What is social capital?

Over the last couple of weeks, I’ve written about how Minnesota and its neighbors have very different economic policies but very similar employment outcomes and how they do have similarly high levels of what is called “social capital.”

So, what is social capital?

One of the pioneers of social capital theory, Robert D. Putnam, offered an early definition of social capital as:

…features of social organization, such as trust, norms, and networks, that can improve the efficiency of society by facilitating coordinated actions.

He subsequently refined his definition of social capital to “connections among individuals — social networks and the norms of reciprocity and trustworthiness that arise from them,” boiling it down to two rather than the previous three primary ingredients: networks and norms.

The twin notions of informality and efficiency underlie most definitions of social capital. John Field explains that:

Modern organisations are governed by rules. There are accepted procedures for making or appealing decisions, and responsibilities are usually defined clearly in terms of a position rather than a person. But when they want to make something happen, many people will ignore these formal procedures and responsibilities, and set off to talk to someone they know. Important decisions almost always involve a degree of uncertainty and risk: if someone is looking for a new job or planning to appoint someone to a job, if they are looking for someone to service their car or mend the washing machine, if they are thinking of moving home or introducing a new way of organizing the office, or if they want to find the best school or hospital, using the formal procedures is no guarantee of success. To make things happen, people often prefer to bypass the formal system and talk to people whom they know. Calling on trusted friends, family or acquaintances is much less stressful than dealing with bureaucracies, and it usually seems to work faster and often produces a better outcome.

“[R]elationships matter,” is Field’s summary:

…to the extent that these networks constitute a resource, they may be seen as forming a kind of capital. As well as being useful in its immediate context, this stock of capital can often be drawn on in other settings. In general, then, it follows that the more people you know [networks], and the more you share a common outlook with them [norms], the richer you are in social capital.


The Organisation for Economic Co-operation and Development (OECD), which defines social capital as “networks together with shared norms, values and understandings that facilitate co-operation within or among groups,” further “divides it into three main categories”:

Bonds: Links to people based on a sense of common identity (“people like us”) – such as family, close friends and people who share our culture or ethnicity.

Bridges: Links that stretch beyond a shared sense of identity, for example to distant friends, colleagues and associates.

Linkages: Links to people or groups further up or lower down the social ladder.

These are types of networks. According to Putnam, “Bonding social capital is good for undergirding specific reciprocity and mobilizing solidarity,” while bridging social capital “is better for linkage to external assets and for information diffusion.” “By making connections with one another,” Field argues, such as through Bonds, Bridges, and Linkages, “and keeping them going over time, people are able to work together to achieve things they either could not achieve by themselves, or could only achieve with great difficulty.”

If having access to social capital generates positive results, not having access or only having access to certain categories of it can generate negative ones. While a group may have significant bonding social capital, for example, if its members lack bridging social capital, they will face difficulties.

The OECD explains:

Almost by definition, tightly knit communities, such as some immigrant groups, have strong social bonds, with individuals relying heavily for support on relatives or people who share their ethnicity. Simultaneously, their lack of social bridges can turn them into eternal outsiders from wider society, sometimes hindering their economic progress. Of course, social exclusion works both ways: tightly knit groups may exclude themselves, but they may also be excluded by the wider community.

To some extent, this is a result of how social capital is accumulated in the first place. Field explains that “People connect through a series of networks and they tend to share common values with other members of these networks.” James Coleman, another founder of social capital theory, argued that the creation of social capital was facilitated by “closure” between different networks of individuals, by stability, and by a common, shared ideology. By “closure,” he meant the existence of mutually reinforcing relations between different actors and institutions which provide, not only for the repayment of obligations, but also for the imposition of sanctions.

Avner Greif’s work illustrates these processes and their relationship with economic development very clearly. Greif notes that:

Without the ability to exchange, the potential for growth is rather limited. Indeed, the historical process of European economic growth is marked by ever expanding exchange relations.


In pre-Modern trade, a merchant had to organize the supply of the services required for the handling of goods abroad. He could either travel along with his merchandise between trade-centers or hire overseas agents to supply the service. Employing agents was efficient, since it enabled the merchant to save the time and risk of traveling, to diversify his sales across trade centers, and so forth. Without supporting institutions, agency relations are not likely to be established, since the agents can act opportunistically and embezzle the merchant’s goods. Anticipating this behavior, a merchant will not hire agents, and efficient cooperation
is not initiated.

This was “The fundamental problem of exchange,” or the “uncertainty and risk” referred to above by Field.

To tackle this, Greif explains how “agency relations” among “Jewish traders, known as the Maghribi traders:”

…were governed by an institution that might be called a coalition. Expectations, implicit contractual relations, and a specific information-transmission mechanism constituted the constraints that affected an individual trader’s choice of action. In particular, these constraints supported the operation of a reputation mechanism that enabled the Maghribis to overcome the commitment problem. In turn, the reputation mechanism reinforced the expectations on which the coalition was based, motivated traders to adhere to the implicit contracts, and led to entry and exit barriers which ensured the sustainability of the coalition.

This coalition was informal and enhanced economic efficiency, as social capital should, but was rooted in a shared ethnicity. It was, to borrow Coleman’s term, “closed.” Ultimately, the Maghribi traders emigrated to trade centers where “a well-established Jewish community already existed, and [they] integrated into the existing communal structure.” When Greif notes that “they integrated within the Jewish communities and vanished from the stage of history,” he is describing a process whereby the Maghribis “bridged” into a wider group, albeit, again, one with a shared ethnic identity.

These attitudes can persist over time. An experimental study of trusting behavior found that people were much more likely to base their actions on trust when they believed they were dealing with members of the same ethnic group as themselves. Research also finds that those countries with the most ethnically heterogeneous populations tend to be those with lower levels of social capital.

This presents a problem for newcomers, especially, perhaps, in places like Minnesota where levels of social capital are high. This is reflected in jokes such as: “You want to make friends in Minnesota? Go to Kindergarten” or “Minnesotans will give you directions to everywhere but their house.” In such circumstances, newcomers might also find the social capital they do have a mixed blessing. It has been suggested that social capital can contribute to inequality by exerting a leveling-down effect on people’s aspirations: specifically, that when group solidarity is cemented by a shared experience of adversity to mainstream society, individual members will be discouraged from trying to leave and join “the enemy,” or develop “bridging” social capital, in other words. Putnam has argued that some types of close, bonding ties may inhibit the formation of looser, bridging links.


Norms are defined as “ways of behaving that are considered normal in a particular society.” As Greif notes of the Maghribi Trader’s Coalition, “they employed a set of cultural rules of behavior —a Merchant’s Law — that specified how an agent should act to be considered honest”; “for a collective punishment to be effective, there must be a consensus about which actions constitute ‘cheating,’” he explains. To return to Field’s point “that the more people you know, and the more you share a common outlook with them, the richer you are in social capital,” the first, network, element — “the more people you know” — is quantitative but the second — “the more you share a common outlook with them” — which we can call norms, is qualitative.

Different norms will generate different outcomes. When Coleman investigated the differences in academic achievement between pupils of religious and state schools of comparable backgrounds and ability, he found that not only were academic outcomes superior in religious schools, but also that drop-out rates and absenteeism were lower. He concluded that the most important factor in explaining this pattern was the impact of community norms upon parents and pupils, which functioned to endorse teacher’s expectations. Subsequent research confirmed Coleman’s general finding of a positive association between social capital and educational attainment, with the social capital indicators — the norms in question — including parent school involvement and parental monitoring of progress.

While some norms will generate positive results, others will generate negatives ones, at least in some directions. Just as physical capital, like a factory, can produce either ice cream trucks or tanks, so can social capital be put to destructive as well as constructive use. As Field argues:

…a reasonably clear distinction can be drawn between productive social networks, which generate favourable outcomes both for members and the community at large, and perverse networks, which we could describe as those that have positive benefits for their members but include negative outcomes for the wider society.

Peter T. Leeson demonstrates that pirates, for example, developed informal structures to enhance their efficiency, but few would argue that this social capital was positive for society. It has been found that people who belong to networks of injection drug users are far more likely to engage in risky injection practices than those who inject alone. While bowling alone might be a bad thing, injecting alone seems not to be, relatively speaking.

Norms do not need to be criminal to be sub-optimal from the perspective of economic well-being – no moral judgement is made here. There is a substantial and growing pseudo-academic literature which argues, for example, that “if we truly believe that all humans are equal, then disparity in condition can only be the result of systemic discrimination.”34 Scholars working in economic growth, by contrast, find many causes for “disparity in condition” between groups, among them disparities in norms between groups. As Oded Galor argues:

Cultural traits — the shared values, norms, beliefs and preferences that prevail in a society and are transmitted across the generations — have often made a significant impact on a society’s development process. In particular, aspects of culture that dispose populations towards or away from the maintenance of strong family ties, interpersonal trust, individualism, future orientation and investment in human capital have considerable long-term economic implications.

For an example of the impact of differing cultural norms on economic outcomes, note that Minnesota has some of the widest disparities in home ownership rates between black and white residents in the United States and that this accounts for a very large share of the disparity in wealth. Note, too, that Minnesota’s black population is unlike that in most places; around 40 percent are recent immigrants compared to an average of nine percent across the country. Furthermore, in Minnesota, 70 percent of black immigrants come from two countries in East Africa: Somalia and Ethiopia, and many of these are Muslim. Because it is impermissible for Muslims to pay or charge interest — a cultural norm — they often struggle to access financing for house purchases. Some portion of Minnesota’s racial disparities in home ownership rates and wealth, are, then, the result of differing cultural norms and not “systemic discrimination.”

Of Putnam’s two ingredients, networks are quantitative and neutral, and norms are qualitative and not neutral. Whether the quantitative, network element of social capital is put towards productive uses or not depends on the qualitative norms actuated through it.

Now that we have a clearer idea of what social capital is, we can address our next key question: How is it related to economic wellbeing?

This article is based on our new report “The X-Factor? Social capital and economic well-being: A quantitative analysis.”