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

 \bigskip

  January 14, 2002 \\

\bigskip

Eric Rasmusen \\

\bigskip

{\it Abstract}
\end{center}

 This paper is my attempt to 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, where I think  that despite its rough edges it
may be useful to people interested in the topic.

\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''. }

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

 
 

\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) \\ 
Www.knuten.liu.se/$\sim$bjoch509/works/burke/reflections/reflections.h
tml (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.



\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.


\newpage

\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.


Two other methods: expert subjective measure (Fukuyama low, middle
high trust countries). Experiments (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: BUSINESSES. They are civil associations too. 

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 admit that 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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Finders Keepers?
By Eric Felten, (2000). 
http://www.readersdigest.com (November 28, 2001)
 


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}

 





















































































