A Matter of Trust: Social Capital and Economic Development

In recent years a great many scholars have argued that the formation of social capital is the engine of economic progress. Many others have noted, however, that the evidence is mixed. In this paper I argue that the deep requirement for economic progress is the development of trust among people. Defining social capital in lean terms, namely, as "interpersonal networks", I show that when suitably directed, social capital can build and sustain trust; but if it is misdirected or if it operates in the wrong sphere, it can hamper economic development and even cause economies to regress. I argue, moreover, that if the idea of social capital is to serve a useful purpose in economics, it should be interpreted as interpersonal networks whose members develop and maintain trust in one another to keep their promises by the device of "mutual enforcement" of agreements. But trust is the key to cooperation; "social capital" when suitably applied, is only a means to creating trust. I also show that a natural place to look for the worth of social capital in macroeconomic statistics in "total factor productivity" (TFP). But that implies that TFP is an amalgam of technology and institutions. The paper concludes (Appendix) by demonstrating how an increase in trust among people would result in an increase in total factor productivity, which is another way of saying that an increase in trust among people would lead to an increase in the economy's wealth.