SOCIAL CAPITAL IN ECONOMIC DYNAMICS: THE EXOGENITY OF
ECONOMIC INSTITUTIONS
Stefano Solari
University of Padua
1. Introduction: microeconomics, social capital and institutions
The concept of social capital (SC) was introduced by some sociologists who, while adopting
methodological individualism, were unhappy with its deficit in the account for the collective
and interactive nature of society (Coleman, 1988). As a consequence, they introduced SC as a
variable – including heterogeneous elements – in order to reconcile self–interest and social
relationships. In this way, SC has often been used as a summary indicator accounting for
different performance and for departures from material self–interest in individual choices as
well as for successful collective action.
The notion of SC has, in particular, met with the approval of socio–economists and scholars
favouring a pragmatic approach to economic issues. Most economists have been less
enthusiastic about this programme of studies (Arrow, 1999; Solow, 1999). Even those more
interested in the issue are puzzled by the use of the term capital (Bowles and Gintis, 2002 p.
420), some are geared to other strategies for inclusion of the social dimension in economics
(Manski, 2000) and others are reluctant to enter such epistemologically slippery ground.
Here, we will firstly focus on the epistemological concept of SC and on the theoretical issues
involved. We will argue that the study of social interaction is an important and unavoidable
microeconomic topic. However, the way most SC theorisations aggregate this variable
crowds out the structural view of the economics of institutions – which is situated at a
mesoeconomic level – preventing a sound dynamic understanding of economic processes.
On the contrary, the study of the embeddedness of the economy in society may benefit from
a connection between microeconomics and institutionalism. A separation between relational
and moral aspects of SC can help to reconcile the two approaches. Many traditions of
thought have focused on moral aspects of human action and on the role of values and rules
in defining individual choices. They may be the connection point between the two
theorisations. Finally we will discuss how this can fit into the Italian tradition of economic
dynamics.
2. The undefined concept of social capital
As a preliminary general definition of SC we adopt the one proposed in the “World Bank”
web site. According to the latter, the concept of “social capital refers to the institutions,
relationships, and norms that shape the quality and quantity of a society’s social
interactions”. SC is also responsible for enabling collective action since it is increasingly
evident that social cohesion is a critical variable for prosperity and sustainable economic
development. It is also specified that “SC is not just the sum of the institutions which
underpin a society – it is the glue that holds them together”1.
The aim of studying the embeddedness of the economy in society is not new: the tradition
stems from the German historical school and runs right through to Gunnar Myrdal and
This definition is the result of the interaction of a group of scholars headed by Ismail Serageldin and Deepa
Narayan, who manage the poverty reduction programmes of the same Bank.
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Douglas North today, not forgetting the many schools of economic dynamics2. However,
the introduction of SC has proposed a different epistemology to frame the problem. This
perspective evolved from Granovetter’s intuitions (1973; 1985) to a more individualistic view
in Coleman (1988) and focused on actors’ social ties as an “enabling device” to enhance their
returns by facilitating action. The result is a theorisation geared to introducing social
structure in the rational choice explanation of methodological individualism3. Such
contextualisation of self–interested man called for a variable to be included in choice theory
able to account for such factors. SC is precisely this variable and, in fact, represents a
“functional” view of social relationships interpreted as instrumental for individual interest.
At the same time, as Coleman (1988) explicitly puts it, SC is the complement to human
capital, the latter being ineffective without the former.
Regarding these first points, however, SC studies have not provided a clear and consistent
view. Coleman (1988) proposed a notion of SC as individual endowment, but at the same
time defined it with collective elements such as trustworthiness of structures, information
channels and norms. The definition of SC as an individual resource remains slightly
ambiguous also in Coleman (1990). It becomes definitely confused with the two most cited
works in this field by Putnam (et al., 1993) and Fukuyama (1995) which displayed a further
shift in the definition of SC. In fact, such works did not necessarily follow methodological
individualism by reducing SC to two more variables: networks and trust. In particular, as
argued by Lin (2001), the habit of taking proxies of SC in some of its presumed
consequences also in its theoretical elaboration confused the levels of description and made
SC a kind of irrefutable argument. The result was the spread of SC studies with shifting
definitions of the fundamental concept from people’s attitudes to aggregate properties of
economic systems, and an unscrupulous oscillation from methodological individualism to
mesoeconomic aggregate analysis and even some fall–back to standard sociological
explanation.
There are some inconsistencies in relating an individual potentiality to a network or to trust.
In the former case, we would not compulsorily expect an individual resource to result in
effective networking, nor the opposite. Networks may fail to be produced because of a
variety of other factors which are not SC: material impediments such as lack of resources to
start collective action, the existence of a reservation price to engage in collective action,
cheap formal alternatives to self–organised activities (the state), etc. Moreover, trust is not a
resource but a rational (in the case of reputation) or non–rational attitude towards risk. It can
be considered a consequence of SC, but it can also be explained in other ways (reputation).
Notwithstanding the epistemological difficulties of the variable SC, however, such studies
have produced a number of interesting results. Trust has been analysed in detail and its
relationships with social networks have been investigated. Fukuyama (1995) pointed out that
the fundamental element in economic development is the progressive extension of trust
from more immediate relationships of a personal kind to more formal and impersonal
market–friendly institutions which characterise industrialised countries. In this, he proposed
We refer to French structuralism, Walter Eucken (1951), the school of Del Vecchio in Italy.
Ben Fine (2001) argued that the way SC is modelled reinforces the separation of the economy from society
instead of contributing to integrating them.
2
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403
an interesting distinction between personal and institutional trust which has some
connections with Keynesian studies (Barbalet, 1998)4.
Another interesting use of SC concerns the difference between “good” SC – connected with
positive collective action – and “bad” SC such as Mafia and distributive coalitions (Olson,
1971; 1988). The former is conceived as displaying a horizontal type of network, the second
vertical (Serageldin and Grootaert, 1999). Further theorisation has distinguished the
“bonding” (group related) vs. the “bridging” nature of SC (opening relationships in space)
and the “linking” properties which connect different groups (Evans, 1996; Narayan, 1999).
Finally, Krishna (1999) proposed a distinction between the structural elements facilitating
interactions – institutions – and the “motivational” element such as values, attitudes, norms
and beliefs predisposing people to co–operation. However, we observe a widespread
tendency in such studies to take part of SC for the whole, qualifying the whole as good or
bad in relation to economic performance.
Some scholars have introduced different terms to indicate the same issue. Temple and
Johnson (1998) rediscovered the term social capability. Stern (1991) introduced the term
“social infrastructure” to identify social ties and underlined how they affect economic
processes by defining «the way business is carried out». He also includes in this variable
honesty, the definition and enforcement of property rights and the functioning of
bureaucracy. Stern’s definition represents an attempt to connect SC with the theory of
institutions. However, some difficulties exist here too, even though many elements of SC are
normally included in the category of informal institutions5. In general, institutionalists are not
contrary to calling institutions “capital”, but this does not help at all in their studies, nor does
it facilitate a connection between institutional studies and standard economics. Institutions
can be distinguished from other forms of capital because they are not resources; rather, they
exogenously “guide” the allocation of resources. Therefore they are best conceived as
mechanisms for resource allocation (Dasgupta, 2001). This distinction is valuable, and missing such
an aspect means reducing the analytical power of theorising.
Van Dijk (1997) argues that from an economic perspective we can supply three
interpretations of SC (and social infrastructure). Firstly, a way of making SC compatible with
economics is – as originally done by Bourdieu – to attribute a value to relationships for
individuals (Coleman, 1988; Snijders, 1999; Van Dijk, 1997; Glaeser et al. 2002). The
network of social relations pertaining to an individual therefore has a value equivalent to the
resources which can be extracted from it. This interpretation proposes a very instrumental
view of relationships and has the shortcoming of losing most of its “social” connotation in
terms of values and, at the same time, of being unaggregable because of its positional status
in many situations6.
A further perspective is that of conceiving the set of rules and laws of a people as an asset.
Del Vecchio, the father of the Italian tradition of economic dynamics, as early as 1933
identified social institutions as an essential immaterial capital of a society but considered it as
an extra–economic factor affecting economic change. This perspective, reproposed by
Knack and Keefer (1997) underlined how the former can be a substitute for the latter addressed to formal
markets.
5 They share a cognitive definition: common knowledge, systems of meaning, behavioural rules and collective
expectations which reduce uncertainty.
6 Glaeser et al. (2002) and Van Dijk (1997) nonetheless provide a collective definition of SC where the
aggregation process is unspecified to avoid specifying the technique.
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Buchanan (1975) and endorsed by Brunner (1987), has been recently rediscovered by
Coleman, Ostrom and North. This view, contrary to the former, has a collective nature.
However, the absence of a reasonable metrics to quantify such stock represents the main
shortcoming which leaves it as a purely metaphoric way of reinforcing other theoretical
points in the arguments of such scholars.
Finally, also the organisational capability has an economic dimension. However, this is a
well–studied phenomenon in economics and in organisational studies as well as in industrial
economics. The dynamic capability approach (Teece and Pisano, 1997) in a certain sense
develops this perspective by relying, as a theoretical standpoint, on untradable assets
embedded in organisations.
The most important fact is that SC studies bring out an important issue still not widely
studied in economics: the qualitative dimension of social relationships. Without a single clear
definition of SC, however, there is the risk of all this work remaining unorganised, non–
cumulative and unsystematic. If we adopt methodological individualism for its analytical
rigour, it would be detrimental to then lose meaningfulness in the “ontological” definition of
variables at stake.
3. Some theoretical weaknesses of social capital
Many economists share the opinion that some “social elements” are important in the
working of the economy, but although SC studies were introduced from an individualistic
point of view, they display some perplexity with regard to this concept.
The main objection is that SC includes heterogeneous elements which cannot be aggregated
(Dasgupta, 1999; Paldam, 2000; Van Dijck, 1997). Dasgupta affirms that SC encourages the
amalgamation of beliefs, behavioural rules, capital assets and interpersonal networks without
mentioning how they relate to each other. However, this was precisely the theoretical
strategy of Coleman (1988). In fact, he affirmed that
By identifying this function of certain aspects of social structure, the concept of social capital constitutes both an
aid in accounting for different outcomes at the level of individual actors and an aid toward making the micro–to–
macro transitions without elaborating the social structural details through which this occurs. (1988, p.101)
Therefore, according to Coleman, SC is the result of a summary view of individual social
endowments, an attempt to bypass analytical studies of social structure. The problems arise
when we try to aggregate such individual attributes to single out some collective properties.
The aggregation problem becomes harder when we insist on individual SC as a means of
extracting resources from the network. In fact, if we suppose a ceteris paribus hypothesis – as
usual – stating that resources are limited, the fact that one individual can increase his share of
resources by raising his connection with other actors does not mean that increasing
connections of all individuals would improve the amount of wealth. Many elements of SC
may well be positional goods, which are offset in aggregation. This is particularly true for
some factors belonging to the category of status, information channels and obligations which
produce a relative advantage for the single actor, but which is often at the expense of others.
In order to increase resources, SC should be seen as a factor of production, but the
technology of production should be explicated.
A logical aggregation problem arises when we add a cause to its effects, a capability to its
structural outcome. SC is sometimes understood as an immaterial asset such as knowledge, a
motivation or a disposition, but at the same time it is also represented by rules, institutions,
networks and collective action. The danger is when the two levels are amalgamated, because
SOCIAL CAPITAL AND ECONOMIC INSTITUTIONS
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different causes and their many effects are taken together without any distinction: anything
adds up to the social endowment called SC. As a consequence, the information concerning
complementarities between social elements and economic resources is assumed as irrelevant7
in favour of an amalgamation of factors. In this case SC, instead of being a simplification of
the social structure, becomes a misinterpretation of it.
Some attempts to unravel the entangled variables at play have been made by Paldam (et al.
1999; 2000) who makes a preliminary distinction between elements relating to trust and co–
operation from those pertaining to networks and social relations in order to measure them8.
Both families can be, and have been, framed in economic models, the former in the studies
concerning strategic choice (game theory), whereas the latter has been formalised in
sociology since the 1950s and is often treated in quantitative terms measuring the density and
the patterns of connections (Burt, 1999). However, the same category of “trust and co–
operation” is difficult to analyse from an aggregate point of view because it is not at all clear
if such factors can enter an aggregate production function as independent variables –
measured as such – or if they are factors which reduce transaction costs by favouring
monitoring and commitment, in which case they are treated as parameters.
The second criticism concerns the “capital” label. It constitutes an “isolating abstraction”9
strictly related to the previous point. Here economists are divided. Buchanan (1975),
adopting a perspective of rule–utilitarianism, argued that the set of rules of a society is a
form of capital. However, Solow and Arrow manifest some perplexities concerning the use
of this concept. Arrow (1999) argues that it would be better to abandon the capital
metaphor. In order to be a capital, it would imply an extension in time, a deliberate sacrifice
in the present to raise future benefits, and tradability, which are not features of social
elements. In fact, most of these relationships are constituted for reasons different from their
value. Solow (1999) insists that there is no depreciation and no profit rate from what can be
best understood as “patterns of behaviour”. As a resource we would expect some
diminishing returns from its use, but this is not analysed in the literature (Piazza–Georgi,
2002). Stiglitz (1999) does not share Arrow’s and Solow’s perplexities and he affirms that if
SC has an opportunity cost, then it is a form of capital. Moreover, it is a production means
because it represents a fundamental feature of economic processes.
However, Paldam and Svendsen (1999 p.10) insist that SC is accumulated and consumed like
any capital and that it can be considered a production factor. The weakest point is how it is
produced. Physical capital is due to tangible investments even if there may be difficulties in
separating it from consumption. In the case of SC there is not always an explicit purposeful
and organised production process and it is often the secondary product of other activities.
Neither does Putnam (1993) give great support to the analogy with capital since he affirms
that SC is the result of processes lasting centuries and therefore investment flows are
negligible in relation to the stock. This fact stimulated Warner (2000) to ask himself why we
should consider this factor a capital if we cannot accumulate it where it is lacking.
This is, however, a central point in Aoki’s comparative institutional analysis (2001).
Also Dasgupta, who is more sceptical about measuring SC, points out and discusses a long list of elements
already included in economic modelling which comprise some of the features of SC: trust, reputation, the co–
operation problem, spontaneous enforcement, the role of social norms, etc.
9 See Schlicht (1985) on isolation principles in economics.
7
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However, as Gui (2000) points out, aspects of SC are often best understood from the
production side rather than from choice theory10. The fundamental idea is that any social
interaction can be seen as a production process where the meeting of individuals results in
some intangible output with a relational nature. Such goods may eventually be simply
consumed or used as further inputs of production. In this way relational goods may build up
rapidly, but their relationships with other inputs or outputs are not as straightforward as the
perspective proposed by SC studies.
Accumulability remains a controversial issue in the works of sociologists11 and most of them
argue that some SC components build up rapidly with use. This, however, does not improve
the point that capital is a good concept for mastering such issues. In fact, the basic features
of many elements composing SC such as the fact that they are reinforced with use instead of
wearing out, or the fact that they have to be shared or reach critical masses, have been
overlooked in favour of a simple conception of an unspecified accumulable asset. We would
argue that most SC aspects are more easily understandable by frequency–dependency models12.
A special issue within SC studies is trust, which is attracting an increasing number of
experimental studies. When we enlarge the perspective from specific relationships, the
concept of trust also becomes slippery. On the one hand, there is an economic rationale
behind this concept as well as some empirical studies. On the other, it makes no sense to
refer trust to an economic system, to a territory or to any economic aggregation. The studies
on industrial districts and clusters of firms firmly embedded in their territory as milieux
innovateurs have theorised that many of the external economies of firms derive from or are
facilitated by cultural factors (proximity, local density…)13. Such sharing of cultural elements
speeds up information circulation and helps reputation mechanisms. Trust is a part of these
mechanisms because it reduces transaction costs. However, local culture represented by
norms, systems of meaning and other social traits can be best said to represent the local SC,
trust being an emergent phenomenon and part of a circular causation process.
4. The findings of empirical studies
Many scholars try to overcome these problems by passing directly to the empirical
estimation14. In fact, the attempt to define the impact of SC on the economy is attracting an
increasing number of studies. The review by Knack (1999) highlights the wide variety of
attempts to connect economic performance with variables representing culture, politics and
societal organisation: some results can be found, but Knack admits that the SC debate would
best refer to more specific levels of description which are best presented in case studies.
Knack and Keefer (1997) argue that trust and “civic co–operation” are associated with a
higher economic growth, but the direction of causation is not clear in econometric
estimations: it could well be growth which improves such variables. In this case, SC would be
a kind of luxury good. Contrary to Putnam et al. (1993), they find no relationship with the
activity of organisations. Trust and co–operation are stronger in countries where institutions
defend property rights and enforce contracts, as well as in regions with fewer ethnic or class
The economics of interpersonal relationships (Gui, 1997; 2000) studies the concept of "relational good"
(Uhlaner, 1989) to include social relationships in economics.
11 Many criticise Putnam for this reason.
12 Such models, made famous by Hacken in the study of laser light, are relatively simple and allow for
formalisation (Witt, 2003).
13 Camagni (1991); Becattini et al. (2003); Solari (2002).
14 Solow (1999) was critical towards this attitude defining it a “casual empiricism”.
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SOCIAL CAPITAL AND ECONOMIC INSTITUTIONS
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divides (Keefer and Knack, 2002). Alesina and La Ferrara (2000) reinforce such findings by
showing that the participation in organisations is stronger where racial, census and ethnic
homogeneity is higher. Zak and Knack (2001) try to measure the effect of trust on
investments and growth. They find a positive relationship, but the causality may be inverse:
investments produce trust. Two of the “hierarchic” religions (Catholic and Muslim) are
negatively associated with trust. However, the trust indicator collected appears ethnocentric
because it does not take into account the different social expectations induced by different
cultures15.
In general, every study finds that variables indicating social homogeneity are correlated with
trust, equality and homogeneous geographical distribution of income. The only robust
conclusion, however, is that a low trust poverty trap exists: homogeneous societies with credible
institutions produce both trust and growth.
After his first study on Italian regions (Putnam et al. 1993), where he argued that a
relationship exists between civic culture and growth, Putnam comes back to such issues
considering the US. In Bowling Alone (2000), he argues that North–American SC is declining
and provides plenty of evidence from participation in civil society organisations.16 Actually,
as Sobel (2002) underlined, he does not really account for the parallel change in technologies,
preferences and organisation in the production of public goods. In fact, production of the
latter has been progressively delegated to the state or to the market by institutionalising these
types of services in formal organisations which best fit the new context demanding a high
mobility of labour. Costa and Khan (2003), in fact, find that increasing female employment is
important in explaining the fall in U.S. SC. In general, it is not surprising that membership of
associations declines in many sectors because all the technological transformations as well as
those concerning the organisation of work imply a rising individualism, which has a fallout in
the organisation of free time. Buchanan (1978) had already predicted that the rising
anonymity due to the population increase, to higher mobility and urbanisation would have
weakened moral rules. However, we would simply say that the form of social relationships is
changing with context. It is arbitrary to affirm that SC is declining because it depends on the
aggregation technique of variables which are compressed in a single measure. In fact, what is
not really convincing in Putnam (2000) is his need to aggregate such variables to produce
some useful assertion. The simple findings concerning the changing specific configurations
of social relations are valuable and may be useful in disaggregated terms to find
complementarities with the evolving economic structure. The controversial epistemological
issue is still the “reduction” of a plurality of elements to a single dimension.
The best expression of SC studies is, however, achieved through case studies. In such works
SC is normally understood as the capability to work in a collaborative setting overcoming the
standard disincentives to collective action. This kind of study is best represented by the work
of Elinor Ostrom, and in fact most case studies are performed by development economists
in communities of less industrialised countries or by sociologists in degraded urban areas17.
The metrics able to capture different answers to the same question posed in different countries is crucial. The
indices are collected by the World Values Survey organised by Ronald Inglehart. The problem is that Catholics tend
to complain a lot about the reliability of other people, but they also tend to expect more from others than people
from individualistic (Protestant) societies.
16 Prophesising the decline of our societies is a recurrent tendency, from Spengler to K. Polanyi and now Putnam.
17 See Ostrom (1994; 1995), the web site of the World Bank and the Journal of Socio-Economics where many issues
are devoted to these themes.
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To conclude, the attempt to establish some relationship between economic performance and
some proxies of SC produces some results. However it is not at the aggregate level that such
studies appear relevant, since the same notion of SC is not at all important for achieving such
findings. Moreover, to look for SC at the aggregate level may also be contradictory if it is
true that it is eroded when social groups are wide or their composition varies (Ostrom,
1995). Case studies therefore seem the best way to study this concept.
5. The study of the embeddedness of the economy in social relations
The studies proposed by the research area of SC therefore present a strong interest due to
the relevance of the topic; however, they also display three basic difficulties: the vague
definition of the object of study due to its heterogeneity, the inconsistencies resulting from
aggregation of the individualistic notion of SC and the analytical relevance of using the
concept of capital. The fundamental problem is represented by the epistemological
assumptions (or lack of assumptions) of the SC research programme concerning the
reduction of a multiplicity of factors to one variable. This was an instrumental strategy of
Coleman (1988) functional to the study of human capital, which becomes analytically
unmanageable when SC is attributed to groups and other aggregated levels of inquiry.
However, the effect of SC studies of turning the attention of economists to the study of the
embeddedness of the economy is fully appreciable.
As a consequence, in order to master the study of the embeddedness of the economy and to
connect individual choices to emergent structural regularities shaping economic interactions,
a basic distinction can at least be drawn between structural and motivational elements of SC
(Krishna, 1999). The former is closer to the microeconomic idea of incentive, the latter is
connected with the concept of preference 18. A similar distinction was proposed in economic
dynamics by Demaria (1973) by propagators and entelechians19. The separating line is a crucial
theoretical point for economics as well as for social philosophy in general, as it was the
distinction between ethics and law in Kant. Even if heterogeneity remains after this
distinction, the problem may become more manageable: rules, networks, information
channels and institutions on the one hand, values, trust, norms, attitudes and beliefs on the
other. Both classes of elements can be studied at the individual level by the “enhanced”
microeconomics of social interaction or at the emergent level by institutional economics,
adopting two different but coherent epistemologies.
On the contrary, current SC studies have in a certain sense invaded these two domains of
economics. The result has been a powerful stimulus to develop the microeconomics of social
interaction20, while institutional economics have been somewhat crowded out by the
aggregated SC approach which, in its sociological part, provides an alternative aggregate
perspective. The main point of this paper is that despite the methodological differences,
there would be positive progress if “social” microeconomics could find a way of connecting
with institutional economics to provide a perspective able to study the embeddedness of the
economy in the critical juncture between the micro and the structural levels, between
motivations and rules.
See Glaeser et al. (2002) p. F443.
See also Cantarelli (1957) for a view of elements included in the two categories and Agnati (1996) for an
application.
20 Which, however, still lacks well-defined connections with some important concepts such as that of values.
18
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We firstly discuss the opportunities for enlarging standard microeconomics to understand
social interaction beyond the material dimension. The aim is to include the effect of
structural elements on individual choices and to understand how to endogenise values and
norms. The basic idea is that social ties and individual values can affect economic behaviour
even if they do not provide any material benefit. As a consequence, they may display
opportunity costs. However, the difficulty in treating them is that they represent non–
rational factors in economic reasoning. Therefore, the alternative economists face is whether
to rationalise them or to study affective choices and value–driven behaviour as primary
decisions which have economic effects. There have been no clear–cut positions, but
institutional economics tend to conform more to the latter, while scholars more interested in
purely microeconomic aspects favour the former.
In both cases the concept of self–interest is reinterpreted in a less materialistic way than is
often proposed nowadays. The consequence is to reduce the separation between
psychological elements and the venal dimension. In this way social ties may provide utility per
se and not as instrumental means to achieve pecuniary ends. In any case, there are many ways
of modelling their effects in microeconomics and, indeed, many economists have produced
models including such factors. VanDijk (1997) considers that from the microeconomic
perspective, social ties may display the following properties.
1. They affect individual aims, and therefore they constitute an interdependency of utility
between individuals.
2. They may produce a mutual influence between actors at the level of selective
interdependence of preferences.
3. Social ties affect expectations about other people’s behaviour (instead of objectives, in the
case of the weakest ties).
4. Ties are opportunities, they represent communication channels determining the flow of
both parametric and structural information.
They may consequently display many economic consequences. First of all, they are a form of
satisfaction in themselves without affecting nominal income. Social ties may raise reservation
prices for some valuable option, or they may produce some trade–off between income and
the tie itself (if the time dedicated to the former is at the expense of the latter). Secondly,
they contribute to the local production of public goods and if the latter are inputs of
production, then output is positively affected (World Bank view). If they are factors affecting
productivity and production costs, they directly or indirectly enter the production function.
Thirdly, if they reduce transaction costs and contribute to the regulation of social
interactions by defining and enforcing property rights, then they represent a reduction of the
cost of external institutions (the model of the industrial district). It should in any case be
remembered that they produce a structural inertia which may be positive in some
circumstances, but which could be a rigidity factor, also generating a lock–in situation which
reduces the reallocation efficiency of the other economic resources21.
When interpersonal relationships are endogenised in an economic system, the form of the
patterns in which social relationships are organised is more important than their quantity.
Comparative institutional analysis studies the complementarity between such patterns and
other economic factors (Aoki, 2001). However, the real opportunity to understand the
relevance of social ties lies in the possibility of connecting micro behaviour to
This issue is nowadays less considered, but it was central in economic development literature before the 1970s
and in particular in works such as Kapp (1963) and Myrdal (1957).
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mesoeconomic regularities which structure the economy: institutions. The possibility of
developing this connection depends on the opening of microeconomics to wider forms of
rationality and the incorporation of customs, values and motivational aspects into the core of
economic reasoning. Therefore, the second issue microeconomics of social interaction faces
in order to tackle the social embeddedness of the economy is to endogenise cultural and
motivational aspects, which are always taken as exogenous by all other fields of economics.
This endogenisation has an important implication: we may obtain economic results by
modifying values by education22. The time dimension of these changes compared to
economic processes is, however, quite different.
6. Economics, values and sense of community: Kantian rationality
First of all, we define values as “regulating ideas” residing in the consciousness of an
individual affecting his judgements and his behaviour23. Values are not extraneous to
economic theorising, especially in continental European thinkers (ethical economy)24. In fact,
values were an important element for theories affected by idealistic philosophy (German
historical school) as well as, later, for those affected by pragmatism (institutional economics).
In the German historical school the concepts of ethical system and moral order were
fundamental elements for understanding the structure of the economy (Koslowski, 1995). In
particular, Wilhelm Roscher and Karl Knies have contributed to theorising of the “sense of
community” which, according to Pirker et al. (1998 p. 417), is the actual foundation of
institutions.
This is a principle which “corrects” self–interest by referring to a form of rationality that
includes a collective dimension. Kantian rationality has often been considered in economics to
connect individualist explanations with rule–based pro–social behaviour25. From this point
of view, a rationality filtered by collective reasons allows co–ordination of individual
behaviour via a universal moral. This logic introduces a relation between means and ends
which necessarily requires reflexive reasoning or, at least, some reference to rules. It is a form
of rationality which relates the individual level to the expectations of collective behaviour in a
less pessimistic way than standard rationality. This theoretical construction is probably the
most practicable way of permitting a connection between values, norms and rules (Sen,
1982). We can point out five features of this interpretation of rationality which make it viable
for this kind of study:
1.
It is compatible with methodological individualism since the cognitive process is that
of a single actor.
2.
It includes a reference to community and to collective rules thanks to the perception
the individual has of them.
3.
It induces self–binding to an acceptable behaviour and is therefore compatible with
freedom.
4.
Morality and rules become rational because there is an interest in respecting rules,
and this can help overcome critical situations highlighted by standard self–interest in
strategic behaviour.
This moves the perspective to a point of view closer to the social philosophy of Jean Jacques Rousseau.
This definition has been inspired by the neo-Kantian philosopher H. Rickert.
24 This issue is central in economic thinking from Aristotle onwards. Smith showed a similar interest but he was
not able to eliminate the disconnection between his theory of moral sentiments and the wealth of nations.
25 The a priori Kantian categoric imperative: "So act that the maxim of your will could always hold at the same
time as a principle establishing universal law." (Critique of Practical Reason).
22
23
SOCIAL CAPITAL AND ECONOMIC INSTITUTIONS
411
5.
The interiorisation of norms reflects to a certain extent collective norms or vice versa.
This can help in studying the structuring of society and the evolution of norms.
Internalised moral norms relate to socially enforced rules through processes of legitimation.
Changes in the shared perception of acceptable behaviour drive evolution of the community
institutions. As a consequence, cultural dynamics, understood as a fundamental phenomenon
by the Historical School and which has survived in institutional economics, is an important
phenomenon in this field 26.
The study of the role of values in economics has also been kept alive by another long
tradition of studies, the “liberal federalism” often interpreted according to Catholic principles
(Bastiat, De Toqueville, Röpke27…). Röpke (1960) affirmed that economic life does not
unfold in the absence of a moral which grants social integration and which is a precondition
for economic co–ordination. The economic order requires some solid ethical foundations
which are far more important than any economic law or principle of political economy. This
ethical perspective has been maintained by Hayek (1967) who argued that a free society
works well only where the free individual action is guided by strong moral beliefs. A similar
interest is alive today also in Anglo–Saxon countries in studies on the “rationality of co–
ordination” such as the principle of we–rationality of Sugden (1996) or in scholars proposing a
“self–interest rightly understood” (Uslaner, 1999).
7. Values and motivation in microeconomics
An explication of how rules can be integrated in economic models of choice has been
proposed by Brunner (1987, p. 382)28. He argued that “the inherited social capital of norms
and rules” affects individual behaviour. This happens via the more or less conscious
acceptance of norms and rules as a part of constraints or preferences. The latter emerge
from individual interactions and the prevailing values are strictly related to the actual
institutional configuration. Rules determine the set of opportunities and then the choice
between the fields of preference. Consequently, social order affects economic choices in two
ways: firstly, rules determine the opportunity set and secondly, norms affect the choice
between the opportunities of the set by modifying preferences. From a technical point of
view, a change in values may be represented as a change in the preference field, which
implies a modification in the optimal choice even with unchanged constraints. Alternatively,
a change in the optimal choice may be induced by a modification of constraints, which may
result in a variation of relative valuations (marginal rates of substitutions) of opportunities.
Therefore, in the latter case, we can obtain different relative evaluations with the same
system of preferences by widening the opportunity set and according a fuller possibility of
expressing preferences. However, although standard microeconomics can include values in
its toolbox, it has difficulties in endogenising such factors and in describing the evolution of
rules and norms.
A way of endogenising and representing values formally (mathematically) and elegantly was
proposed by Sen (1982). In fact, he formalised the problem by interpreting values at the
individual level as second order preferences or meta–preferences. This is a recursive application of the
In particular, K.W. Kapp (1961; 1985) conceived culture as a structure connecting symbols, people, goods,
values and institutions in a unitary whole.
27 Actually he was not Catholic, but quite close to these values.
28 Brunner continued a line of reasoning started by Meckling (1976).
26
412 STEFANO SOLARI
concept of preference ordering to itself using the theory of logical types29. According to Sen,
given X, the set of all possible results of choices, and π, the set of all possible orderings of
the elements of X, a moral order can be defined as a “quasi” ordering Q of the elements of π.
He considers a “quasi” order since it is a reflexive and transitive order relation, but it is not
necessarily complete because moral visions are not so. In this way we obtain a judgement of
preference orderings.
The stability of metapreferences becomes a fixed point in the evolution of choices and a
guide in choices of not perfectly known products (consumer learning). It also allows the
endogenisation of rule change by connecting values and rules. Finally, the alignment of
metapreferences represents a requisite for the existence of shared norms and values in a
community.
The basic problem concerning values is how far they are compatible with economic self–
interest. The answer was provided by Gary Becker (1996 p. 139) who, in the revision of his
Nobel Prize award speech, affirms that unlike Marxist analysis, the economic approach he
refers to does not presuppose any materialistic egoism. Economics, according to Becker, is a
method of analysis without a particular hypothesis concerning action motivation. Therefore
Becker hypothesises that individuals maximise their welfare as they conceive it, whether they
are egoists, altruists, loyal, respectful, naughty or masochistic (Becker, 1996 p. 139). No
problem therefore exists with utility functions including social behaviour. In particular,
Becker (1996 p. 225) argues that
Norms are those common values of a group which influence an individual’s behaviour through being internalised
as preferences. (…) It is easy to appreciate the social contribution of many norms since they combat the tendency
to free ride by internalising particular values in preferences.
This view is adopted by Fehr and Fischbacher (2002) who argue that individuals are not only
motivated by material self–interest, but they also have “social preferences”. This definition
reproduces, from a slightly different perspective, Harsanyi’s (1955) (normative) distinction
between ethical preferences and subjective preferences, where the former include impersonal
considerations about what is good from a social point of view30. They adopt a “Kantian”
view, but they do not develop values as an ordering principle which grants coherence
between the two kinds of preferences31.
The fundamental problem, therefore, remains how values and norms can be included in
preferences. Bruno Frey (1997) proposes a more concise method, in relation to the more
formalised idea of Sen, which is based on the concept of “intrinsic motivation”. It leaves the
relationship between motivations and values or norms analytically undefined, which can be a
stimulating field of studies. This is particularly interesting because it equally permits the
connection of individual motivation with the configuration of social relationships. In fact,
Eichenberger and Frey argue that:
The traditional rational choice approach, which has successfully been applied to many social problems (…), is ill–
equipped to deal with governance issues in which intrinsic motivation plays an important role. Sure enough, the
traditional Homo oeconomicus model does not deny that people’s behaviour may be influenced by intrinsic
motives such as civic virtue. But it dismisses intrinsic motivations as either unimportant and fickle or robust but
This theory is due to Whitehead and Russel and was adopted also by Hirschman (1984) who, however, does
not appear to fully exploit the implications of this way of reasoning.
30 However, Harsanyi acknowledges Harrod’s paternity of this distinction.
31 Otherwise some inconsistency may arise if the two kinds of preferences interact. This applies also to Vanberg
and Buchanan’s constitutional approaches (Vanberg, 1994).
29
SOCIAL CAPITAL AND ECONOMIC INSTITUTIONS
413
invariable. Thus, traditional rational choice theory overlooks the systematic relationship between intrinsic and
extrinsic motivation mentioned above. (Eichenberger and Frey, 2002 p. 269)
This kind of theoretical construction underlines how individual behaviour is determined by a
series of complex motivations which may perhaps be difficult to grasp also from Sen’s
approach. What Frey and his collaborators tend to show is that monetary incentives
(extrinsic motivations) may crowd out intrinsic motivations to action32. Moreover, the latter,
according to Bohnet and Frey (1997), are favoured or discouraged by institutional
configurations. For this reason, such authors study some “motivation–compatible
mechanisms”, some institutional configurations or interaction schemes which encourage
individuals to express behaviour in line with their intrinsic motivations. Institutional
frameworks designed to prevent opportunism may crowd out civic virtues of citizens and
co–operative efforts in general. As a consequence this area of study tries to connect the
theory of intrinsic motivations with cognitive psychology (Lindenberg, 2001). In particular,
motivations are related to a multi–level view of cognition where recursive processes are
introduced as in Sen’s theorisation.
“Second order preferences” and “intrinsic motivations” are only two of the many
approaches taken by economists to study the problems of socially oriented interaction. In
general, we can summarise, along the lines traced by Sen (1982), four ways of including
“social behaviour” in economics.
1. It may accidentally enter individual preferences.
2. An individual may be altruistic, that is to say, his wellbeing is functionally tied to the
welfare of other people or, at least, is negatively related to others’ suffering.
3. It can be the joint effect of social norms and reputation effect when actors respect pro–
social norms to obtain social approbation.
4. It may be the effect of reflexive rationality concerning the effect of actions when actors
behave in accordance with their view of social order.
Only the latter point may be an expression of “Kantian rationality” and “intrinsic
motivation” arguments with an endogenisation of norms. In point three norms are
exogenous. The second point does not necessarily provide any tool to connect individual and
aggregate outcomes and provides local equilibria only. Therefore only point four proposes a
view of economic processes able to study the interaction between individual choice and
social structure.
8. Conclusion: social capital and exogenity of institutions
Social interactions are the fundaments of the economy. However, their study is probably the
most problematic part of economics. The method proposed by the SC literature is promising
in as far as it provides a consistent categorisation of concepts. In SC literature we can find
some very good studies as well as some incongruent translation of concepts. Some aspects of
it, such as the aim of aggregating heterogeneous elements in a single stock variable, are
clearly unsatisfactory. Moreover, aggregated views of SC tend to be alternative to
institutional economics – which tends to study social interaction in its complexity – without
providing very clear answers to the problems.
The approach to social interactions advocated here is that of separating motivational aspects
and value–based choices from the role of structural elements such as relationships, rules and
32
This aggravates the already mentioned cleavage between income and factors included in SC.
414 STEFANO SOLARI
institutions. This distinction permits an understanding of interpersonal relationships avoiding
excessive reductionism. At the same time it is compatible both with the institutional view of
the economy and with the dynamic view of the economy which clearly distinguished
between exogenous elements as institutions (acting as propagators) and “vital” elements as
ethical preferences. The connection between values and rules can be assured by the concept
of Kantian rationality, which assures a reference to social rules of interaction. It constitutes a
long term feed–back of ethical elements on exogenous structural factors, driving their
evolution.
On the one hand, however, an enlargement of the notion of “interest” is in any case required
to understand social behaviour. What Uslaner (1999) calls “self–interest rightly understood” opens
up economics towards a Toquevillian model of man, that is to say a model of explanation of
human action where preferences are modified by social interaction. This improvement may
also see education as a valuable social and economic policy beyond simple competence
building.
On the other hand, institutional economics represents the natural way in which behaviours
can be structured to describe aggregate performances of societies. Institutions, in fact, are
empirically–based regularities of behaviour. As a consequence, we argue that such theories
are complementary, although epistemologically different. Social interaction microeconomics
requires the inclusion of rule–based interactions. Institutional economics, which is defined at
a mesoeconomic level, and from the methodological point of view is more pragmatic, needs
some microfoundation to justify how individuals are affected by institutions without
recourse to the “oversocialised man” model.
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Published in DINAMICA
ECONOMICA ED ISTITUZIONI
Studi in onore di DAVIDE CANTARELLI
A cura di - Edited by
ACHILLE AGNATI GIANDEMETRIO MARANGONI
ALDO MONTESANO ANNA PELLANDA
CEDAM, CASA EDITRICE DOTT. ANTONIO MILANI
2005