Thursday, June 13, 2024

Social Capital and Economic Growth


“Social capital” is a term that refers to the goodwill, trust, and cooperation evident in any particular organization or society. Social capital has been informally recognized in the worlds of management and government for some time, however little has been written on the subject or its practical applications. Today, many believe that social capital is an under-leveraged intellectual capital asset which could be powerfully mobilized within both organizations and communities to deliver benefit.

The theory behind social capital is that, just as ill will drives the occurrence of many unfortunate things, goodwill causes good things to happen. This may sounds simplistic, but clearly, goodwill, or the presence of social capital, builds trust that leads to cooperation and the synergy that is necessary to build businesses and communities. Workers and managers, citizens and public officials, who experience ill will toward one another, do not enjoy trust, the benefits of teamwork and community, the free play of ideas, or the greater productivity and value-creation that drives economic growth.

The Driver of Economic Growth

What is the relationship between social capital and economic growth? For most contemporary theorists, social capital is broadly recognized as a driver of economic growth, while wealth and financial capital, the results of economic growth, are seen as enabling factors. Social capital is seen as an asset that can be leveraged to create deals, relationships, build teams and community, moderate disagreement, inspire innovation and change, enter new markets, and attract businesses and citizens to a community.

Some may reply that it is the wealth produced by modern day capitalism that is improving society. Our enhanced standard of living, educational achievement, widespread private and corporate philanthropy, and the vast availability of venture capital for funding promising businesses, all may suggest that it is economics that drives social capital. However, the concentration of financial capital, per se, never drives the development of social capital. Without the trust, the cooperation, and the visionary goodwill necessary to put financial capital to work, nothing can be accomplished. It is the strength of social capital, in the form of leadership, partnerships, esprit de corps, and community spirit that drives economic growth and development.

Leveraging Social Capital

How can we leverage social capital to drive economic growth? Adam Smith, the famous 18th century Scottish philosopher and author of The Wealth of Nations, argued that the pursuit of our economic and social self-interest was simultaneously the pursuit of the general welfare of the society. In The Wealth of Nations, he said:

“Every individual necessarily labors to
render the annual revenue of the society
as great as he can. He generally indeed
neither intends to promote the public
interest, nor knows how much he is
promoting it.… He intends only his own
gain, and he is in this, as in many other
cases, led by an invisible hand to promote
an end which was no part of his intention.”

– The Wealth of Nations (1776)
Vol. 1, book IV, chapter 2

Adam Smith’s argument appears primarily to be an argument for economics driving social capital. Because we all pursue our interests, work to earn a living, and make our contributions to our society, and they are all motivated by our individual goodwill, those efforts create a civic culture within our society, which in its vibrancy, eventuates and delivers our individual and mutual well-being and prosperity.

But Adam Smith knew that self-interest and markets were not enough to build the ideal society. The economic dimension was only part of the larger creation of a good society. Civic and organizational institutions, with their cultures, form the structures within which we pursue our life and livelihood. Social capital grows within these formal institutions, the rule of law, rationality, a liberal democracy, and the cultural accomplishments of our civilization. A vibrant civic culture is essential, and the resultant network of family, school, religion, community, work, and our voluntary daily associations drives and creates, or destroys, the social capital which makes it all possible.

Adam Smith believed that by understanding the interdependency and the inseparable links between social capital and its economy we could enjoy a more ideal society. He believed that our economy encouraged our social well-being, and our social interactions enriched our economy.

Managing Social Capital

During Adam Smith’s day the concept of “social capital,” while implied within his work, was not articulated per se. Then it was “the greatest good for the greatest number,” while today we may speak of the “public good.”

The contemporary discussion about social capital can enhance our awareness of the importance of goodwill, and allow us to more consciously deploy this social goodwill to drive economic development, and its reciprocal, the direction of financial capital, as “social responsibility,” to benefit the society.

Today, social capital is broadly recognized as an intangible asset of considerable value that resides within our many respective societies in the workplace, the community, and in our nation. Many believe, social capital, understood as goodwill and cooperation, can be consciously applied by us each, and thus used to drive effectiveness within organizations, economic development at the civic or state levels, and, as the natural result, the generation of the public good, prosperity, and well-being.

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