Monday, April 17, 2006

Have the Returns to Social Capital Fallen?

In our discussion of social capital trends on Thursday, I failed to ask the two main questions that should have grounded our assessment of Putnam's arguments. I never explicitly asked whether or not the returns on individuals' investments in social capital have fallen and whether or not the costs of investing in social capital have risen? That is, we failed to completely discuss the trends in marginal benefits and marginal costs. Assessing these two factors is essential to determining social capital trends.

Putnam argues that several factors raised the cost of investing in social capital. Suburbanization and sprawl increased distances between people and raised travel costs associated with meeting others. Television, higher wages, and higher female labor force participation also substantially raised the opportunity costs associated with social engagement. (He also argues that a substantial portion of the decline stems from generational factors which I am not sure how to fit into the framework. I guess maybe different shocks changed the benefits associated with social engagement across cohorts.)

The trends Putnam discusses almost certainly affect social capital investments in the way he hypothesizes; however, observing trends which we expect reduce social capital does not imply that social capital declined overall. Other trends might offset these trends by lowering the costs or raising the benefits associated with investments in social capital.

In class, we discussed some of the ways in which communications technology changes the costs associated with certain social decisions. And while technology changes the composition of social networks and how people are tied together, it seems very likely that some of the increase in the cost of investing in social capital discussed by Putnam is offset by declines in the cost stemming from the use of technology.

There have also been significant changes in the expected returns to social interactions. Growth in service employment has likely raised the returns to social skills (and other forms of social capital) in the workplace. Specifically, office work requires large investments in social ties with one's co-workers and clients that needn't occur on an assembly line.

Further, to the extent that friendship is a normal good, we should expect that individuals demand more of it as their incomes rise. Also, if social interaction is complementary to other normal goods (like restaurant meals) we should expect higher incomes to increase the demand for social interaction.

Higher incomes, however, might reduce the need for favors and thus the need to invest in certain relationships (particularly with one's neighbors -- e.g., it used to be that Ed had the lawnmower and John had the leaf blower and they would borrow from each other, now Ed and John each buy their own stuff and needn't interact). Other economic changes like 24-hour markets and easily accessed emergency services also reduce the need to call upon neighbors for help (and thus the expected returns from interacting with them).

Returns from social networks also decline as a result of the development of more formal information signals. Investments in college degrees and high credit scores provide information that used to be informally stored and passed through social networks. When one's reputation (at least for certain things) is externally certified the need to make sure people know and trust you diminishes. Further, people may invest differently in their social capital because exploiting social networks to obtain jobs or capital has become semi-taboo (although it is still done extensively).

There are a number of other trends to consider, but the basic picture is starting to emerge. Social capital is more important, on average, in one's work and professional life than it used to be. However, in a number of contexts, market institutions have replaced social institutions substantially changing the returns to many forms of social investment and thus the composition of social capital. Such changes are clearly apparent in individuals' neighborhoods. Today, people rely on their neighbors for a smaller set of favors, and thus people are less inclined to "grin and bear" socializing with the random people who happen to live nearby. Instead, they choose to socialize with people who they know they like and who, because they have a great deal of shared interests, will involve them in very enjoyable (high return) activities and experiences.

These changes don't imply that individuals' stocks of social capital are smaller. People are likely to (and do) spend as much or more time engaged in social activities as they used to. They are likely to have as many or more social ties then they used to. However, who they are tied to, what ties them together, and the social skills necessary to make and maintain useful social ties have probably changed. Specifically, we have fewer ties to those who randomly share the same space. Thus Putnam may be right to worry. Many problems require collective action among neighbors and the coordination necessary to solve these issues is hindered by an absence of social ties. Specifically without norms of trust and reciprocity people are unwilling to compromise, skeptical of others motives, and lacking familiarity with certain social skills and manners that help govern the process.

While this specific trend may be undesirable, it is not obvious whether or not society as a whole is worse off. These bad effects may be more than offset by the good of being able to spend one's social time with people that you really like, etc. More empirical work is necessary to help clearly frame the full set of tradeoffs.

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