Monday, February 11, 2008

Does Social Capital beget Wealth?

Is it true that only when people live under favorable social circumstances can they create wealth? The central premise of social capital is that social networks have value. Social capital refers to the collective value of all people and the inclinations that arise from these networks to do things for each other.

How does social networking create wealth?
People can earn large amounts only when they live in positive social situations, and most importantly they don’t create those circumstances by themselves. So if you have money beyond your basic needs, then you must acknowledge that society is responsible for much of that wealth.

Warren Buffet, one of the wealthiest people in the world acknowledges the importance of social capital for him when he says, “If you stick me down in the middle of Bangladesh or Peru,” he said, “you’ll find out how much this talent is going to produce in the wrong kind of soil.”

The Nobel Prize-winning economist and social scientist Herbert Simon estimated that “social capital” is responsible for at least 90 percent of what people earn in wealthy societies. What Simon means by social capital is not only natural resources but, more important, the technology and organizational skills in the community, and the presence of good government. These are the foundation on which the rich can begin their work.

I agree that infrastructure, markets, etc. are necessary to build capital, but I also think that some folks are so resourceful and adaptable that they would come out on their feet no matter where they fell. While researching this topic, I came upon this from the

Social capital is the amount of community spirit or trust that an economy has gluing it together. The more social capital there is, the more productive the economy will be.

Yet, curiously, one of the best-known books to address the role of social capital, "Bowling Alone", by Robert Putnam of Harvard University, pointed out that Americans were far less likely to be members of community organizations, clubs or associations in the 1990s than they were in the 1950s. He illustrated his thesis by charting the decline of bowling leagues. Yet the American economy has gone from strength to strength.

This has led some economists to question whether social capital is really as important as the theory suggests, and others to argue that membership of bowling leagues and other community organizations is simply not a good indicator of the amount of social capital in a country.

I don’t know that bowling is a good indicator – it seems people have replaced that with other activities. Some of which are sociable as well (poker tournaments, attending pro sports games) and some that are not (internet surfing, television). What has not changed is that humans have an innate need for socializing. We have just found other ways to meet that need.

It is apparent that we have become more dependent on each other. People are not as resourceful as they once were. They rely on others to do more and more tasks. When was the last time you butchered a cow? painted your house? cooked your own dinner? harvested your own grain? You get the point. It was not that long ago that individuals had all of those skills.

Social capital has allowed us to become more specialized. To concentrate on one skill and hone it to perfection, while subcontracting out all the other work. Sure that allows us to be more efficient, but it also makes us very dependent on others.

For instance, I work in a specialized field of engineering and am able to buy everything to meet my basic needs off a portion of my salary. What do I do with the rest of my earnings? Do I re-invest into my own business? Buy more land to farm? No, I invest in other people’s businesses. I invest in the stock market. And if you have investments in the stock market, you are depending on that social capital, as well.

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