Written on 8 Nov 2021

The changing social wealth of nations

It is time for economics to recognise the true wealth of nations – and that means focusing on social capital, writes Yamini Cinamon Nair.

The World Bank’s flagship series on inclusive wealth is beginning to focus on social capital. Productivity and growth depend on trust, cooperation, and stability in a society. Social capital is often referred to as the glue that holds societies together – without it there can be little economic growth or human well-being.

For the first time, the World Bank’s book The Changing Wealth of Nations 2021, includes a chapter on social capital written by Bennett Institute economists, Matthew Agarwala and Dimitri Zenghelis. It makes the case that social capital is an asset with the capacity to improve productivity and growth. They position social capital as a key factor in addressing challenges facing modern society. The Changing Wealth of Nations marks a landmark step in going beyond GDP by measuring wealth comprehensively and taking seriously the role of intangible capitals in securing a sustainable future.

What is social capital?

Social capital is complex to define. The Office for National Statistics (ONS) describes it as “the extent and nature of our connections with others and the collective attitudes and behaviours between people that support a well-functioning, close-knit society”. It is about the social networks that ‘bridge’ people together, and the norms, reciprocity, and trustworthiness that ‘bond’ them (Putnam 2001). But social capital can also be thought of as the resources available to an individual – such as who you know – which get used to leverage economic or status gain (Bourdieu 1986; Liu 2002). Some have also suggested a spatial dimension to social capital. Klinenberg (2018) makes the argument social capital is acquired within physical social infrastructure – such as public parks or libraries (for more on social infrastructure, see: Levelling up after Covid, Building social infrastructure of and for the future, The case for social infrastructure: lessons from Barking and Dagenham, and Ringfence funding for ‘social plumbing’.

Measuring social capital

The present data on social capital is sparse. The majority, including trust measures, come from surveys conducted annually or biennially (such as the European Social Survey). The lack of real-time data makes it difficult to measure short-term changes in social capital, how it responds to world events, and its relative stability or sensitivity in a time of crisis. It also makes it challenging to see how social capital may vary across space and demographics.

But this is changing. For example,  Guriev and Melnikov (2016) performed principal components analysis (a method for compressing a lot of data into a small number of variables) on Google search data to construct a weekly measure to estimate the effect of war and inflation on social capital in Ukraine in 2014. They showed that social capital rose with the intensity and close proximity of armed conflict, possibly revealing a ‘pulling together’ effect. In a separate example, Bartscher et al (2020) showed that a one-standard-deviation increase in social capital was associated with a 12% (Germany) and 32% (Italy) reduction in Covid-19 cases, compared to areas of low social capital. As such examples indicate, improving the quality of data and information on social capital is key to understanding our world: even partial success in developing metrics, while acknowledging what is missing, can better inform policy.

Social capital as wealth

Social capital exhibits many wealth-like characteristics (Robison et al. 2002). It can be increased through investment: individuals and organisations devote time and effort to building relationships, allocating scarce resources to networking events. Such activities entail a sacrifice of leisure or work time to attend[1] in order to secure future flows of benefits. Social capital can grow and appreciate in value or usefulness if one’s network grows in size, or one’s community provides new forms of support. But it can also depreciate if trust is eroded or community support wanes. It is durable and is not consumed in the process of production – for example, societies at university provide access to networks throughout the career path. And finally, social capital is substitutable. For example, in the face of crop failure, access to insurance markets can substitute for family support networks, which have been the default option for small holder farmers around the world.

At the same time, social capital can be seen as a ‘latent’ construct with no standard unit of measurement. In other words, we know what it means intuitively but it is hard to find a crisp definition. This makes it difficult to think of an accumulated stock of social capital, or how it changes over time. Moreover, many of the descriptions of social capital outlined above refer more to the services social capital provides to people than to the stock itself. Indeed, Arrow (1999) and Solow (1999) caution against using the term ‘capital’, though they fully acknowledge the importance of trust, social norms, and relationships to economic performance (Robison et al. 2002). Finally, there is a potential dark side to social capital. In the extreme, criminal gangs often have closely observed norms of behaviour and mechanisms for building and reinforcing trust. But other examples exist: social capital ties can help perpetuate exploitative class structures and close social networks can encourage groupthink, reducing the spread of important information. But the fact that it can be used for good or for ill is not unique to social capital. Indeed, the nuclear engineer’s human capital can be used to make bombs or clean energy.

Treating social capital as an asset is necessary for future sustainability, though. It plays an important role in overcoming the tragedy of the commons. For example, Carlton and Vallance (2017) show how social capital was key to the reconstruction of Christchurch’s civic space following the devastating earthquake of 2010. The 2018 Nobel Prize winner Paul Romer argued new technologies can be harmful if not accompanied by the rules which make growth more sustainable, such as regulatory limits on air pollution or soil degradation. This testifies to the complementarities between social capital and other assets on the balance sheet. The Bennett Institute’s Wealth Economy framework is valuable for emphasising the linkages between social and natural capital.

Social capital is vital to economic welfare

The World Bank estimates that intangible capitals make up between 60% and 80% of total wealth in developed countries (Lange et al., 2018). There is growing evidence that robust social capital based on trust, civic engagements, and effective institutions can support economic growth and well-being (Dasgupta, 2010). While it is impossible to establish causality, social capital is associated with reduced transaction and monitoring costs, facilitating more efficient allocation of resources in goods, labour, and capital markets (Dasgupta 2005; 2009). A recent Cambridge study found that interpersonal trust has a significantly positive association with the level of total factor productivity, with direct implications for growth (Coyle and Lu, 2020).

Acemoglu and Robinson (2012) found the main determinant of economic prosperity to be functioning, inclusive, and law-based institutions. Trust and civic engagement – key indicators of social capital – are associated with strong governance. Putnam (1993) found a strong correlation between measures of civic engagement and government quality across regions in Italy dating back centuries, and Dasgupta (2010) has presented a convincing theoretical model to demonstrate how interpersonal trust can cause higher output (with no change in the level of capital and labour used).

People are surprisingly cooperative beyond what the theory suggests is in their self-interest (Paldam 2000). This may reflect the fact we gain direct utility and higher reported well-being from living in a trustworthy, supportive, and socially cohesive society. Social capital thus becomes a public and private consumption good as well as an asset.

Looking forward

Agarwala and Zenghelis make it clear that future editions of The Changing Wealth of Nations will need to continue to include social capital. It is a critical component of a nation’s wealth, key to achieving growth today and sustainability in the future. Adopting a wealth economy approach requires identifying the strategic complementarities between social capital and other assets, for example how social capital may influence human capital, and hence its role as an enabling asset for productivity growth.

Further work is needed to arrive at conceptual agreement of what social capital is and how it should be measured. There are many questions to be answered beyond these boundaries too, such as how these accounts will be used, and whether the data will be comparable across space. Place-specific measures of social capital are needed to uncover the inequalities in access across space, class, ethnicities, and other demographics, as well as through time.

This is an exciting opportunity for economics and public policy, part of the wider reassessment of how we should value progress and protect and nurture the intangible assets we rely on. Looking ahead to recovering from the pandemic, addressing stagnant productivity, and dealing with the growing climate crisis, building social capital is going to be essential.

[1] The wage premium attached to former politicians who join corporate boards or investment funds without any specific expertise in the field may be considered a signal of willingness to pay for social networks.