your business partner. your friend. your family.

Every hand shake, every nod on the street and every interaction; may all lead to social capital.

Have you ever noticed someone consistently as you routinely traveled to your coffee shop for a nice cup of Latte and many months later happen to meet that same person a networking event? -And of course the obvious choice of topic will be the wonderful coffee served at that particular coffee shop. That in itself is social capital accumulation! Our basic interactions in our everyday lives tend to fuel future economic transactions. But how does family bonding fuel economic transactions?… Well, besides the obvious example of family businesses; when your family goes for family gatherings or dinners at a restaurant that a family friend had recommended, that in it self is a great example of how the effect spirals and fuels economic transaction, as one may argue that one who has no family would not normally go out for a family dinner.

Even flash mobs provides participants social capital, with the amount of networks created and when it is usually done for a common cause. The actions of groups are and always be more powerful that those acting as an individuals. It is simple and logically. But let us consider economic development. It is possible to create economic development from social capital? Can economic transactions take place without the fundamentals of institutions? Fundamentally, economic transactions are based on ‘trust’, thus can it be argued that transactions can occur through the channel of social capital?
Kumar & Matsusake (2009) released a paper; From family to formal contracts: An approach to development. The paper describes how there are means for social capital to be a substitute for market mechanisms, or at least institutions that assist with enforceability of contracts and property rights. It may not be apparent to us, but there are 2 types of capital, Social/Local capital and Market capital. The former requires that economic agents use their kin-ship and networks as means to enforce contracts, whilst the latter uses market institutions to do the same. But which is better? -Well, the paper illustrates that Local Capital (LC) precedes Market Capital (MC) only up to the certain level of economic output incentives.

So to what extent should a community invest in LC vs MC? The paper shows that LC provides societies with a sound framework for economic transactions to occur in the pre-industrialization phase; whilst any point beyond that would not be as successful. Thereafter, MC will be required to sustain economic growth. This was illustrated in a graph in the previous post.

Imagine a situation where there are no proper authorities to help you exercise a contract that has gone wrong. What would be the next step of action? Well, one might call upon their communities to ensure that the agent accepts their liabilities. However, the one must ensure that they have sufficient levels of LC to call upon the ‘village elders’ and its people for this cause. Thus, an agent with high levels of MC cannot do such a thing given this circumstance. Now, let us think about the same circumstance where there are proper third party institutions to enforce the contractual agreements. Would one go to the ‘village elders’ (Local council members) for a failed contract? or approach exercise lawful regulations that everyone in that society must adhere to? -You can do the math.

Depending where you live and the circumstance of your community institutions, which would you use? LC or MC?
The paper illustrates the distinct differences between the 2. However, we cannot deny that LC also exists when MC platforms are established. For example, 2 agents applying for the same job with the same qualifications will be deeply varied in advantage if one of the agents’ was acquainted with an executive member from the company to which they are applying to.

Perhaps its time to start setting KPIs (Key performance Indicators) for your Social Capital…

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