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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.

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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

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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 collectivetheories 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 firstgeneration 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 Trust and Reciprocity

Achieving 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-tooperational 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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