Social Capital, Networks, and Economic Determination (1)

This is where my PhD started. This report received a shockingly high mark (from possibly the best lecturer I have ever had: Dr Robert Lee of the Royal Holloway university, one of Britain's foremost researchers of social capital and entrepreneurship). Anyway, what followed from this was an MSc dissertation on Chinese networks. What followed from that was a PhD thesis: "Risk Management in Chinese Supply".

Innovation: the Classical Context

To Schumpeter, new and novel products were the raw material of industrial capitalism. Although Schumpeter claimed that most innovations are incrementally derived, his definition of innovation was inclusive, incorporating the introduction of new goods, development of extant goods, and creation of novel ways of working. Resources, and, crucially, combinations of resources, are a prerequisite of competitive advantage. It is through the formation of unique resource combinations that novelty and thereby commercial power is created. Absence of resources, or the actors who can combine them, amounts to absence of commercial vitality.[1] With this emphasis, Schumpeter diverts from Ricardian economic factors of scale and capital as explanations of economic strength, and steers instead toward admonition of the creative and innovative entrepreneur and his/her inchoate firm as the destructive-creative driver of capitalism.[2] But, since the individual is both the product and constituent unit of society, the nature of social formations in terms of contribution to innovation phenomenon merits scrutiny.

Social Capital

That unity and commonality within collectives engenders conditions that facilitate or impair economic activity is a rational assumption. Social infrastructure – whose qualities are broadly contingent on the literacy, reciprocity, and aspirations of the collective’s membership – can be regarded as a variety of capital, in that its features determine a capability for exchange of goods, labour, and other assets.

Based on the writings of the modern forefathers of social capital theory (Bourdieu, 1986; Coleman, 1988; Nahapiet and Ghoshal, 1998; Putnam, 2000; and Lin, 2000), the following amalgamative definition of social capital might suffice:[3]

A set of resources generated by and made accessible through informally connected individuals or groups.

One of social capital’s primary theoretical imports is the primacy of trust, which expands rational exchange by giving credence to motivators beyond the buy-sell dyad. Human interaction need not be reduced to expressions of utilitarian exchange alone. Social capital develops social exchange: relations form and evolve according to complex processes of socialization, obviating reductionism to facilitation-motivated rituals.

Transaction cost-based reasoning can be similarly extended. Arrow (1972) claimed commercial exchanges are critically dependent on trust, and environments where trust is scarce cannot be considered viable commercial environments. The inclusion of social capital liberates human exchange from theoretical adhesion to transaction-cost minimizing strategies: social mechanisms outside contractual methods of addressing market complexity, partner obligations, and myriad forms of spillover can now inform transaction cost economics.

[1] See A.1. for more details on Schumpterian innovation.

[2] Indeed, Spencer et al (2008) argue that it is the entrepreneur rather than entrepreneurialism that is key.

[3] See A.2. for details on the Marxist to modern transition of the term “social capital”.