  \\

http://www.norc.uchicago.edu/projects/gensoc.asp (November 24, 2001).}

The problem with this as a proxy for social capital is that it is

narrow. If we find that people  in Ohio  

belong to many associations, that might be a sign of high social

capital.  It might also, however, be a sign that people in Ohio do not

trust anybody  who is not a member of the same association as they

are, so the very prevalence of associations is a sign of lack of other

kinds of social capital.   Putnam and others, however, have found the

associations variable to be

correlated with many other social variables. One example is the study

of individual

social capital by  Edward   Glaeser, David Laibson, and Bruce

Sacerdote.\footnote{  Edward L. Glaeser, David Laibson, and Bruce

Sacerdote,   ``The Economic Approach to Social Capital,''  National

Bureau for Economic Research Working Paper No. W7728, issued in June

2000, \\

 http://papers.nber.org/papers/W7728.pdf (September 20, 2001).} Rather

than beginning with aggregate social capital, they look at what

explains the number of associations  to which individual people

belong. They find that people belong to more associations if they are

well-educated, middle-aged,  and nontransitory, just as one might

expect from rational investment on their part.  They do not try to

determine how much richer people are as a result of their belonging to

more associations, but measuring the  individual return to social

capital  is a logical extension of their approach.











A different  proxy commonly used for social capital   is  drawn from

the World Values

Survey, which was

conducted  1981-84, 1990-93, and 1995-97 (and will be done again on a

regular basis).\footnote{{\it World Value Survey, 1981-84 and 1990-93}

(ICPSR

6160) Ann Arbor, Michigan: Inter-University Consortium for Political

and Social Research, 1994, \\

http://wvs.isr.umich.edu/ (November 25, 2001). } It asked 1,000 people

in each of 40

countries the following question:

\begin{quotation}

\begin{small}

 ``Generally speaking, would you say that most people can be trusted,

or that you can't be too careful in dealing with people?''

\end{small}

\end{quotation}





	A problem with the trust question is that it is  

subjective, and    different respondents interpret it differently. In

addition, it is hard for a person to know how trusting he really  is

unless  he must actually decide whether to take a trusting action and

put himself at risk.

Glaeser, Laibson, Scheinkman and Soutter found that Harvard students

who answered the World Values Survey question by saying that most

people can be trusted  were  actually not especially trusting in

experimental games (though they were more trust{\it worthy} in those

games).\footnote{Edward Glaeser, David Laibson, Jose Scheinkman and C.

Soutter, ``Measuring Trust,'' {\it Quarterly Journal of Economics},

115: 811-846  (August 2000). } The trust variable  has nonetheless

been used with

interesting results.  Rafael La Porta, Florencio Lopez-de-Silanes,

Andrei Shleifer, and  Robert W. Vishny find that a country's level of

trust as measured this way is correlated, conditioning on income per

capita,  with any number of desirable things, including  noncorrupt

government, civic participation,  good infrastructure, and even low

inflation.\footnote{

 Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, and

Robert W. Vishny, ``Trust in Large Organizations,'' {\it The American

Economic Review,   Papers and Proceedings}, 87: 333-338  (May 1997). }

What gives rise to these correlations is an open question, but they

show that  the  trust variable has some predictive power and hence

some meaning.



	One of the best-known studies of social capital, that of

Stephen Knack and  Philip Keefer, uses cross-country data  to try to

explain economic growth (as opposed to the level of GDP) using both an

association variable and two more subjective variables from the from

the World Values Survey.\footnote{

    Stephen Knack and  Philip Keefer, ``Does Social Capital Have an

Economic Payoff? A Ccross-Country Investigation,''

 {\it   Quarterly Journal of Economics},   112:  1251-1289 (November

1997). }

 One of the subjective variables is the Trust variable used by La

Porta et al.  and the other, which they call ``Civic'',  is based on

the degree to which the respondent disapproved of actions such as

``claiming government benefits which you are not entitled

to.''\footnote{The other actions used to construct the Civic variable

are

 ``avoiding a fare on public transport,''

 ``cheating on taxes if you have the chance,''

 ``keeping money that you have found,'' and 

 ``failing to report damage you've done accidentally to a parked

vehicle.''}

 Knack and Keefer  find  that Trust and Civic both are significant

explanatory variables for GDP growth, though their significance

disappears if investment is added to the regression, suggesting that

Trust and Civic help growth by increasing investment in physical

capital.  The sample size,

like La Porta et al.'s, is only about 30 countries, which makes it

remarkable that even Trust and Civic show up as significant. They

also find that the number of associations  to which

respondents belonged is insignificant, however, even when Trust and

Civic are not included in the regression equation. They note that

although Trust and association membership do  have a strong bivariate

correlation, conditioning on income and education that correlation

disappears--- that is, it seems the correlation is accidental

because  both   are independently  correlated with income and

education.



 A different kind of proxy would be to use some variable measured at

the aggregate level such as the number of  bowling leagues in a state

or the crime rate in a county. There is a problem with this that

also  lurks in the background of the association variable:

distinguishing inputs from outputs. Numerous associations    might be

as much the output from social capital (viewed as a tendency to

cooperate)  as the input to a production function.  This is even

clearer with respect to crime. We would like to determine production

functions for non-economic goods such as crime  as well as for

economic ones. Ideally, we would discover  how inputs such as police,

laws, income, and education generate the output of crime, rather than

using crime as our base variable and using it to predict other social

outputs.  Finding that some variable such as crime  helps explain

economic output measures would nonetheless be an interesting

result.\footnote{Two other methods, which I will  not explore here,

are (1)

 expert subjective measures (e.g. Fukuyama's low, middle

high trust countries), and (2)  experiments (e.g. the Reader's Digest

study).}







\bigskip

\noindent

 {\it Neglected Topics:  Businesses, Families, Norms,  and Social

Outputs}



 It may seem  unfair to  make extra requests of a literature that is

still unsure of how to  define its key variable, but I will do so

anyway.  I would like to raise  several  topics that I think are

central to the

idea of social capital but have not received enough attention. 



 First, we should keep in mind that businesses are civic associations

too, and very common ones. What is the effect of associating in

businesses such as partnerships and corporations on the participants'

value as citizens?  Theoretical arguments could be made for either a

positive or negative effect--- so how can we measure this?



A second  lacuna  in the social capital literature is  that most

common  of civic associations: the family. Although families are

partly hierarchical in their interactions, they are local associations

with active participation of their members, and they clearly are

are

important

both for information transmission and for solving prisoner's dilemmas.

The family is  the obvious building block for civil society and

government has often been viewed as something like a large family (or,

conversely, the family as something like a small government). Nor is

this just the view of older thinkers such as  Edmund Burke and

Confucius; evolutionary biology devotes much attention to solving

prisoner's dilemmas, and its focus is on how this helps an animal's

genes-- that is, members of its family.\footnote{A good overview is

Robert

Trivers's {\it Social Evolution}  (Menlo Park, California: The

Benjamin

Cummings Publishing Company, 1985). See especially Chapters 4 (``The

Group Selection Fallacy''), 6 (``Kinship''), and 15 (``The Evolution

of Cooperation''). } Human behavior, too,  may be based on behavior to

family members, and it is from that base that we seek to expand

virtues such as altruism to people outside the family.\footnote{An

alternative explanation for human altruism, which Trivers discusses at

p. 388, is that it  arises from an instinct for reciprocal altruism.}



 Almost everyone is born into a family, but

the 

size and strength  of families  differs considerably across

time  and place.  To an American, what comes immediately

to mind is the increase in divorce rates from 1960 to 2000.  Perhaps

just as important, however, is the degree to which families stay in

one area geographically (something never as true in America as

elsewhere), the extent to which  cousins and more distant relatives

are included, and the sheer number of children (a family of ten grown

children has more opportunity for mutual aid than a family of two).



	Glaeser and his co-author report that over half of the General

Social Survey respondents belong to just zero or one

association.\footnote{Glaeser et al., Appendix Table 1. 30\% belong to

zero, 26 \% to one, 18\% to two, 11\% to three, and 15 \% to more than

three.  }   Thus,  including  a person's family in the number of

associations to which he belongs would   would typically  more

than double the number. If

everyone belonged to a family, the omission of that variable would not

matter. But for many people--- especially adults--- belonging to a

family is as nominal as belonging to the state church is for someone

in a modern  European country.  The overwhelming majority of citizens

may belong to the state church but  never attend

   a church service except for weddings and funerals.  Similarly,

many adults are out of contact with parents and siblings, not to

mention uncles and cousins. Even  children are often out of contact

with

their fathers,  and  a family with just one parent will not be as

effective a civic association, other things equal.



	Data are available on the size and marital status of families.

The World Values Survey also has questions relevant to the strength of

families. One of them is the extent to which the respondent trusts his

family. La Porta et al., responding to a suggestion by Fukuyama that

strong families are bad for large organizations,  regress the market

share of the 20 largest firms on trust in family and trust in general,

finding that it is negatively correlated with trust in family and

positively correlated with trust in general.\footnote{La Porta et al.,

pp. 335-336.}  It would be useful to try to combine the two trust

variables, since there is no reason to think that families would be

less useful than other civic associations, even if they do substitute

for alternative memberships.







	 Another  topic, which  if not neglected  by the social

capital

literature, at least needs better integration,

is

social norms.   In the 1990's a literature on norms   mushroomed in

law and economics,

parallel to the literature on social capital but largely separate from

it.  The norms literature has had the same problem of defining its key

variable  and even more trouble in measuring it. Indeed, so daunting

is the task of measuring the strength and number of norms that nobody

has tried to create a numerical variable. Instead, empirical work is

largely  based on case studies  and  anecdotes.\footnote{Examples from

the literature are: Robert Ellickson, {\it Order without Law: How

Neighbors

Settle Disputes}, (Cambridge: Harvard University Press, 1991);  Lisa

Bernstein,   ``Opting Out of the Legal System: Extralegal Contractual

Relations in the Diamond Industry,''  {\it Journal of Legal Studies},

21: 115-158 (June 1992); Elinor Ostrom, ``A Behavioral Approach to the

Rational-Choice Theory of Collective Action,''  {\it American

Political Science Review}, 92:1-22 (March 1998); Richard Posner and

Eric

Rasmusen ``Creating and Enforcing Norms, with Special Reference to

Sanctions,''  {\it International Review of Law and Economics}, 19:

369-382 (September 1999).  Much of the  work focuses on the relation

between private norms and public laws, e.g.  Robert Cooter, `` Models

of Morality in Law and Economics: Self-Control and Self-Improvement

for the `Bad Man' of Holmes,'' {\it Boston University Law Review},

78:903-930 (June 1998); Avery Katz, ``Taking Private Ordering

Seriously,''  {\it  University Pennsylvania Law Review}, 144:

1745-1763

(May 1996); Eric A. Posner, ``The Regulation of Groups: The Influence

of

Legal and Nonlegal Sanctions on Collective Action,''   {\it University

of Chicago Law Review} 63: 133-197  (Winter 1996).   }



	Social norms are clearly part of social capital. To some

extent their existence is correlated with that of trust and of civic

associations. If norms work, people can trust each other. If people

belong to civic associations, they can more easily detect wrongdoing

and  enforce norms against each other. But norms are distinct from

the  other two ideas. If norms are strong, people may be very careful

with each other, but only so that if others are predaceous they can

bring the  norms' penalties to bear against them. And if  norms are

strong, associations may be unnecessary.  Internalized norms,

especially, do not need associations for   enforcement, and lack of

civic associations might be just as much a sign of a well-ordered

society

as lack of police.    To reduce opportunism,    encouraging

moral education  may be just as easy and effective as encouraging

civic associations.



	 This brings us back to the topic of the family.

Families     devote a huge amount of time to teaching

norms to children  and   are notorious for the intensity with

which they enforce norms even against adults. Data

from the World Values Survey might be useful in measuring this. One

question asks which of a variety of qualities a child should be

encouraged to learn at home, a variety including good manners,

independence, hard work, imagination, and unselfishness. Some

qualities build social capital; others are more individually

useful.\footnote{``1995-1998 World Values Survey

Questionnaire,''\\

 http://wvs.isr.umich.edu/wvs-ques3.html (November 25, 2001). }





 	The final   topic is social outputs.  

So far, research has been concentrated on economic outputs such as GDP

growth or political outputs such as the degree of government

corruption.\footnote{Putnam's {\it Bowling Alone} is an exception: it

looks at US state data on various social indicators.}  More natural

outputs of social capital are social outputs

such as

crime, divorce, child neglect, and drug use.  These, like economic

outputs,  can be modelled

using    production functions,

  as has been clear from the   work of  Gary

Becker and those coming after him.\footnote{See, e.g., Gary S. Becker,

Elisabeth M. Landes, and

Robert T. Michael,  ``An Economic Analysis of Marital Instability,''

   {\it  Journal of Political Economy},     85:1141-1187 (December

1977); Gary Becker,

  ``Crime and Punishment: An Economic Approach,''  {\it

Journal of Political Economy}, 76: 169-217 (March/April 1968). }

   Moreover, they are an important part of wealth. What do people

value? If asked, most people will not answer ``money''  (not even

economists!).  Their responses may not be truthful, but  in our daily

lives we do not act as

if money is the  only  goal, or even the most important one. We do not

marry the richest potential spouse  or take the most lucrative job.

This  is quite consistent with economic rationality; economic theory

fully grants that nonmaterial goods are as important as material ones.

Yet   we behave in policy making as if material possessions are  what

is most

important.  This is true of both liberals and conservatives.

Conservatives focus their attention on redistribution of wealth and on 

 incentives  for wealth production. Liberals focus their attention

on inequality of wealth. Both neglect nonmaterial influences on

happiness.



	Yet are greater inequalities in social indicators than in

economic indicators, and greater potential for improvements in

government policy. What is the crime victimization rate for rich

people compared to for poor? The illegitimacy rate?  I have not seen 

that data, but we can see the relative inequality of

economic versus social indicators even at the   aggregated level of

U.S. states. Table 5 shows the minimum, maximum, and 25th, 50th

(median), and 75th percentiles for six indicators for the 50 states

plus the District of Columbia.   What is    important for present

purposes is the interquartile range-- the gap between the 25th and

50th percentiles-- since that shows the extent of  variability among

typical

states. (I include the

District of Columbia not just because it is there in my original data

source but because it illustrates how extreme localities can be in

these indicators. Its presence has little effect on the percentiles,

however.)



 



\begin{center}

{\bf Table 5:   State Data on Economic and Social Health}

\footnote{Sources:{\it The  Statistical Abstract of the United States,

2000}, tables 24, 25, 33, 76, 150, 456, 648, and the state rankings

website,

http://www.census.gov/statab/www/ranks.html (11/25/01). Illegitimacy

is from the Center for Disease Control,

http://www.cdc.gov/nchs/births.htm (11/25/01), table 19.}







\begin{tabular}{l| lll | lll}

  &   Income  & Average &  \% Finished &   Murders 

& Divorces  &\% Births\\

 &    per    & teacher&  college   &per & per    & Illegitimate\\

 &     capita  & salary&     &100,000 & 1,000  &  \\

\hline

\hline

  &     &    &       &    &    &    \\

Minimum& 19,608 & 28,552  &    17.3  &     1.1   &    2.2   &   16.7\\

\hline

1st Quartile &  22,488  & 34,244     & 21.5 &   3.1  &  3.7  &

28.9\\

Median &  25,895  &   37,405  &  24 &  5.1 &      4.5 &     32.9\\

3rd Quartile &  28,968   &  42,833  & 27.1 &   8  &     5.2&

34.9\\

\hline

Maximum &  37,452  &   51,584 &     42.1   &49.7  & 6.8   &   61.7\\

\end{tabular}

\end{center}



 It is   easier to  see differences in variability in Table

6, in which the  median for each

variable is  normalized  to equal 100. Income per capita's

interquartile range

is from 87 to 112, compared to a range of 61 to 157 for murder.

Social variables are not always  more dispersed than economic

variables--- illegitimacy is suprisingly uniform across states, for

example-- but Table 6 does show that anybody interested in inequality,

or  in the potential for worse-performing  states to change their

policies to catch up to the others, ought to pay attention to social

outputs as much as economic ones.  The aim of social capital is not

just to generate new Silicon Valleys. 



 



\begin{center}

{\bf Table 6:   State Data, Normalized so the Median Equals 100}



\begin{tabular}{l| lll | lll}

  &   Income  & Teacher&   Finished &   Murder

& Divorce &Illegitimacy\\

 &      & Salaries&  College   &  & & \\

\hline

\hline

  &     &    &       &    &    &    \\

Minimum& 76 & 76  &   72  &     22   &    49   &   51\\

\hline

1st Quartile &  87  & 92     & 90 &  61  &  82  &    88\\

Median &  100  &   100  &  100 &  100 &      100 &     100\\

3rd Quartile &  112   & 115 & 113 &   157  &     116&     106\\

\hline

Maximum &  145  &   138 &     175   &975  & 151   &  188\\

  \end{tabular}

 \end{center}



	   If we do reach the stage of

measuring the dollar value of social capital for a city, state, or

country, its dollar effect on social outputs will not be a small part

of that value.  In theory, social outputs can be priced. People would

give up

some amount of income in order to reduce their probability of being

divorced or murdered. We can even use market prices to try to value

social outputs, since people move from place to

place to escape social evils.\footnote{See, e.g., Richard Thaler, ``A

Note on the Value of Crime

Control: Evidence from the Property Market,'' {\it  Journal of Urban

Economics}: 137-45 (January 1978). }  The chief difficulty is that

it is

harder to start by valuing   individuals' social capital, the approach

taken by Glaeser et al. Social outputs are mostly public goods. A

person may join a neighborhood defence organization to control crime

or a strict church to prevent divorce, but for  social outputs  even

more than  economic outputs  joining associations and fostering norms

have spillovers.





	These three neglects--- of family, norms, and social

outputs--- are as much opportunities for the social capital literature

as deficiencies.  Any way that we can acquire more leverage with which

to attack the topic is useful,  and it may be that the social capital

measure for which we are searching will be found by paying attention

to these things.











\bigskip

\noindent

 {\it Concluding Remarks}



	Defining and measuring social capital is hard. Is it so hard

that we should give up? The physicist Lord Kelvin said

\begin{small}

\begin{quotation}

``When you measure what you are speaking about and express it in

numbers, you know something about it, but when you cannot express it

in numbers your knowledge about is of a meagre and unsatisfactory

kind.''\footnote{Quoted in D MacHale, {\it Comic Sections} (Dublin

1993),\\

http://www-groups.dcs.st-

andrews.ac.uk/$\sim$history/Quotations/Thomson.html (November 24,

2001).}

\end{quotation}

\end{small}



Kelvin's statementis true enough to make us uncomfortable, but we must

also remember the opinion of Aristotle, who tackled both physics and

politics:

\begin{small}

\begin{quotation}

  ``...it is the mark of an educated man

to

look for precision in each class of things just so far as the nature

of the subject admits; it is evidently equally foolish to accept

probable

reasoning from a mathematician and to demand from a rhetorician

scientific

proofs.''\footnote{Aristotle, {\it Nicomachean Ethics}, Book I,

chapter 2, W.D. Ross, translator, \\

http://classics.mit.edu//Aristotle/nicomachaen.html (November 24,

2001). }

\end{quotation}

\end{small}



    I see no reason to stop looking yet. There is wide agreement that

networks and solving  prisoner's  dilemmas are important, and that if

we give up studying them we will not understand either economics or

civil society as well as we ought.  I would not be surprised if at the

end of the day we do abandon the idea of social capital as an

aggregate  variable that can be measured, and instead use the term

loosely to refer to the collection of  non-government institutions

that help us live more satisfactory lives together. But we should take

cheer from another of  Lord Kelvin's opinions: 

\begin{small}

\begin{quotation}

``I can state flatly that heavier than air flying machines are

impossible.''\footnote{

http://zapatopi.net/kelvin/quotes.html (November 24, 2001). }

\end{quotation}

\end{small}



\newpage

\noindent

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 \noindent

See also: 



Putnam's Bowling Alone data page: http:

//www.bowlingalone.com/data.php3



Glaeser's home page:

http://post.economics.harvard.edu/faculty/glaeser/papers.html



The World Bank social capital page:\\

 http://www.worldbank.org/poverty/scapital/index.htm





\end{document}



 











































































































































































