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A Social Science Perspective on Social Capital: Social Capital and Collective

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-DRAFT-

A SOCIAL SCIENCE PERSPECTIVE ON SOCIAL CAPITAL:

SOCIAL CAPITAL AND COLLECTIVE ACTION

by

Elinor Ostrom and T. K. Ahn

Workshop in Political Theory and Policy Analysis

Indiana University

© 2001 by authors

Paper to be presented at the European Research Conference on “Social Capital: Interdisciplinary

Perspectives,” Exeter, United Kingdom, September 15-20, 2001. An earlier version of this paper
was submitted to the Bundestag – Enquete Commission and a revised version of this paper will
appear in a book of readings on social capital being edited by T. K. Ahn and Elinor Ostrom and
published by Edward Elgar.

Workshop in Political Theory and Policy Analysis

Indiana University, 513 North Park
Bloomington, IN 47408-3895 USA
Phone: 812-855-0441 / Fax: 812-855-3150
E-mail: [email protected]
http://www.indiana.edu/~workshop
 Acknowledgments

This report on Social Capital was commissioned by the Enquete Commission of the German
Federal Government during the Fall of 2000. The literature on “social capital” is immense. We
have tried herein to pin down a theoretically based and useful definition of social capital and its
various forms. We were helped immensely in the task of providing an overview of this literature
by Laura Wisen, Research Library Coordinator, Workshop in Political Theory and Policy
Analysis. Many colleagues pitched in with great enthusiasm to read some of the recent
literature and provide abstracts of it. These included Paul Aligica, Krister Andersson, Theresa
Burcsu, Derek Kauneckis, Frank Maier-Rigaud, Lilian Marquez-Barrientos, Esther Mwangi,
Kunle Oyerinde, Dan Sabet, Ron Smith, Tracy Yandle, and Hans Wiklund. We appreciate their
insights as well as the superb editing skills of Nicole Todd.

2
 A SOCIAL SCIENCE PERSPECTIVE ON SOCIAL CAPITAL:
SOCIAL CAPITAL AND COLLECTIVE ACTION

Table of Contents

1. Introduction

2. A Short History of the Concept of Social Capital

The Minimalist View— Social Capital as Individual “Connections”

Network Analysis
Sociology of Jobs, Education, and Neighborhoods
The Transitional View— Coleman and the Public Good Nature of Social Capital
The Expansionist View— Relating Social Capital to Collective Action and Public Policy

3. How Social Capital is Related to Physical and Human Capital

Physical Capital
Human Capital
Social Capital

4. Differences between Social and Physical Capital

5. Proliferation of Social Capital Research

6. Forms of Social Capital and Collective Action

Second-Generation Collective -Action Theories

Trust and Reciprocity
Networks/Civic Engagement
Formal and Informal Rules (Institutions)
Context Makes a Difference

7. Why is Social Capital Important in Modern High-Tech Economies and Polities?

Social Capital and Tec hnological Innovation

Social Capital and the Internet

Notes
Bibliography

3
 A SOCIAL SCIENCE PERSPECTIVE ON SOCIAL CAPITAL:
SOCIAL CAPITAL AND COLLECTIVE ACTION

by

Elinor Ostrom and T. K. Ahn

1. Introduction

As the search by social scientists for the causes of economic prosperity and democratic order
continues into the twenty-first century, the concept of “social capital” is attracting more and
more attention. Social capital has been proposed as the answer to a wide variety of questions.
For example:

$ What gave rise to the different industrial structures among the capitalist economies?
(Fukuyama, 1995)
$ Why do some democratic governments succeed and others fail? (Putnam, 1993)
$ Why do development policies that focus on building infrastructure fail so often? (E.
Ostrom, 2000)
$ What explains the resurgence of the U.S. economy during the late twentieth century and
the technological innovations that facilitated it? (Fountain, 1997)
$ Why do more youths in East Berlin participate in right wing extremist movements than
those in West Berlin? (Hagan, Merkens, and Boehnke, 1995)
$ How do the characteristics of a citizen’s personal network affect his political
participation? (Lake and Huckfeldt, 1998)

The concept of social capital stresses several factors that are not new but have often been
ignored during the heyday of neoclassical economics and rational choice theories: trust and
norms of reciprocity, networks and forms of civic engagement, and both formal and informal
rules or institutions. The contribution of the social capital approach lies in that it brings these
seemingly diverse factors into the framework of collective action. The social capital approach
helps to address the question of how to accelerate economic development as well as democratic
governance. At the same time, the social capital approach asks collective-action theorists to step
out of the world of pure reasoning and address empirical policy questions of practical
significance. It also urges policymakers to widen their perspectives.1

However, when a single concept includes such a variety of factors and claims to provide
answers to so many different questions, it is only natural that some researchers challenge the
concept itself. Critics argue that: (1) the concept is ambiguous because it is too ambitious, (2) it
only gives a new label for old ideas, and (3) it does not elaborate how each form of social capital
affects economic and political performance (Harriss and De Renzio, 1997; Jackman and Miller,
1998; Baron and Hannan, n.d.). 2

Based on a review of the concept’s history and current usage, this report lays out a
perspective of social capital that adds to the concept’s scientific quality and policy usefulness.
Social capital should not be treated as a fad nor discarded simply as a new label for old ideas.
4
Recognizing the important commonalities shared across variables that had previously been
treated independently is a step forward in social and policy sciences. For decades, progress has
been made treating various kinds of physical capital within one rubric when dealing with
conceptual issues of investment in and growth of individual firms and economies. That does not
mean that a physical plant, a road, or a computer, are the “same” thing. For many questions, one
wants to analyze the impact of new transportation facilities separately from the impact of new
physical technology. But for other questions, focusing on the impact of new physical capital (as
a single broad concept) can be useful analytically. Similarly, the concepts of a social network, of
shared norms and trust, and of formal and informal rules, which we treat below as separate forms
of social capital, can productively be brought together under the rubric of social capital. This
allows the analyst to address many broader questions of social and economic development. The
key for analysis is to know when to address a question at a more specific level and when to mov
up in generality and address a question at a broader level.

We argue that the concept of social capital has to be located in the widespread efforts to
develop second-generation theories of rationality and of collective action (E. Ostrom, 1998a: 9
14). And the efforts to develop a behavioral theory of collective-action benefits from the social
capital approach.

In Section 2 of this report, we will provide a short history of the concept of social capital.
We will discuss the minimalist view that social capital is limited to the individual connections
that individuals have with others. We will then examine James Coleman’s work on the public
good nature of social capital as a transitional view. Finally, we will examine how social capital
has been related to collective action and public policy—the expansionist view.

In Section 3, we will focus on how social capital is related to other types of man-made
capital—specifically physical capital and human capital. All types of man-made capital involve
spending time and effort in activities to build tools or assets today that increase welfare in the
future. Human capital involves the creation of new opportunities by also imposing some
constraints. All types are created either as the by -product of other activities or as the result of
self-conscious efforts. There is always a risk that investments will fail. And, all types of capital
potentially have a dark side where the capital is devoted to harming others.

In Section 4, we identify the difference between social and physical capital. Four
differences are identified including: (1) social capital does not wear out with use, but rather with
disuse; (2) social capital is not easy to observe and measure, (3) social capital is hard to construc
through external interventions, and (4) national and regional governmental institutions strongly
affect the level and type of s ocial capital available to individuals to pursue long-term
development efforts.

In Section 5, we briefly review the proliferation of research on social capital in a prelude to

our effort to identify the key forms that social capital takes. In Section 6, we argue that focusing
on the role of social capital in solving collective-action problems facilitates the development of a
more rigorous analysis of social capital as well as adding to the contemporary development of
theories of collective action. We identify three broad forms of social capital: (1) trust and norms
of reciprocity, (2) networks, and (3) formal and informal rules or institutions. We see trust as the
core concept that is affected by the other two forms of social capital as well as by contextual
5
factors. And, successful collective action cannot be explained by social capital alone. Other
contextual factors also affect the incentives that individuals face and their likely behavior in
collective-action settings.

Section 7 turns briefly to a discussion of social capital in the context of modern, high-tech
societies since some scholars are skeptical of its relevance for contemporary times. We focus on
the role of social capital in technological innovation and related to the Internet.

2. A Short History of the Concept of Social Capital3

The usage of the concept of social capital referring to the functions and forms of social
relations close to the current usage dates back at least to Hanifan’s (1920) study of the roles of
communities in satisfying individuals’ social needs. 4 Hanifan does not make explicit comparison
of social capital to other forms of capital, but rather uses it figuratively to refer to the aspect of
“. . . life which tends to make those tangible substances (real estate, personal properties, or cash)
count for most in the daily lives of people: namely good will, fellowship, sympathy, and social
intercourse among the individuals and families who make up a social unit—the rural community
whose logical center is in most cases the school” (Hanifan, 1920: 78). As an illustration of how
social capital can be developed and used to improve a community’s “recreational, intellectual,
moral, and economic conditions,” Hanifan—then state supervisor of rural schools in West
Virginia—analyzes a district supervisor’s effort to bring in teachers and parents to diverse
communal activities organized around schools. He points out that building social capital not only
improved the quality of life in the communities, but also trained students for “meeting later in
life situations of a public nature” (ibid.: 80-90).

Development of the concept of social capital later on shows two related, but relatively
distinct trends. We shall call the first trend minimalist and the second the expansionist. The tw
trends represent extremes. Thus, a specific study may fall anywhere in between these
extremes —and we find that Coleman’s classic works have aspects of both views.

The Minimalist View—Social Capital as Individual “Connections”

Network Analysis

The minimalist usage of social capital is most often found in social network analysis where
social capital is understood as individuals’ access to favorable personal networks. Imagine a son
of an upper-class family who enjoys advantage throughout his business career because of the
“connections” his father has already established. In the minimalist usage, social capital belongs
to each individual, at times at the expense of others. As Burt (1992: 9-13) puts it in simple
words, social capital is one’s relationships with “friends, colleagues, and more general contacts”
through whom one maximizes the financial and human capital one already possesses.

A group of individuals (e.g., a business firm) can possess social capital collectively. In the
minimalist understanding of social capital, however, possession by a collectivity is quite
different from the concept of possession described below in the expansionist usage. It is a
corporate actor, competing with other corporate actors, who possesses the social capital in this
view. “The social capital of people aggregates into the social capital of the organization. . . .
6
There are ‘rainmakers’ [in a firm], valued for their ability to deliver clients. . . . [they] represent
[the firm’s] social capital” (Burt, 1992: 9-13). As used here, the concept is not related to solving
a group’s internal collective-action problem, but rather as a sum of the network connections held
by group members that can be used to achieve the group’s goal. The role of social capital in
solving collective-action problems inside the group is less emphasized. Burt (1997) provides a
network analyst’s comparison of social and human capital. He argues that social capital is an
attribute among people, whereas human capital is an individual attribute. The human capital of
an individual derived from their intelligence, education or age is more or less effective
depending on where that individual is located in a friendship circle, a market, or a hierarchy.

Sociology of Jobs, Education, and Neighborhoods

Also belonging to this minimalist trend is the usage of social capital by researchers including
Loury (1977), Bourdieu (1983), and in part Coleman (1988, 1990) himself. In these studies,
social capital refers to “the set of resources that inhere in family relations and in community
social organization and that are useful for the cognitive or social development of a child or young
person. These resources differ for different persons and can constitute an important advantage
for children and adolescents in the development of their human capital” (Coleman, 1990: 300).
The only empirical case in Coleman’s seminal article that receives more than anecdotal treatmen
has “drop out rates from high school” as a dependent variable. In the empirical study, Coleman
regards presence of parents in a family, the frequency of talking to parents about personal
matters as measures of a student=s social capital in family. He also regards the number of move
and the types of schools as negative and positive measures of social capital to a student outside
the family.

Common across the minimalist views is an understanding of social capital as (1) belonging to
individuals and as a (2) connection to potential helpers as the primary form. Over time, the
concept has been expanded—“stretched” as some critics call it, especially of Putnam=s usage
to include a variety of other factors and to explain political and economic performances at group
regional, and national levels. An example is Fukuyama’s (2000: 4) definition of social capital as
“an instantiated informal norm that promotes cooperation between two or more individuals.”
Coleman, although he is cited as being against Putnam’s “stretching,” 5 has actually provided a
theoretical foundation for the expansion.

The Transitional View—Coleman and the Public Good Nature of Social Capital

The main empirical case Coleman studied in his seminal article “Social Capital in the
Creation of Human Capital” is reminiscent of the narrow definition of social capital close to its
origin. The place of the concept in his Foundations of Social Theory (1990: 315-18), however,
emphasizes the public-good aspect of social capital. Further, his treatment of the diverse forms
of social capital—trust and norms —justify regarding him as a key scholar who bridges the
original more narrow and the current wider understandings of social capital. Coleman defines
social capital by its function.

[Social capital] is not a single entity, but a variety of different entities having two
characteristics in common: They all consist of some aspect of a social structure, and
they facilitate certain actions of individuals who are within the structure. . . . Unlike
7
 other forms of capital, social capital inheres in the structure of relations between persons
and among persons. It is lodged neither in individuals nor in physical implementation of
production. (1990: 302)

The public good nature of social capital is immediately apparent in the examples that follow
his definition. First, the clandestine study circle among radical South Korean student activists,
built on pre -exiting hometown or high school relations (as reported in the International Herald
Tribune, June 21-22, 1986). Second, the vicious cycle of malpractice lawsuits and increase in
medical costs, due to the decline of social relations between physicians and patients on which
trust can be built. Third, the normative structure in Jerusalem that makes mothers feel safe to let
young children play outside.

In Coleman’s examples, not only do the actors achieve their individual goals but they achieve
their collective goals by utilizing forms of social capital. Social capital helps them to solve their
collective-action problems. Coleman (1990: 314-18) explicitly addresses the public-good nature
of social capital. The benefits of physical and human capital accrue to the person who invests in
them. Once created, social capital, on the other hand, benefits all the individuals within the
relevant social structure. This can, of course, lead to potential underinvestment, which is a
higher-level collective-action problem. Another implication of the public-good nature of social
capital is that “most forms of social capital are created or destroyed as a by -product of other
activities” (ibid.: 317).

After providing a broader understanding of social capital, Coleman (ibid.: 310-12) introduce
several forms of it: potential for information that inheres in social relations, norms and effective
sanctions, authority relations, appropriable social organization, and intentional organization.
Inclusion of intentional organizations such as business firms and PTAs as forms of social capital
which is not the case in his 1988 article, shows another step away from the more narrow
understanding of social capital as personal connections toward a conception of social capital as a
family of factors that enhance individuals’ ability to solve collective-action problems (see also
Coleman, 1986).

The Expansionist View—Relating Social Capital to Collective Action and Public Policy

Recognizing the roles of social capital in solving collective-action problems has significant
implications to both the theory of collective action and public policy. The traditional model of
collective action assumes atomized individuals seeking short-term selfish goals that lead each
individual not to contribute at an overall efficient rate to collective projects. In this view,
individuals will not voluntarily tackle a whole host of jointly beneficial projects in both the
private and public spheres because they wait for others to take the costly actions needed to
benefit them all. Collective-action problems have been identified as shirking within private
firms, as a lower rate of entrepreneurial activity, as an inability to provide local public goods,
and as the likelihood that common-pool resources will be overharvested or destroyed instead of
harvested at an optimal level. Collective-action problems are endemic in all societies.

Advocates of the traditional model tend to recommend either external authorities are needed
to impose and enforce rules from the outside. Solutions that rely on external authority can easily
lead to an attempt to impose uniform rules that do not take into account local conditions.
8
Imposed uniform rules not only fail to mobilize local level social capital in solving concrete
problems but may also result in a total destruction of already existing social capital resources.

Drawing on Coleman’s theoretical elaboration, Ostrom and co-authors (E. Ostrom, 1990,
1992; E. Ostrom, Schroeder, and Wynne, 1993; E. Ostrom, Gardner, and Walker, 1994) and
Putnam and co-authors (1993, 1996, 2000) broaden the concept of social capital in a way that ha
led to the wide appeal of the concept both to theoreticians and policymakers today. First, they
explicitly locate social capital concepts in the framework of collective action. Second, they
address significant public policy problems with the social capital/collective-action approach.
Given the importance of collective action to the transformational economies and polities of
modern Europe, we will focus largely on the importance of social capital to the solution of
collective-action problems.

Social capital in Ostrom’s work is primarily in the form of shared norms, common
knowledge, and rules-in-use and is emphasized as a means of solving the collective-action
problems that the appropriators of relatively small-scale, common-pool resources (CPRs) face.
Ostrom (1990: 183-84) points out that the appropriators of small-scale common-pool resources
such as forests, irrigation systems, ground water basins, inshore fisheries, can “communicate and
interact with one another in a localized physical setting,” and thus “can learn whom to trust, wha
effect their actions will have on each other and on the resource, and how to organize themselves
to gain benefits and avoid harm.” The shared norms and patterns of behavior the appropriators
develop over time are forms of social capital with which they can build institutional
arrangements for resolving common-pool resource dilemmas.

Ostrom, Gardner, and Walker (1994: 328) also point out that communication and continued
interaction, expectations of mutual trust that are generated from communication and continued
interaction, and the capacity to create their own rules and establish the means of monitoring and
sanctioning the rules constitute a key factor that help individuals to solve their collective-action
problems.

The lessons from the study of small-scale communities cannot be directly applied in more
complex and larger scale collective-action situations. However, if individuals facing such
problems are “also participants in overlapping organizational arrangement that help generate
information about successful efforts to govern CPR situations, then they have a better chance at
testing, modifying, and improving their rules” (ibid.: 326). The idea that overlapping
organizational arrangement can help individuals to solve a larger scale collective-action problem
also constitutes the key mechanism in Putnam’s account of how the overlapping networks of
small-scale civic engagements create the foundations for democratic governance at a higher,
regional level.

Understanding the importance of social capital does not imply that external authorities should
always stay away from local problems. The key role for the public authorities lies in providing
accurate and reliable information to the individuals while allowing them to devise their own
institutional arrangements to cope with the specific problems they have. External authority can
also help local appropriators/citizens by providing complementary endogenous systems of
monitoring and sanctioning. Ostrom, Gardner, and Walker (ibid.: 327) conclude that
“appropriate policies involve the provision of fair and inexpensive conflict resolution and back
9
up enforcement mechanisms, rather than the imposition of rule making and rule enforcement by
external officials, on the one hand, or complete neglect on the other.”

While these studies incorporate the concept of social capital in the study of well-defined and
relatively small-scale collective-action situations involving the management of common-pool
resources, Putnam’s Making Democracy Work: Civic Traditions in Modern Italy (1993) expands
the applicability of the concept further to the study of a larger scale democratic governance.
Putnam attributes the striking difference between the North and the South of Italy in terms of the
performance of regional governments to the differences in the tradition of civic engagements and
the levels of trust among people.

For at least ten centuries, the North and the South have followed contrasting approaches
to the dilemmas of collective action that afflict all societies. In the North, norms of
reciprocity and networks of civic engagements have been embodied in tower societies,
guilds, mutual aid societies, cooperatives, unions, and even soccer clubs and literary
societies. These horizontal civic bonds have under girded levels of economic and
institutional performance generally much higher than in the South, where social and
political relations have been vertically structured. (ibid.: 181)

Putnam defines social capital as “features of social organization, such as trust, norms, and
networks, that can improve the efficiency of society by facilitating coordinated action”
(ibid.:167). He devotes the concluding chapter of Making Democracy Work to develop a theory
of how social capital facilitates democratic governance as well as economic prosperity. The key
mechanism can be summarized as follows (ibid.:170-171):

• The problem of collective action lies at the core of economic development and
democratic order.
• Explicit contracting and monitoring is often too costly or impossible, and third-party
enforcement impractical.
• Therefore, voluntary cooperation is necessary.
• Voluntary cooperation is greatly enhanced when participants draw on existing social
capital.

Putnam argues that in complex modern settings, social trust, the key factor in facilitating
voluntary cooperation, can arise from two related sources: norms of reciprocity and networks of
civic engagement. Generalized reciprocity efficiently restrains opportunistic behavior that will
lead to an increase in the level of trust by those who have witnessed repeated reciprocity. Dense
networks of social exchange, which in game-theoretic terms, increase repetition and
connectedness of relationships also increase trust since individual count on seeing one another
again or hearing about each other again (ibid.:172-73).

Networks of civic engagements, such as “neighborhood associations, choral societies,

cooperatives, sports clubs, mass -based parties” are a particularly important form of social capital
because they “represent intense horizontal interaction.” Putnam presents several reasons why
networks of civic engagements have such strong beneficial effects (ibid.: 173-74).

Networks of civic engagement:

10
 • Increase the potential costs to a defector (someone who does not act in a trustworthy
manner) in an individual transaction.
• Foster robust norms of reciprocity.
• Facilitate communication and improve the flow of information about the trustworthiness
of individuals in past transactions.
• Embody past success at collaboration, which can be served as a culturally-defined
template for future collaboration.

In this report , we will take this fuller view. We see the theory of collective action as a key theor
for all of the social sciences and thus view social capital as a crucial factor for all social scientist
and policymakers in their effort to understand and promote more effective ways of solving
collective-action problems in all facets of economic and political life. Given this view, it is
important to understand the similarities and difference of social capital with other forms of
human-made capital—including physical and human capital. (We exclude consideration of
natural capital in this report because human actions are less responsible for the generation of
natural capital.)

3. How Social Capital is Related to Physical and Human Capital

While some critics have argued that social capital is not really a form of capital at all, we wil
argue—as many of the key theorists in the field have argued—that social capital shares
sufficiently many characteristics with the well understood concepts of physical and human
capital that it is definitely a form of capital. 5 In this view, all forms of human-made capital are
created when individuals spend time and effort in transformation and transaction activities to
build tools or assets today that increase individual welfare in the future. 6 “People form capital
when they withhold resources from present consumption and use them instead to augment future
consumption [or production] possibilities” (Bates, 1990a: 153).

Investments in physical capital are usually self-conscious decisions. Human and social
capital are sometimes developed as a by -product of other activities as well as developed in a self
conscious manner. The essential role of capital is everywhere acknowledged, but not always
well understood. Unfortunately, capital is sometimes equated with money. Money is not capital
but rather the means by which some forms of physical, human, and social capital may be
obtained. Money, like many resources, can alternatively be used for consumption or kept in a
vault as a store of value. Many types of capital can be created without money, or with very little
money involved, based on the time and energy spent by individuals in building tools and
facilities, learning skills, and establishing regularized patterns of relationships with others. All
human-made capital involves creating new opportunities as well as exercising restraints, a risk
that the investment fails, and the possibility of using capital to produce harms rather than
benefits.

Physical Capital

Physical capital is the stock of human-made, material resources that can be used to produce
flow of future income (Lachmann, 1978). Physical capital exists in a wide variety of forms
including buildings, roads, waterworks, tools, cattle and other animals, automobiles, trucks, and
11
tractors, to name just a few forms that physical capital can take. The origin of physical capital is
the process of spending time and other resources constructing tools, plants, facilities, and other
material resources that can, in turn, be used in producing other products or future income.

The construction of physical capital involves establishing physical restraints that (1) create
the possibilities for some events to occur that would not otherwise occur (e.g., channeling water
from a distant source to a farmer’s field), and (2) constrain physical events to a more restricted
domain (e.g., water is held within a channel rather than allowed to spread out). Thus, physical
capital opens up some possibilities while constraining others. The intention to construct useful
physical capital is not always fulfilled. An investment in physical capital may not generate the
improved flow of future services. A new but crumbling roadway or irrigation system, or an
empty building represents a failed investment decision.

Physical capital may have a dark side and generate more harms than benefits. Investments in
a weapons facility increases the quantity of physical capital existing at a particular point in time,
but the product of this form of physical capital is the threat of human destruction. Even
investments in the production of consumer goods can produce substantial externalities. A
nuclear power plant that leaks radioactive materials, for example, is constructed in order to
increase the availability of p ower for positive purposes but may produce more negative
externalities than the net benefits generated. Physical capital cannot operate over time without
human capital in the form of the knowledge and skills needed to use and maintain physical assets
to p roduce new products and generate income. If physical capital is to be used productively by
more than one individual, social capital is also needed.

Human Capital

Human capital is the acquired knowledge and skills that an individual brings to an activity.
Forms of human capital also differ among themselves. A college education is a different type of
human capital than the skills of a cabinetmaker acquired through apprenticeship training.
Human capital is formed consciously through education and training and unconsciously through
experience. 7 An individual who swims for the pleasure of the activity, for example, is engaging
in consumption activities but also improving physical health. Health is an asset that is drawn on
to achieve other goals. Some investments in human capital are not made self-consciously but
result from activities engaged in primarily for other reasons. Alternatively, some individuals
dislike using stationary bicycles but do so because they know that aerobic exercise is essential
for sustaining future capabilities. They exercise primarily to invest in human capital and then
find ways to make this activity as pleasant as possible. Thus, both self-conscious and relatively
unconscious investment processes go on when building human capital.

Human capital consists of the acquisition of new capabilities as well as the learning of
constraints. Learning a new language opens up different conceptions of the world. Many of the
skills that individuals acquire involve the imposition of discipline on self. Like physical capital,
human capital can be used for destructive purposes as well as productive ones. An individual
knowledgeable in computer languages can use this skill to write programs today that help solve
many problems in the future . Those who write programs to function as a virus that invades and
destroys the records of others, use their human capital for destructive purposes.
12
Social Capital

As we discuss below, social capital takes on many forms. We consider social capital to
encompass the concepts of trust, norms of reciprocity, networks of civic engagement, rules and
laws. All affect the expectations that individuals have about patterns of interactions that groups
of individuals bring to a recurrent activity (Coleman, 1988; E. Ostrom, 1990, 1992; Putnam,
1993). In the establishment of any coordinated activity, participants accomplish far more per
unit of time devoted to a joint activity if they draw on capital resources to reduce the level of
current inputs needed to produce a joint outcome. They are more productive with whatever
physical and human capital they draw on, if they agree on the way they will coordinate activities
and credibly commit themselves to a sequence of future actions.

In the realm of repeated coordination problems, humans frequently face a wide diversity of
potential equilibria. It is a nontrivial problem to find the best or even a good equilibrium in the
set. When they face social dilemma or collective-action situations, participants may easily
follow short-term, maximizing strategies that leave them all worse off than other options
available to them. Somehow participants must find ways of creating mutually re-enforcing
expectations and trust to overcome the perverse short-run temptations they face (E. Ostrom,
1998). Agreements can be based on mutual learning about how to work better together (Sirianni
1996). They can be based on one person agreeing to follow someone else's commands regarding
this activity. Or, they can be based on the evolution or construction of a set of norms or rules for
how this activity will be carried out repeatedly over time and how commitments are monitored
and sanctions imposed for nonperformance.

Like other forms of capital, social capital opens up some opportunities and closes down
others. A decision to establish majority-rule as the decision rule for making particular collective
choice decisions, for example, opens opportunities that did not previously exist. Voting does no
exist in nature. The opportunity to vote is created by rules. On the other hand, a rule that limits
the slope of land on which a farmer may plant or the size of the unplanted edge next to a road,
for example, restrains activities to a more limited set than previously available.

A dark side exists to social capital as well as to physical and human capital. Gangs and the
Mafia use social capital as the foundation for their organizational structure. Cartels also develop
social capital in their effort to keep control over an industry so as t o reap more profits than would
otherwise be the case. An authoritarian system of government based upon military command
and use of instruments of force destroys other forms of social capital while building its own.
These commonalities are not shared with physical capital and are the source of substantial
differences between these two forms of human-made capital.

4. Differences between Social and Physical Capital

The similarities among diverse forms of social capital lead to some key differences between
social and physical capital. We will discuss four key differences that include:

! Social capital does not wear out with use but rather with disuse.
13
 ! Social capital is not easy to see and measure;
! Social capital is hard to construct through external interventions; and
! National, regional and local governmental institutions strongly affect the level and type
of social capital available to individuals to pursue long-term development efforts

Many of these differences are due to the importance of shared cognitive understandings that are
essential for social capital to exist and to be transmitted from one generation to another.

First, social capital differs from physical capital in that it does not wear out with use
but rather with disuse. Social capital may, in fact, improve with use so long as participants
continue to keep prior commitments and maintain reciprocity and trust. Using social capital for
an initial purpose creates mutual understandings and ways of relating that can frequently be used
to accomplish entirely different joint activities at much lower start -up costs (Putnam, 1993). It i
not that learning curves for new activities disappear entirely. Rather, one of the steepest section
of a learning curve—learning to make commitments and to trust one another in a joint
undertaking—has already been surmounted. A group that has learned to work effectively
together in one task can take on other similar tasks at a cost in time and effort that is far less than
bringing an entirely new group together who must learn everything from scratch. The fungibility
of social capital is, of course, limited. No tool is useful for all tasks. Social capital that is
adapted to one broad set of joint activities may not be easily molded to activities that requir
different patterns of expectation, authority, and distribution of rewards and costs than used in the
initial sets of activities.

If unused, social capital deteriorates rapidly. Individuals who do not exercise their own skills
also lose human capital ra pidly. When several individuals must all remember the same routine in
the same manner, however, the probability that at least one member of a group forgets some
aspect increases rapidly over time. In addition, as time goes on, some individuals enter and
others leave social groups. If newcomers are not introduced to an established pattern of
interaction as they enter (through job training, initiation, or any of the myriad of other ways that
social capital is passed from one generation to the next), social capital dissipates through
turnover of personnel. Eventually, no one is quite sure how a particular joint activity used to be
done. Either the group has to pay most of the start-up costs all over again, or forego the joint
advantages that they had achieved at an earlier time.

Second, social capital is not as easy to find, see, and measure as is physical capital. The
presence of physical capital is usually obvious to external onlookers. Health centers, schools
and roads are simple to see. Social capital, on the other hand, may be almost invisible unless
serious efforts are made to inquire about the ways in which individuals organize themselves and
the rights and duties that guide their behavior—sometimes with little conscious thought. Even
when asked, local residents may not fully describe the rules they use. Robert Yoder warns those
interested in helping farmers that they must probe deeply and in nonthreatening ways to get
adequate information on the rules used to allocate water and maintenance duties within irrigation
systems. “Intimidated by the higher status of officials, they may fail to communicate the details
of the rules and procedures they use to operate and maintain their system” (1994: 39). Common
understanding is frequently hard to articulate in precise language, particularly when status
differentials make communication difficult in the first place. If external agents of change do not
expect that villagers have developed some ways of relating to one another that are productive in
14
the setting in which they live, those who are trying to help may easily destroy social capital
without knowing what they have done. If past social capital is destroyed and nothing takes its
place, the well being of those involved can be harmed by external “help” rather than improved.

The researcher or project workers interested in social capital cannot assume from the outside
that a group has (or has not) established common understandings that enable them to rely upon
each other to behave in ways that are predictable and mutually productive. The presence of
words on paper or a building with a name on the outside is not the equivalent of the common
understandings that are shared among participants. The self-organizing processes that social
capital facilitates generate outcomes that are visible, tangible, and measurable. The processes
themselves are much harder to see, understand, and measure.

Third, social capital is harder than physical capital to construct through external
interventions. A donor can provide the funds to hire contractors to build a road or line an
irrigation canal. Building sufficient social capital, however, to make an infrastructure operate
efficiently, requires knowledge of local practices that may differ radically from place to place.
Organizational structures that facilitate the operation of physical capital in one setting may be
counterproductive in another. Local knowledge is essential to building effective social capital.

Creating social capital that makes physical capital operational over the long run is something
that individuals who successfully use physical capital repeatedly do, but it is not as well
understood as the technology of constructing physical capital. For private sector activities, an
important aspect of entrepreneurship is bringing relevant factors of production together and
relating them effectively from one to another. Aspects of these skills are taught in schools of
management and learned in the workplace through experience. The incentive to create social
capital related to private enterprise is attributed to the profit motive. A great deal of what private
entrepreneurs do is to create networks of relationships that increase the profits that can be
obtained. The private entrepreneur then keeps the residuals from creating and sustaining social
capital.8

The incentives and motivation of public entrepreneurs who provide public goods and
services is not as well understood as that of private entrepreneurs (Kuhnert, 2000; Henton and
Walesh, 1997). In an earlier era, the theory of bureaucracy posited public officials who
ascertained the public interest and were motivated to achieve it. More recent analyses of public
bureaucracies are less optimistic about the capacity of public officials to know the public
interests or to undertake the least costly ways of providing and producing collective goods.
Instead of being viewed as if they were automata who do what they are told to do in the most
efficient way, public employees are viewed in much of the recent public choice literature as
individual actors seeking their own interests. Pursuing their own interests may or may not
generate net public goods, depending on how well the rules affecting their incentives help induce
high performance. Thus, simply turning over the task of creating social capital to make physical
and human capital more effective to a public bureaucracy may not generate the intended results
unless officials are strongly motivated to facilitate the growth and empowerment of others. The
social capital created may instead be the organization of limited networks of individuals or
cliques that engage in mutual reciprocity at the expense of the larger group they are supposed to
be serving.

15
 Fourth, national, regional, and local governmental institutions strongly affect the level
and type of social capital available to individuals to pursue long-term development efforts
Larger-scale governmental institutions can facilitate the creation of social capital by citizens
trying to solve coordination or collective-action problems or make it more difficult. They
facilitate the creation of social capital when considerable space for self-organization is
authorized outside of the realm of required governmental action. On the other hand, when
national or regional governments take over full responsibilities for large realms of human
activities, they crowd out other efforts to enter these fields. When national governments take
over the ownership of all forests or other natural resources or close down schools and hospitals
run by religious groups in an attempt to provide all health and educational services themselves,
they destroy an immense stock of social capital in short order. Rarely can this be replaced
rapidly. Creating dependent citizens rather than entrepreneurial citizens reduces the capacity of
individuals to generate capital.

Now that many scholars accept the importance of social capital along side the realms of
physical and human capital, let us turn to a brief review of the substantial proliferation of
research on this topic.

5. Proliferation of Social Capital Research

A considerable body of research has been conducted from the perspective of social capital
since the earlier works.9 Studies on economic and political development from the perspective of
social capital have been conducted in Africa, 10 Meso- and South America, 11 South Asia (Isham
and K≅hknen, 1999; Sadeeque, 1999), European Union (Grahl, 1996), and post-communist
societies.12 Also found are theoretical and empirical studies on social capital applied to medieva
European history (McIntosh, 1999), political culture (Rotberg, 1999), political behavior, 13
industrial R&D (Fountain, 1997; Rausser, 1999), industrial organization (Lorenz, 1991), public
administration (Gregory, 1999), voluntary associations (Putnam, 1995; Gamm and Putnam,
1999), household income (Robinson and Siles, 1999), information age (Riedel et al., 1998;
Blanchard and Horan, 1998), national economy (Fukuyama, 1995; Knack and Keefer, 1997), and
economic theory.14

A review of the whole range of social capital literature would require a book-length work. A
simple key word search conducted using ELSCOhost Academic Search Elite returns 147 articles
with the term “social capital” in the title and published in academic journals in the five years jus
since 1995. One way to synthesize the literature is to use the collective-action/social capital
framework as the organizing scheme. As we discuss below, we do not claim that the three forms
of social capital are analytically exclusive or that they fully exhaust the concept of social capital.
These are the most often discussed forms of social capital in the extant literature, and they make
relatively coherent sense as individual forms. Since the essence of the social capital/collective
action approach is to analyze the factors that affect individuals’ ability to solve collective-action
problems related to economic and political development, we have focused on the three forms tha
are clearly related to collective action.

The vast scope of social capital research explains the frustration that many social scientists
experience as well as the popularity it enjoys. Harriss and De Renzio (1997: 932) suggest that to
use the concept of social capital in an analytically meaningful way, one has to “recognize
16
different usages, and to distinguish different forms.” We agree that in most research, a broader
discussion of social capital should not replace actual analysis on how certain forms of social
capital, their particular configuration, and their interaction with other factors cause the
phenomena under investigation. As we have mentioned in the introduction, social capital is a
meaningful “rubric” for the diverse factors related to collective action and political/economic
development, but not an analy tical replacement of them.

On the other hand, we think that the tendency of disaggregating social capital into its specific
forms is only one aspect of the much-needed effort to provide a scientific basis for the concept.
The other necessary direction has to be made to synthesize the “forms” in a coherent theoretical
framework. We believe that the burgeoning new trends in collective-action theory, from the
second-generation models of rationality (E. Ostrom, 1998), behavioral game theory (Camerer,
1997), and indirect evolutionary game theory (Güth and Kliemt, 1998; Güth, Kliemt, and Peleg,
1998) can provide a theoretical framework that provides a scientific conceptual basis for social
capital.

6. Forms of Social Capital and Collective Action

This section discusses how the forms of social capital, their particular configurations, and
their interaction with other factors facilitate collective action. Coleman (1990: 304-13) lists
obligations and expectations, information potential, norms and effective sanctioning, authority
relations, appropriable social organization, and intentional organization as forms of social
capital. He finds a commonality in their value to actors since they can all be used as resources to
realize their interests. Harriss and De Renzio (1997: 932-33) distinguish family and kinship
connections, social networks (or associational life), cross-sectional linkage (or contracts
spanning differences in sectors and power), political capital, institutional and policy framework,
and social norms and values as different forms of social capital. They identify their commonalit
as being the ways “in which actors organize themselves.”

We have selected three forms of social capital and particularly important in the study of
collective action: (1) trust and norms of reciprocity, (2) networks/civic engagement, and (3)
formal and informal rules or institutions. We view social capital as an attribute of individuals
and of their relationships that enhance their ability to solve collective-action problems. The
relevant forms of social capital and their specific roles have to be provided by the theoretical
framework in which the concept is located. We regard the second-generation of collective-
theories as the organizing tool for social capital discourse. Therefore, this section starts with a
brief discussion of the second-generation theories of collective action.

Second-Generation Collective-Action Theories

Theories of collective action concern settings in which there are a group of individuals, a
common interest among them, and potential conflict between the common interest and each
individual’s interest. The first generation of collective-action theories (Olson, 1965; Hardin,
1968) concluded that individuals could not achieve joint benefits when left by themselves if
everyone would be benefited whether or not they contributed to the effort. Intervention by
external authority, provision of selective incentives, or privatization was viewed with this theory
as the way of overcoming the inability of individuals to solve these problems.
17
 The first-generation collective-action theories were a valid criticism of the naive belief that
individuals with common interests would voluntarily act to achieve those common interests,
expressed by earlier group theorists such as Bentley (1949) and Truman (1958). However,
research on collective action has shown that the first-generation theories, while not entirely
wrong, represent only the limiting case of the ways that collective-action situations are structur
and individuals solve them (Blomquist, 1992; Bolton and Ockenfels, 2000; Feeny et al., 1990;
McCay and Acheson, 1987—to name just a few relevant studies).

At the core of the first-generation theories of collective action is an image of atomized,

selfis h, and fully rational individuals. In reality, individuals do not live in an atomized world.
Many collective-action problems are embedded in preexisting networks, organizations, or other
ongoing relationships among individuals. Second, the universal selfishness assumption has been
repeatedly rejected by empirical research conducted in the field and the experimental laboratory.
There are individuals who are concerned only with immediate material gains, at the expense of
others. There are also a significant proportion of individuals who, in game-theoretic terms, have
nonselfish utility functions—who take into account other individuals’ interests as well as their
own in decision making (Frey, 1994, 1997). Nonselfish individuals also differ among
themselves in terms of the extent to which they depart from the purely selfish motivation.

Unlike the first-generation theories of collective action that presupposed universal

selfishness, the second-generation collective-action theories acknowledge the existence of
multiple types of individuals as a core principle of modeling (E. Ostrom, 1998). In addition to
the standard noncooperative game theory that has been the key modeling tool of the first-
generation collective-action theories, the second-generation theories also use behavioral and
evolutionary game theories (Gintis, 2000; Henrich, 2000). Many models of collective action
based on behavioral or evolutionary game theories still use the solution concepts of the standard
noncooperative game theory. They address new kinds of questions, however, that are
particularly relevant to social capital research. For example, one of the main concerns of
behavioral game theory is the problem of social motivations, which has a direct implication to
the discussion of trust and trustworthiness in social capital research. Another example is the
problem of endogenous preferences, a key issue in evolutionary game-theoretic approach to
collective action (Bowles, 1998, 2000; Güth and Yaari, 1992; Güth and Kliemt, 1998), that
provides a way to model the historical interaction between the institutional structures and the
quality of citizenship described by Putnam (1993).

In this section we will not actually construct game-theoretic models that link forms of social
capital to collective action, but we will use game-theoretic languages whenever it helps to clarify
our points.

Trust and Reciprocity

Trust as a form of social capital is the most encompassing factor in facilitating voluntary
cooperation. The other forms of social capital contribute to successful collective action, almost
always, by enhancing trust among the actors. In other words, we see the three broad forms of
social capital linking with successful collective action as shown in Figure 1.

18
 Figure 1

Forms of Social Capital and their Linkage to Achieving Collective Action

Contextual Variables

Networks Achieving
Trust and Reciprocity Collective Action

Institutions

Torsvik (2000) treats trust not as a form of social capital but as an outcome of other forms of
social capital linking them to economic development. It is true that the existence of trust among
a group of individuals can often be explained as a result of the other forms of social capital such
as norms of reciprocity, networks, rule, and institutions. But there are also aspects in the concep
of trust that are not reducible to other forms of social capital.

Drawing on Gambetta (2000), we define trust as “a particular level of the subjective

probability with which an agent assesses that another agent or group of agents will perform a
particular action.” Thus, trust allows the trustor to take an action involving risk of loss if the
trustee does not perform the expected action (E. Ostrom and Walker, forthcoming). Another
crucial aspect of trust is that it involves an opportunity for both the trustor and the trustee to
enhance their welfare. Let us think of a business transaction in which agent A has to pay before
agent B delivers the desired good. If A pays the price and B delivers the good, both are better off
than in the absence of the transaction. B might be tempted not to deliver the good even after A
has paid the price. This lack of trustworthiness would leave agent A with a net loss. If A does
not trust B in the first place and refuses to complete the transaction, B will have lost an
opportunity to sell his product and thus increase his wealth. Thus, trust and trustworthiness are
essential for the completion of many complex transactions in modern life. As Kenneth Arrow
(1972: 357), the Nobel Prize-winning economist pointed out: “Virtually every commercial
transaction has within itself an element of trust, certainly any transaction conducted over a period
of time. It can be plausibly argued that much of economic backwardness in the world can be
explain by a lack of mutual confidence.”

Theoretically, the subjective belief of a trustor can be independent of objective conditions.

One can falsely trust someone who is not trustworthy and experience losses. Trust as a
subjective belief cannot be sustained in the long run unless it is verified frequently enough by the
behavior of the trusted. Therefore, when we say that a society enjoys a high level of trust, the
essence is that its people are quite trustworthy. Trust also involves trustworthiness of the trustor
Technically, when trust is defined as a subjective belief about a trustee’s unobservable or not
yet-observed behavior, it is possible that an untrustworthy individual trusts another agent. But

19
saying that A, who wouldn’t repay what he borrowed from B, trusts B to repay what B might
borrow from A himself, is highly unlikely.15

The key factor in distinguishing trust that is reducible to other forms of social capital and
trust that is not reducible is the origin of the subjective belief of the trustor about the expected
behavior of the trustees. The variants of the Prisoner’s Dilemma game in standard
noncooperative game theory provide an ample amount of cases in which the expectations of
others’ behavior in collective-action situations can be reduced to other factors. Repetitive
interaction among individuals—a sign of a robust network and an important form of social
capital—provides incentives to individuals to build a reputation of being trustworthy. Even very
selfish individuals may not betray the trustor under those circumstances. In fact, precisely
because he is selfish and he wishes to obtain gains from future transactions with the trustor, a
selfish individual embedded in assured repetitive interactions will reciprocate trust.

Dense horizontal networks with the capability of efficiently transmitting information across
the network members also create incentives to behave in a trustworthy manner for those who
have only selfish motivations. Suppose that, though the transaction between A and B is not of a
repetitive nature, there are other agents C and D who obtain information about the transaction
and condition their future transactions with A on whether A behaves trustworthily in his
transaction with B. Then again, A has an incentive not to betray B, not because of the prospects
for future gain from transactions with B, but in expectation of those from C and D. Used car
dealerships increasingly rely on Internet auctions to sell their stock. Since most consumers buy
cars only infrequently, the transaction is most likely of a one-shot nature. The managers of the
Internet auction sites typically provide potential consumers with the information about the
dealers’ past transactions. They actively solicit comments from the past consumers on the
dealers’ trustworthiness and post them on the auction sites so that potential buyers can see how
the dealer has behaved in the past.

Rules and institutions also create incentives for the parties of transactions to behave
trustworthily. They can influence behavior directly by establishing mechanisms of rewards and
punishment or indirectly to help individuals govern themselves by providing information,
technical advice, alternative conflict resolution mechanisms, and so forth. When formal or
informal institutions exist that punishments will be imposed on those who do not keep contracts,
they affect a trustor’s assessment of the trustee’s future behavior. Intentionally not delivering the
good after receiving the payment for it constitutes a crime. Though the existence of laws that
punish fraud may not completely eliminate the possibility of fraud, it does increase the trustor’s
assessment that the trustee will abide by the terms of the transaction. The quality of a rule, an
institution, or a statute as forms of social capital depends not only on their content but more
critically on how they are actually implemented. One of the reasons why formal rules,
institutions, and laws are not enough in solving the problems of collective action is that fair
implementation of rules often constitute other, higher level, problems of collective action. It is
therefore a total configuration of factors, forms of social capital, in concrete context, that
determines the level of success of a collective action.

We have so far examined how other forms of social capital may affect trust. In sum, they
change the incentive structure of the trustee. As a result, the trustor knows the incentive
structure the trustee faces given the repetitive nature of the interaction, the existence of other
20
network members who observe the trustee’s behavior, and the rules and laws that punish or
reward the trustee. Common understanding between the trustor and trustee regarding the
existence and functioning of those factors encourages them both to engage in productive
transactions. Trust in such cases is a result of other forms of social capital.

There are also aspects in trust that cannot be reduced to one or another form of social capital:
the characteristics of the trustees themselves. Imagine a transaction that occurs in an absolute
absence of other forms of social capital: no repetition, no networks, no possibility of external
sanctions. Both a local villager being asked for help by a lost traveler who promises to repay
twice the worth of what he is asking at a later time, or a first mover of a single-play sequential
prisoner’s dilemma experiment conducted in a double-blind procedure, face a decision whether
or not to trust each other’s pure motivation. In those cases, the probability assessments by the
trustors depend only on their belief regarding the trustees’ motivation. Having neither any
specific information about the trustee’s trustworthiness nor the structural incentives the trustee
faces, a trustor regards the trustee as representing a population of heterogeneous individuals.
The individual who wants to be trusted in these cases is represented as coming from a population
in the trustor’s mind. The distribution of trustworthy individuals in this hypothetical population
is based on the trustee’s observable characteristics (if these can, indeed, be observed), such as
appearance, dress, gender, age, language, and so forth (see Frey and Bohnet, 1996).

The above examples are presented to abstract a trustor’s belief about a trustee’s motivation a
an independent source of the trustor’s expectation of the trustee’s behavior. In most social
transactions, a potential trustor’s belief about a trustees’ motivations compound with his
understanding of other structural factors to form a final subjective expectation, in the form of a
probability assessment, of the trustees’ behavior.

The trustworthiness of a population can be formalized in game theory by introducing a

generic utility function that contains a “type” parameter (Crawford and Ostrom, 1995). Suppose
the parameter takes a value of 0 for purely selfish individuals, whose cooperative behavior can
be only induced by other forms of social capital, and a value of 1 for those who are entirely
trustworthy, who would behave cooperatively in the absolute absence of other cooperation
enhancing social capital. Then, the statistics of the parameter, its mean value and variance, and
so forth, is an independent input to the trustor’s probability assessment when faced with an
anonymous individual or individuals in a collective-action situation. The evidence suggests that
few individuals are truly unconditional altruists who cooperate or trust others no matter what!
Rather, in addition to networks and institutions, considerations of equity and fairness also affect
the likelihood of individuals adopting conditional cooperation in collective-action situations
(Fehr and Schmidt, 1999; Bolton and Ockenfels, 2000; Ahn, Ostrom, and Walker, 1998).

Norms, especially the norm of reciprocity, are another important form of social capital.
Reciprocity is an internalized personal moral norm as well as a pattern of social exchange.
Ostrom (1998a: 10) defines reciprocity as involving a family of strategies in collective-action
situations including “(1) an effort to identify who else in involved, (2) an assessment of the
likelihood that others are conditional cooperators, (3) a decision to cooperate initially with other
if others are trusted to be conditional cooperators, (4) a refusal to cooperate with those who do
not reciprocate, and (5) punishment of those who betray trust.”

21
 As the above definition indicates, trust is an integral part of reciprocity. An individual who
abides by the norm of reciprocity is trustworthy. The information about others’ trustworthiness
is an essential input to a reciprocal individual’s decision whether or not to cooperate. That the
norm of reciprocity prevails in a society implies that a significant proportion of individuals in the
society are trustworthy. Putnam (1993: 171) stresses the generalized reciprocity, which he
defines as “a continuing relationship of exchange that is at any given time unrequited or
imbalanced, but that involves mutual expectations that a benefit granted now should be repaid in
the future,” as an especially productive component of social capital.

Reciprocity as a prevailing pattern of interaction among individuals is, in game theoretic

terms, an efficient equilibrium of repeated social dilemma games with multiple types of
individuals and incomplete information. Ahn (2000) studies a social dilemma action situation in
which there is a continuum of types, from those who are purely selfish to those who have strong
orientation toward fairness. He shows that if there are enough nonselfish individuals and the
material gains from defection are not too big, an equilibrium exists in which mutual cooperation
persists to near the final stage of the game. The equilibrium strategy of the nonselfish players
closely resembles the five behavioral rules of reciprocity that Ostrom outlines. However, even
when the proportion of nonselfish individuals is large, mutual defection still constitutes another
equilibrium of the game. The analysis implies that for reciprocity to prevail as patterns of social
interaction, trustworthy individuals need not only to overcome the temptation to free-ride but
they also need to coordinate their actions successfully.

Though the methods of modeling individual motivation and resulting characterization of a

population are not directly applicable to empirical research, except for experimental studies,
many standardized surveys such as the General Social Survey (SGG), the Monitoring the Future
(MTF), the World Values Survey (WVS), and the Eurobarometer include questions that provide
measures of trustworthiness. Various empirical studies have been conducted utilizing these
survey data to examine the causes and consequences of social trust (see, for example, Brehm and
Rahn, 1997; Putnam, 2000).

Empiri cal studies using these survey data typically find that the higher the level of trust
among the individuals of a nation, region, or a community, the more likely that those individuals
would enjoy economic prosperity and democratic governance. Using the World Values Survey
of twenty market economies, Knack and Keefer (1997) found that interpersonal trust has a
significantly positive impact on investment and growth rates, after controlling for per capita
income, education, and investment good prices. They also found that trust is associated with
more secure property rights and contract enforceability that they see as main predictors of
economic performance. The impact of trust is especially strong in poorer nations.

Fukuyama (1995) argues that the differences in the national industrial structure across marke
economies can be explained by trust. He observes that while, in the U.S., Japan, and Germany,
giant and professionally managed corporations play the key role in national economy, in France,
Italy and the marketized parts of China are dominated by smaller, family-owned and managed
business. He argues that this difference is due to the level of trust in the respective group of
nations. This is, of course, rooted in the nations’ historical experiences related to centralization;
“China, France, and southern Italy, and other low-trust societies all went through a period of
strong political centralization. . . . By contrast, those societies experiencing a high degree of
22
social trust such as Japan, Germany, and the U.S. never experienced a prolonged period of
centralized state power” (ibid.:5). What hinders formation of larger business in those low trust
societies is that trust remains within the limits of family and kin-relationships and does not
extend to the society as a whole.

Mackie (2001) reviews Eurobarometer survey data related to trust in twelve western
European countries. He finds that the propensity to trust others by the citizens of a nation is
closely related to the perceived trustworthiness of the citizens by themselves and by the citizens
of other countries. The twelve countries are divided into high (Luxemburg, the Netherlands,
Denmark, and Belgium), intermediate (France, Germany, Great Britain, and Ireland), and low
(Spain, Portugal, Greece, and Italy) trusting groups. When other European countries are
included in the survey in 1996, Swiss, Swedish, and Norwegian respondents score highest and
the eastern Europeans and Turkish respondents score the lowest in regard to their level of trust.
Mackie proposes the historical patterns related to marriage strategy as the most persuasive
hypothesis to explain the difference in trust level across countries. He argues that the late
marriage, the tradition of forming separate households after marriage, and the traditional practice
of the northwest youth to leave home to work as temporary servants outside the households,
encouraged the development of general social trust beyond the family relations.

We defer additional discussion of trust to the next s ubsection on Networks/Civic

Engagements, where the theoretical and empirical studies on the causal relationships among
trust, participation in civic organizations, and political participation in general will be discussed.

Networks/Civic Engagement

We have already discussed the impact of networks on behavior during our discussion of trust
However, there is more to the roles of networks than simply providing additional incentive for
behaving cooperatively to selfish individuals. As Putnam (ibid.: 127) points out, dense network
of social exchange are a crucial condition for the rise of the norm of generalized reciprocity.
When trustworthy individuals who are willing to cooperate with others constitute only a small
minority of a society’s whole population, one condition for them to survive, prosper, and spread
is to establish a network among them. Evolutionary theorists (Hamilton, 1964; Axelrod, 1984)
have shown that when reciprocal agents using the Tit-For-Tat strategies have a higher chance to
interact with one another than with the surrounding population in general, they can invade a
population composed of agents who always defect. Information regarding potential transaction
partner’s trustworthiness is crucial when trustworthy individuals try to initiate cooperation.
Dense social networks also encourage the development of reciprocity norm through the
transmission of information across individuals about who are trustworthy and who are not.

Putnam (ibid.:173) distinguishes two forms of networks: a horizontal network that “brings
together agents of equivalent status and power” and a vertical network that links “unequal agents
in asymmetric relations of hierarchy and dependence.” He argues that networks of civic
engagement represent both dense and horizont al social interactions and have the most powerfull
beneficial side effects for the society as a whole. While vertical networks also contribute to
solving collective-action problems to some extent, upward sanctioning is difficult when agents
are not considered equal. Family and kinship relations have the characteristics of a dense
network, but the ties in those relations are too strong. Thus, the reciprocity norm developed in
23
family and kinship networks often fails to spread to the society as a whole. For that reason,
Putnam agrees with Granovetter (1973, 1985) in that overlapping “weak ties” are more importan
than intense personal ties in sustaining social stability and collective action.

Putnam (ibid.: chs. 3, 4) himself has provided probably the most persuasive and influential
empirical study on the impact of civic engagements—in the form of participation in voluntary
associations —on democratic governance. He compares the performance of regional
governments of Italy that were established as autonomous governing entities during the 1970s.
The twenty regions show significant variance in terms of the four measures: policy process and
internal operations, policy decision content, policy implementation, and bureaucratic
responsiveness. He finds that the density of membership to voluntary associations such as
“amateur soccer clubs, choral societies, hiking clubs, bird-watching groups, literary circles,
hunters’ associations, Lions Clubs, and the like in each community and region of Italy” (p. 91) is
a powerful indicator of the performance of regional government.16

Building on Putnam and Granovetter’s works, many political scientists have conducted
empirical research investigating the impacts of networks and associational membership to
politics. Brehm and Rahn (1997) examine a crucial link in Putnam’s scenario, the impact of
civic engagement on trust, using the GSS data from 1972 to 1994. Their statistical analyses
show that there does exist a tight relationship between interpersonal trust and civic engagement.
But the relationship is asymmetric in the sense that “the effect of civic engagement on
interpersonal trust was much stronger that the reverse effect.” But their finding is not always
confirmed. For example, Stolle’s (2001) comparative study of the impacts of associational
membership in Sweden, Germany, and the U.S. finds that the members do develop social skills,
trust, and behavior but most of them are utilized only in the group context. He characterized
these learned skills, attitudes, and behavior as private social capital, which cannot be easily
generalized to the society as a whole.

Lake and Huckfeldt (1998), drawing more on Granovetter than on Putnam, focus on the
networks of interaction that citizens construct around themselves, and study how these networks
aid in the transmission of information and political participation. Using American data from the
1992 cross national election project, they statistically test the relationships among human capital
organizational membership, network characteristics, and political participation. They find that
human capital measured as the level of education has significant impact on all the aspects of the
networks. Organization membership is found to be a significant factor in explaining both the
size of one’s network and the political expertise of that network. They also found that network
characteristics encourage political participation after controlling for all other factors.

Formal and Informal Rules (Institutions)

We define rules in broad terms as prescriptions that specify what actions (or outcomes) are
required, prohibited, or permitted, and the sanctions authorized if the rules are not followed
(Crawford and Ostrom, 1995; E. Ostrom, Gardner, and Walker, 1994: 38). Rules are the results
of human beings’ efforts to establish order and increase predictability of social outcomes. Rules
can be used to increase the welfare of many individuals or, if collective choice processes are
controlled by a well-organized subgroup, to benefit that group more than others.

24
 Written laws, administrative regulations, court decisions, and so forth are formal rules
written on paper and enforced by public authority. Grootaert (1998) considers the view of social
capital that includes “formalized institutional structures, such as governments, the political
regime, the rule of law, the court system, and civil and political liberties” as the most
encompassing. Many scholars (e.g., Fuller, 1981; Taylor, 1982) have argued that legal rules and
formal institutions are an ineffective means to solve collective-action problems, and sometimes
might even undermine the very basis of social cooperation. This view is a valid criticism to
Hobbesian tradition in which the state is regarded as the inevitable and omnipotent solution
the collective-action problem (see V. Ostrom, 1991, 1997). We think that this criticism,
however, should not be stretched so far as to deny the significant role of formal laws at national,
regional and local levels in sustaining and facilitating social cooperation. First of all, formal
laws, or the characteristics of a political system broadly understood, can encourage or discourage
individuals’ efforts to voluntarily solve their collective-action problems. Though no
authoritarian regime can completely demolish peoples’ will and ability to self-organize to deal
with the problems they face on a daily basis, whether or not a regime explicitly allows and even
encourages those activities makes a big difference for the fate of self-governance. In addition,
formal laws, government agents, and courts are important sources for self-governing individuals
as they seek technical advice, information, and complementary monitoring and sanctioning
systems. Therefore, a rule of law, a democratic atmosphere, and a well-structured government
(if these exist) are valuable social capital for any society.

Knight (2001) addresses the conditions under which formal institutions, meaning more
specifically the rule of law, can foster generalized social trust. He argues that, in a socially
diverse society, the key task in designing legal institutions is how to foster “positive change in
horizontal beliefs: ones that increase equality of status, decrease conflicts of substantive and
cultural interests, and reinforce the encouragement of elite.” He argues that the conception of th
rule of law organized on principles of pragmatism provides the best answer. Legal pragmatism
implies that:

• “. . .both the content of the laws and the procedures of application and interpretation
should, whenever possible, reflect the common features found in the cultures of different
social groups.
• . . .the rule of law should be flexible enough to accommodate the diversity of problems
characteristic of a modern, socially heterogeneous society.
• . . .the process of applying legal rules must take account of the full range of relevant
interests in a socially diverse society.” (Knight, 2001: 368-69)

In democratic societies individuals in private firms, voluntary associations, and villages are
allowed to devise their own rules and enforce these rules to deal with the daily concerns insofar
as those rules are “within the broad set of potentially lawful rules that are theoretically consisten
with the larger constitutional system” (E. Ostrom, Gardner, and Walker, 1994: 39). These
working rules (or rules -in-use) are another important form of social capital.

Formal laws themselves are often major sources of working rules especially when backed
with close monitoring and sanctioning by public authorities. The difference between working
rules and formal laws depends on the contexts in which the working rules operate and the extent
that formal laws apply to those contexts. No formal laws can completely cover the exigencies
25
arising in daily life, thus the roles of working rules “may involve no more than filling in the
lacunae left in a general system of law.” However, when the mandates from relevant laws and
official regulations are deemed impractical or improper, individuals may devise their own
working rules that “assign de facto rights and duties that are contrary to the de jure rights and
duties” (E. Ostrom, 1992: 20).

To provide themselves with working rules to deal with their collective-action problems,
individuals need to invest in those working rules in the form of devising, revising, monitoring,
and sanctioning. While the difficulties of sustaining long-term collective action are substantial,
the benefits of creating local organizations and selecting locals as leaders who are rewarded for
their performance can offset these high costs. Instead of presuming that individuals face an
impossible task, we are better advised to assume that it is possible, even though difficult, for
those facing severe collective-action problems to overcome them. To do so, they need sufficient
local autonomy to invest in the social and physical capital involved in building systems and
monitoring performance.

No general set of formal rules exist that guarantee successful development of working rules
in all contexts. Efforts to generalize have been made to identify relevant variables that the
crafters of working rules need to consider. Ostrom (ibid.: 48-65) suggests some of them in the
context of crafting institutions for self-governing systems. Those variables include
environmental conditions, cultural traditions, and monitoring, sanctioning, and conflict
resolution mechanisms.

The rules used by individuals to structure their patterns of relationships may enhance or
retard the creation of other forms of social capital and also affect the level and impact of human
and physical capital. Rules relate to patterns of activities at several levels including day-to-
operational activities all the way to constitutional activities that create and recreate the general
patterns of authority in a society. The type of rules that individuals will find productive depends
upon the kinds of norms and patterns of reciprocity that already exist. Similarly, patterns of trus
and reciprocity will depend to a large extent upon the types of rules that are crafted in any polity
Oakerson (1993) points out that modifying the structure of constitutions within a society is one
technique for affecting the level of reciprocity—particularly, that between rules and those who
are ruled.

To begin to modify a general constitution in which serious asymmetry exists, what needs to
be done is to raise the price of rulership. To do this, one must find ways of introducing new
elements of symmetry in order to leverage greater reciprocity from rules. Success will
depend upon a capacity to sustain such relatively autonomous organizations as private
businesses, labor unions, churches, and local governments, which are able to constrain the
decisions of rules. . . . Only the development of countervailing structures of authority and
power can introduce greater reciprocity into the general constitution of a society in which
serious political asymmetries exist. (Oakerson, 1993: 154)17

Self-governing systems in any arena of social interactions tend to be more efficient and stabl
not because of any magical effects of grassroots participation itself but because of the social
capital in the form of effective working rules those systems are more likely to develop and
preserve, the networks that the participants have created, and the norms they have adopted. For
26
example, many scholars have found it hard to understand why the “primitive” irrigation systems
built by the farmers themselves significantly outperform those that have been improved by the
construction of modern, permanent, concrete and steel head works often funded by donors and
constructed by professional engineering firms (E. Ostrom, 2000).

Many factors contribute to these results, most of them related to the incentives of key
participants in the finance, design, construction, operation, and maintenance of differently
organized irrigation systems. On farmer-governed irrigation systems, farmers craft their own
rules to counteract the perverse incentives that they face given the physical and cultural setting in
which they are enmeshed. These rules are frequently invisible to project planners when they
design new physical systems. In project planning, most effort focuses on how to improve
physical capital, such as creating permanent headworks, that affects various aspects of the
technical operation of a system. How these variables affect the incentives of participants is
rarely explored. Unless the changes in physical infrastructure are undertaken with a
consciousness that they will affect the incentives of participants—sometimes in perverse
manners —projects intended to do good may generate harm instead. In other words, investment
in physical capital that does not also include efforts to improve social capital and the fit between
social and physical capital hardly guarantees desired consequences.

Simply agreeing on an initial set of rules, on the other hand, is rarely enough. Working out
exactly what these rules mean in practice takes time. If those learning how to use a set of rules
do not trust one another, further investments are needed in extensive monitoring activities.
Appropriate sanctions for nonconformance must be developed. Conditions under which
exceptions to rules can be made without endangering the basic ordering principles must be
discovered and discussed. Conflict over rule interpretation and adjustment will occur, which if
no facilities for conflict resolution are available may destroy the process of building capital
before it gets very far. The time it takes to develop a workable set of rules, known to all relevant
parties, is always substantial. If this is the first time a set of individuals has attempted joint
activities, the time needed and the level of contestation involved in the process will tend to be
higher than in settings where the same set of individuals have worked well together in the past.

Part of learning through experience is what happens when things go wrong. In all practical
affairs, many things can go wrong. Everyone may not have received the same information about
joint objectives, processes to be followed, and how one process feeds into another. Some may
do their part while others fail to perform. Some may want to interpret a rule in a way that is
harmful to the interests of others. There may not be fair and objective conflict-resolution
processes available. Conflict may destroy prior lessons about how to work together and may
reinforce prior doubts about the reliability and trustworthiness of some participants.

Thus, social capital is not only created, it can be weakened, destroyed, strengthened, or
transformed. Social capital can be characterized as outdated, up -to-date, or ahead of its time. It
may enhance the outcomes of a few without any impact on others. Or, advantages to the few ma
come at the expense of others. Alternatively, the advantages to a few may generate positive
benefits for others. A system of government based upon military command and use of
instruments of force can also destroy other forms of social capital while building its own.

27
Context Makes a Difference

Existing social capital is not, however, the only factor that affects the capacity of individuals
to solve collective-action problems. As the vast number of studies of collective action
demonstrates, multiple factors affect the likelihood that individuals will solve collective-action
problems. Olson (1965) earlier identified two major factors that continue to be important
building blocks that are needed to construct an explanatory theory: (1) the nature of the good,
and (2) the attributes of those affected including the size of the group.

The structure of the process that transforms individual actions into outcomes (and the size of
the payoffs to individuals) has an obvious effect on the likelihood of collective action. There are
multiple types of goods involved. In regard to public goods, the consumption by one individual
does not subtract from the availability of the good to others. In regard to common-pool
resources, on the other hand, one person’s consumption is definitely subtractive. One should
expect different kinds of behavior when individuals are dealing with different types of goods and
the production and appropriation functions that are involved in a particular problem.

Further, since a change in the number of individuals benefiting from collective action always
implies a change in at least one other key variable needed for predicting behavior and outcomes,
extreme care has to be taken in drawing conclusions about the effect of size of a group without
specifying what else has been held constant and what has been allowed to change. And, one
should expect that the impact of the size of a group on successful collective action depends to a
large extent on how the network of relationships within a group and the linkage of some
members of that group to others outside a particular group (Krishna, 2000a, b).

Another key building block of a better theory of collective action, as briefly discussed above
is a specification of the “types” of individuals involved in a collective-action problem. Olson
used the standard economic model of individual choice to characterize all participants. Rational
individuals are posited to have fixed preferences that include only those benefits that they
themselves will receive and only the costs of the actions they themselves will pay.
Contemporary theoretical developments enable scholars to develop more encompassing theories
that assume multiple types of individuals—some of whom are not entirely self-seeking.

A further essential building block affecting the context of a situation is the capacity of
participants to change the structure of the situations they themselves face. In order to prove a
logical result in a single-layer game it is necessary to assume that the structure of a situation is
exogenous and held constant. It has also been assumed that changing the structure is itself a
second order social dilemma and that individuals are no more likely to solve this problem than
the first-order problem they initial face. However, the production function to produce a revised
set of rules may be more conducive to successful collective action than the production function
of the initial social dilemma. Consequently, one way that many groups eventually solve
collective-action problems is to change the structure of their own situations so that the continuing
collective-action problem is “solved” through the creation of new incentives that can be
monitored and enforced by the participants themselves.

This makes the study of federal systems of governance, where individuals opportunities to
organize themselves at multiple scales, an important element of future efforts to build social
28
capital. Further, it is important for scholars and policymakers not to presume that firm
boundaries exist around the public sector as contrasted to the private sector. Polycentric public
economies—as contrasted to strictly private economies or “the state” are an important
component of contemporary dynamic systems that can adjust to new problems because of the
complexity and diversity of their scales (see McGinnis, 1999, 2000). By providing the
institutional environment in which individuals can create new private, public, or mixed
enterprises designed to cope with specific problems and opportunities, a national government can
greatly enhance the social capital of its people.

7. Why is Social Capital Important in Modern High-Tech Economies and Polities?

While many scholars today acknowledge the importance of building social capital in
developing countries, some still remain skeptical of the importance of building diverse forms of
social capital in modern societies given the substantial physical and human capital that exists and
the presence of extensive formal laws. We briefly discuss the role of social capital in
technological innovation and in regard to the Internet as examples of the relevance of social
capital to modern times.

Social Capital and Technological Innovation

The performance of advanced market economies depends to a great extent on successful

Industrial Research and Development (R&D) that requires coordinated efforts among scientists
and engineers inside a research unit and those among business, government, and academia. The
coordination efforts require networks that are a form of social capital. There are studies,
conducted from the perspective of social capital, on how the network characteristics inside a
research unit affect the performance of R&D efforts (Reagans and Zuckerman, 1999; Gabby an
Zuckerman, 1998). A more important form of social capital in terms of R&D is the network of
organizational actors at regional and national levels. This is an important area in which public
entrepreneurship can contribute enormously to economic development (Habisch, 1998).

More than a decade ago, based on a comparative study of the science and technology
strategies and priorities of France, Germany, Japan, Sweden, the United Kingdom, and the
United States, Lederman (1987: 1125) concluded that there was a new trend of which the
consequence needed to be seen.

Governments are trying to provide increased incentives for university-industry -

government laboratory cooperation and mobility of research personnel from one sector
to another. . . . The role of the public sector in these relationships tends to be that of a
catalyst with some funds supplied. These newer technical-development partnership
programs are mostly experimental in design and it will take several more years of
experience, data, and study to determine their effectiveness.

The consequences of the trends, a decade since Lederman’s observation, appear to differ
between the U.S. and the Europe. Recent economic statistics suggest that the downturn in high
technology industry is a major reason for the increasing unemployment rate in Europe (Rhoads,
2000). On the other hand, the U.S. has experienced an unprecedented economic growth and low
unemployment during the last several years. Fountain (1997) argues that social capital in the
29
form of horizontal connections among similar firms, vertical links in supply chains, and
multidirectional links to sources of technical knowledge, human resources, and public agencies
explains the strong resurgence of the U.S. economy. She reviews two cases of “best practices”
of recent coordination for R&D in the U.S.

• The Biotech Industry: Learning Networks

During the 1980s and early 1990s, the National Institute of Health played a vital role,
with its $65 billion support to research centers in universities and buffering institutions,
in the birth and development of the biotechnological industry. Especially in the most
research-intensive areas of the industry such as human therapeutics and diagnostics, there
has been a steady growth in the percentage of firms with formal and horizontal ties to
other firms in the same area, indicating an increasing connectivity and collaboration
among firms. As a result, those firms that collaborate externally tend to survive longer
and grow bigger. The number of firms in this area that do not have any external
collaboration has decrease from 62 in 1990 to 31 in 1994 (ibid.: 8-12).

• Regional Network-Based Industrial Systems: The Case of Silicon Valley

Silicon Valley in California and Triangle Park in North Carolina are exemplary cases of
successful networked systems of production that utilize geographical proximity in
building networks. Unlike the innovative networks in the biotech industry that connect
similar firms, the regional based industrial networks are based on collaboration among
three different, but highly related actors —firms, industry, and universities. The
collaboration provides a high level of efficiency, adaptability, and potential for
innovation. In Silicon Valley, the horizontal networking has become a norm at both the
levels of a firm and the industry as a whole. Firms have shortened the chain of command
and rely more on horizontally organized teams. The industry as a whole also shows a
low level of vertical integration. Various types of dense linkages among producers,
suppliers, and consumers form a rich system of networks.

Fountain argues that due to the intensified pace of technological change, the traditional,
bureaucratically organized firms with high level of vertical integration can no longer compete in
the market place. With this changing trend, the social capital in the form of networks among
firms, among industry, universities, and government agencies plays the vital role in the
technological innovation at the industry level and economic development at the national level.
She emphasizes the role of government as public entrepreneur in building social capital of this
nature.18 Examples include the U.S. Department of Commerce’s Advanced Technology Program
and Manufacturing Extension Partnership, both of which, in part unintentionally, brought a large
number of firms into cooperative networks.

Social capital can, of course, be used to restrain technological change when past social
capital has been the foundation for high levels of productivity in stable industries. Using a panel
of data on the twenty Italian regions for 1970-1995, Thomas Lyon (2000) found that Putnam’s
measures of social capital were significantly positive predictors of regional output. The
disturbing finding, however, was that measures of technological change in contemporary Italy
were strongly negatively correlated with all measures of social capital. Thus, once more we find
30
that social capital does not uniformly produce positive outcomes in all settings. Just as installed
physical capital can increase productivity but be a drag on change, social capital appears to have
a similar dual role.

Social Capital and the Internet

The innovations in computer technology and their application to everyday life have greatly
changed the way people communicate with others and organize themselves. The Internet, an
especially revolutionizing factor in the information age, “is at once a world-wide broadcasting
capability, a mechanism for information dissemination, and a medium for collaboration and
interaction between individuals and their computers without regard for geographic location”
(Leiner et al., n.d.:1).

The Federal Networking Council (FNC) defines the Internet as

the global information system that—(i) is logically linked together by a globally unique
address space based on the Internet Protocol (IP) or its subsequent extensions/follow-ons; (ii)
is able to support communications using the Transmission Control Protocol/Internet Protocol
(TCP/IP) suite or its subsequent extensions/follow-ons, and/or other IP-compatible protocols
and (iii) provides, uses or makes accessible, either publicly or privately, high level services
layered on the communications and related infrastructure described herein.” (FNC
Resolution: Definition of “Internet,” 10/24/95, quoted in Leiner et al., n.d.: 15)

As the FNC’s definition reflects, the Internet is by itself a network, an important form of
social capital—global social capital. But the fact that the potential for connection exists does no
guarantee that people will actually utilize the potential and connect to each other. Some people
use the Internet primarily as a means for information retrieval. The potential of the Internet as
social capital, or an innovative means for building social capital, depends on how the Internet
users build diverse “communities” of various scales.

Thousands of newsgroups in Usenet News represent a new way of building “horizontal

networks” using the Internet. Most of those newsgroups exist at the global level, though the
accessibility from some regions of the world is limited due to economic and political reasons.
Pruijt (1997: 5) reports a case in which the activities of one of the newsgroups resulted in a
successful collective action against a giant corporation. “In 1994, a user discovered a bug in the
Intel Pentium processor. This information was made public to a user newsgroup (comp.sys.intel
newsgroup), leading to a wide debate. Intel representatives tried to downplay the problem.
Mounting users’ protests, however, caused Intel to adopt a replacement policy costing $475
million.” In principle, this kind of consumer collective action is possible without the Internet.
But there is no doubt that the speed and scope of the Internet made the collective action
considerably easier and less costly to the initiators of the protest.

It is too early to judge the potential of the Internet as a means to build social capital at a
global level and the consequences of those kinds of social capital in the era of globalization.
Many forms of conflicts among human beings exist due to geographical division and lack of
communication. This gives a chance to opportunistic political leaders to rise to the power by
emphasizing the differences and creating tensions. The users of the Internet may not connect to
31
each other for the purpose of building global communities. But once they are connected to each
other, to share useful information or to pursue common hobbies, there is a chance that these
activities will help them to overcome the prejudices they might have against people from
different regions and cultures.

Global networks in various forms have always been an important means to advance
democratic and environmental causes. Conscious efforts have been made to build international
networks among democratic activists under authoritarian regimes and the NGOs in the first
world to support each other to publicize human rights violations and to share information. The
geographic distance and the limited freedom of movements those actors often experience po
significant, though not insurmountable, barriers to these efforts. During the last decade of the
twentieth century, the Internet has played an increasing role in overcoming those obstacles. The
Internet serves as an especially precious means of connecting to outside for those who have been
in the most disadvantageous positions. It affords the “possibility to circumvent traditional media
and government censorship, to organized across borders, and to voice their political opposition in
anonymity” (Everett, 1998: 8).

Edwards et al. (1999:18) reports an exemplary case:

. . . as access to technology grows, communities feel they can speak for themselves through
video and the internet as well as more traditional arenas such as marches and demonstrations
A recent internet conference in preparation for a UN meeting on women in Addis Ababa
found that—in contrast to most internet discussion groups—over 40 percent of contributors
were women from Africa, even though they are the group most excluded from resources and
technology.

Everett (ibid.: 9) points out that the efforts by the first world NGOs to help to publicize
legitimate concerns of the third world civilian groups can sometimes involve a paradox. She
introduces a case involving the Huaorani Indians in Ecuador and Ecological Enterprises, an
environmental group based in the U.S. The environmental group posted on their gopher a letter
sent by the Huaorani Indian leaders to the Maxis Energy Corporation protesting the corporation’
activities that destruct the Indian’s ecological and cultural basis. The Ecological Enterprises
urged people to write letters to the company and voice their support of the Huaorani Indians.
However, Everett points out that the Indians also wrote in the letter that no one should represent
them nor “speak in the name of Huaoranis without authorization.” Especially when those whom
the first world NGOs are trying to help do not use or do not want to use the Internet as their
means, “their movement could easily become coopted or dominated by foreigners.”

Pruijt (1997: 4-5) points out several possible downsides of the Internet as a form of social
capital. First, there is a trade-off between the openness and trust building. Networks as a form
of capital can often serve as a means of exclusion (Portes and Landholt, 1996). In that regard,
the Internet seems to have the advantage of openness. However, the openness can come at the
expense of low-trust. Many virtual communities do not require their users to reveal their true
identities. Even when they do, there are always ways to go around the requirement for
individuals with some degree of technological sophistication. How to establish mutual trust is an
important question for those hoping to use the Internet as a source of global social capital.

32
 Second, anti-social groups, such as criminal organizations and racist organizations can also
use the Internet to build negative forms of social capital. Third, as people spend more and more
time on-line, the traditional forms of civic engagements may lose their membership basis.
Putnam (1995) blamed the increasing time spent watching television as a key reason for
declining social capital basis in the U.S. Pruijt correctly points out that the increasing use of
Internet has two potential directions for development. The key question is whether the Internet
would replace television or community activities. If the former becomes the trend, there is a
good chance that overall stock of social capital will increase due to the Internet. Fourth, t he if
the Internet is perceived mainly as a means of commercial activities and the influence of the big
private capital over the Internet increases, the “social capital” aspect of the Internet can be
marginalized. This is quite possible in the long run, especially if the control of the physical
infrastructure of the Internet is handed over to private capital.

* * *

While this review has grown to a size that was not originally intended, we have tried to cover
the equivalent of several volumes within the context of a single report. We hope that by now the
reader accepts the concept of social capital as a useful concept alongside that of physical and
human capital. The role of social capital in helping to solve collective-action problems is one of
the important subjects of contemporary social science and public policy analysis. The
bibliography accompanying this report provides interested readers with an initial guide to this
extensive literature.

33
 Notes
1
“Social capital’s greatest merit, however, is that it provides a credible point of entry for
sociopolitical issues into comprehensive multi- and interdisciplinary approach to some of the
most pressing issues of our time” (Woolcock, 1998: 188).
2
James Putzel (1997) argues that Putnam “stretches the concept of social capital and trust to nea
breaking point.” Putzel then argues that using a single framework to account for the entire
gamut of political and economic performance is taking it too far.
3
For additional histories see Woolcock, 1998; Habisch, 1996; Harriss and De Renzio, 1997;
Wall, Ferrazzi, and Schryer, 1998.
4
Of course, deeper roots can be found in de Tocqueville’s Democracy in America (see
Siedentop, 1994; V. Ostrom, 1997). Jane Jacobs (1961) provides an outstanding analysis of
social capital in urban areas without actually using the term.
5
This section draws on E. Ostrom (2000).
6
Transformation activities take one set of physical inputs and transform them into another set of
outputs that may then be used in still further transformation activities or be finally consumed.
Transaction activities are the relationships among the individuals involved that take time and
energy to accomplish the transformation activities. See E. Ostrom, Schroeder, and Wynne
(1993) for a detailed discussion of transformation and transaction costs involved in the provision
and production of goods and services.
7
Parents often invest in the education of their children not only to enhance their children’s future
income but also to enhance the income of the parents, especially in developing countries. In
Zambia, Robert Bates indicated that:

Parents paid the expenses of educating [their children], imparting sufficient skills that they
could successfully compete for jobs in the cities of the Copperbelt. The costs of education
were high. . . . But so too were the returns. For adults devoted resources to their children not
only because they loved them but also because they expected later remittances of goods
(soap, bedding, building materials, clothes, and prepared foods) and money from children
who held jobs in the towns. . . . Taking into account the magnitude and duration of the costs
incurred in schooling, the period of waiting for a child to gain employment, and the
subsequent magnitude and duration of the payments of remittances, the rate of return to
expenditures upon children lay in the range of eight to ten percent. (1990a: 154-55)
8
John R. Commons (1957) stressed the difference between the plant, on the one hand, and th
going concern, on the other. The going concern included the working rules that enabled those in
the going concern to relate to one another in a productive fashion in using a plant.
9
There are several factors that lead to the current popularity of social capital approach not only
within the academics but also among policymakers. First, efforts has been made, as is mentione
34
earlier, to apply the concept of social capital in research related to important policy questions.
Numerous studies use the social capital approach in studies with direct policy implications.
Second, the concept seems to appeal to diverse ideological spectrum including “neoliberal
right—still skeptical about the role of the state—and to those committed to ideas about
participation and grassroots empowerment” (Harris and De Renzio, 1997: 920). Third, the
concept has intuitive appeal to people outside academia.
10
Barr, 1998; Hyden, 1994; F. Lyon, 2000; Narayan and Pritchett, 1999; Francis 1998; Widner
and Mundt, 1998.
11
Bebbington, 1998; Bebbington and Perreault, 1999; Ravnborg and Guerrero, 1998; Booth and
Richard, 1998; Fox, 1997; Molinas, 1998; Seligson, 1999; Durston, 1998, 1999; Katz, 2000.
12
Mearns, 1996; Enyedi, 1992; G. Easter, 1996; Neace, 1999.
13
Hagan, Merkens, and Boehnke, 1995; Sirianni, 1996; Brehm and Rahn, 1997; Lake and
Huckfeldt, 1998.
14
Krugman, 1993; Woolcock, 1998; Zeckhauser and Pollack, 1993.
15
Using one’s own view of what one would do in a situation has repeatedly been found to be a
good predictor of one’s expectations about what someone else would do in that situation. In
social dilemma situations those that choose the more cooperative strategies usually have a higher
expectation that others will also cooperate than those who do not cooperate (see Orbell et al.,
1984; Orbell and Dawes, 1991).
16
In spite of the persuasive theoretical scenario Putnam provides, the limited number of
observational units and the problems related to building composite measures of institutional
performance and civic-ness invite criticisms on the empirical validity of his study. There are
also criticisms on his account of Italian history (see Jackman and Miller, 1996, 1998; Tarrow,
1996; Sabetti, 1996).
17
See Brennan and Buchanan (1985), Buchanan (1975), Buchanan and Tullock (1962), and V.
Ostrom (1987, 1991, 1997) for a deeper discussion of the importance of constitutional choice for
the long-term sustenance of a democratic society.
18
For a discussion of public entrepreneurship more generally and its relevance to many aspects
of contemporary societies and economies see Kuhnert (2000).

35
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