Economics has recognized the importance of institutional contexts to economic development.
ECONOMICS HAS recognized the importance of institutional contexts to economic development. Property rights and their role in lowering the uncertainty associated with the interaction between economic agents have been accorded a central role in both theoretical and empirical analyzer of economic growth.
However, the prevalence of cooperative behaviour beyond the contexts justified by rational choice theory narrowly defined, suggests that the range of transaction cost reducing institutions may extend beyond property rights. One suggestion as to what form such additional institutions might take, has emerged from the analyses by Coleman (1988) and extended by Coleman (1990), Putnam (1995) and Fukuyama (1995) by analogy with notions of physical capital and human capital.
Social capital refers to features of social organization such as networks, norms, and social trust that facilitate coordination and cooperation for mutual benefit (Putnam 1995:67). The hypothesis has similarities with that advanced in connection with property rights, but is more broadly based. A range of social practices, values and institutions are held to serve the purpose of lowering transactions costs of interaction between agents. As a result norms of generalized reciprocity emerge between agents, what we might loosely term social trust.
Such social trust facilitates coordination, communication and thus resolves dilemmas surrounding collective action, reducing the incentives for opportunism (free riding). The consequence is greater certainty in transactions, making possible not only a more extensive array of social and economic activity, but allowing for more complex forms of organization to emerge, forms capable of acting in contexts which require economies of scale, or long time horizons. The corollary is that societies with high levels of social capital in the long term are more likely to experience economic success (and be better governed, safer, cleaner, even happier), than those with low levels of social trust.
The question, of course is what precise concrete forms such social capital might take, and how it might come to emerge. Coleman (1990) argues that social capital might include; obligations and expectations - which serve as a form of credit agents in societies with social trust may draw upon; information potential - informal social relations which store and impart information; norms and effective sanctions which serve as regulatory devices to constrain agents to act in the public interest, increasing the predictability of actions and lowering uncertainties in action; authority relations- which prevent agent from engaging in free riding; appropriable social organization - social organizations formed with a specific (limited) objective, which come to outlive that objective and serve as more generalized organizing mechanisms for a wider range of objectives; Intentional organization - specifically created to reduce transactions costs. All of these forms of social capital (end there may be more) serve to reduce the transactions costs of interaction between agents, and thus facilitate exchange.