Business Columns & Blogs

Ed Lotterman: ‘Social capital’ still ignored by economists

I am trying to coordinate getting five people together to tear carpet and tile out of an education room at my church.

Meanwhile, a Catholic Charities facility a half-mile from my house feeds and houses 60 nonrecovering alcoholics every day. And one of my neighbors is helping organize the much-beloved Fourth of July festivities for our close-knit neighborhood.

Myriad U.S. foundations support everything from improving educator training to better treatment of companion animals.

The common thread? These are all nongovernmental “associational activities” that are vital for an economy to effectively meet the needs and wants of its citizens. But conventional economic theory pays little attention to this sector — a fault I don’t expect to be corrected soon.

All of these endeavors — church, charity, neighborhood activities, arts, sports and youth development — are important to a healthy society. All involve people organizing to work together, in many cases in quite large organizations. None essentially involve “profit maximizing,” although sports leagues such as the International Olympic Committee and the National Collegiate Athletic Association certainly stretch that concept to the breaking point.

Few, if any, economic thinkers have worked on a theoretical framework for such activities and organizations. The traditional definition for microeconomics is “the study of how resources are allocated at the level of the individual, the household and the firm.”

There is no mention of the nongovernmental organization, the association, the foundation, the church or the neighborhood. Some economists do focus on sports, some on nonprofits. But these tend to be empirical studies of the size, structure and activities in these sectors and don’t tie them to any deeper theory of their role in the economic efficiency of an economy as a whole.

Theologians, political scientists, historians and sociologists rush in where economists fear to tread.

The Anglo-Irish political philosopher Edmund Burke argued that voluntary, nonprofit associational activities are key to a successful society. His widely quoted assertion was that “to love the little platoon we belong to in society is the first principle (the germ as it were) of public affections.” That this was his critique of why the political system of late-1700s France was collapsing emphasizes how he saw these collective impulses, and their resulting social structures, as key to a successful society.

Political thinker Alexis de Tocqueville, in writing about an 1831 nine-month trip though the United States, emphasized the role of volunteerism, community cooperative spirit and associations as key factors in both the economic and political success of our country and as a factor that was lacking in most of Europe, particularly his native France.

Herbert Hoover, a highly successful mining engineer long before entering government during World War I, thought about private “associational action” long before he tried to rely on it to end the Depression. That failure unfairly blighted modern views of his thought, but the same themes of the necessity of spontaneous and voluntary social organization that were flexible and could meet people’s needs in situations where government could not were clear.

In the 1970s, sociologist Peter Berger, whose writings on economics I deeply respect, teamed up with Lutheran pastor Richard John Neuhaus in examining what they termed “mediating structures.” Both are now seen as conservatives, and Neuhaus certainly became more conservative theologically as well as politically over time, but both had been on the liberal side of the divide in the 1960s.

To them, mediating structures were somewhat along the same lines as those described by de Tocqueville, Hoover and many others. Because of their rightward shift, many liberals now dismiss Berger and Neuhaus and most economists never paid any attention at all. This is unfortunate.

Since then, Harvard political scientist Robert D. Putnam has been at the forefront of examining these issues, first in “Bowling Alone,” the title of a journal article in 1995 and a book in 2000. Three months ago, he published “Our Kids: The American Dream in Crisis.” This focuses less on what he and others call “social capital,” and more on causes of growing economic and social inequality. But the role of voluntary associations in civic life is a continuing theme for him.

As with Berger and Neuhaus, Putnam puts some people’s backs up, and has many critics. He may be wrong on certain empirical details and he may ignore implications of new technology, such as online networks, but I cannot help but think he is on to something important, even if his ideas have had minimal impact on economics.

Putnam’s work on comparative social capital started with his study of local institutions and culture in Italy, particularly between the prosperous north and the impoverished south, so it has always had implications on economic performance.

Similarly, most of the economists who do look at the role of voluntary associational organization within economies tend to be economic historians, including David Landes and even Ferdinand Braudel. So do some of the newer comparative economists, including Turkish-American Daron Acemoglu and his colleague James Robinson in their 2012 book “Why Nations Fail.”

I think they are wrong in their conclusion that institutions, private as well as public, are important but culture is not. For me, a nation’s institutions clearly spring from its cultures and you cannot separate the two. But their book is valuable.

The intellectual landscape of economics still shows few features of work on the economic outcomes of nongovernmental nonprofit organizations defined broadly. But economics is in ferment as young behavioral economists cut the intellectual fetters of assuming strict rationality in all human decision making. As we allow our understanding of human deciding to be richer, we allow for a broader range of collective outcomes, and there is more theoretical space for a whole range of human organizations broader and more complex than the extremes of the profit-maximizing individual or corporation on one hand and central government on the other.

The intellectual discussion will go on, and should get more interesting. In the meantime, enjoy participating in your own favorite “mediating structure” and building your own community’s “social capital” whether economists want to explain it or not.