The CAPITAL in Social Capital:
An Austrian Perspective
ABSTRACT. In recent decades economists started discovering the
importance of the social dimension of economic interactions. Contemporary economics has borrowed several sociological concepts
for its own use, among the most important being the concept of
social capital. However, this transfer within disciplines did not occur
without a loss—the nature of social capital in economics remains
confused and obscure. The purpose of this article is to clarify it,
specify the possibilities for its use, and discuss their limits. It is argued
that economics once also possessed a view of human beings that was
more “socialized” than the modern neoclassical Homo oeconomicus,
and that this more “socialized” view still exists in the Austrian school
of economics. Because this tradition of economic thought has also
developed an elaborate capital theory, it can serve as an ideal source
where we can look for inspiration in the current social capital debate.
First, social capital is (re)defined along these lines as an individual’s
asset connected with recognized reciprocity (as opposed to interactions usually classified as “altruistic”). Then major critical claims about
the relation between social and physical capital are answered and
the connection between social capital, trust, and social norms is
*The author is an Assistant Professor at the Department of Institutional Economics,
University of Economics in Prague, Nam. W. Churchilla 4, 13067 Prague 3, Czech
Republic. E-mail address: [email protected] Dr. Chalupnicek’s interests include
the study of altruism in economics, economics of religion, and spontaneous social
institutions based on trust. He has recently co-authored an article in the Independent
Review (USA) on private provision of sick insurance by so-called Friendly Societies in
19th-century England. He would like to thank Prof. Peter J. Boettke (George Mason
University, USA), David Lipka (University of Economics in Prague), Lukas Dvorak,
participants of Association for Private Enterprise Education (USA) 2008 Annual Meeting,
and two referees of this journal for their comments on earlier versions of this article. All
the usual caveats apply. Financial support by the Grant Agency of the Czech Republic
(grant no. GA402/07/0137) is also acknowledged.
American Journal of Economics and Sociology, Vol. 69, No. 4 (October, 2010).
© 2010 American Journal of Economics and Sociology, Inc.
The CAPITAL in Social Capital: An Austrian Perspective 1231
Given the boom of literature on social capital in recent decades, it
almost seems as if social capital was the solution to almost any social
problem imaginable. But as it has been said in a similar context,
“[t]his almost perfect generality should sound an alert” (Liebowitz and
Margolis 1994: 134), if a concept starts to explain too much, it might
not really explain anything. Indeed, “blurred” or “fuzzy” are some of
the adjectives often associated with the concept of social capital
(Ostrom and Ahn 2003). Its methodological and conceptual ambiguity
became one of the main sources of criticism among sociologists
(Sobel 2002).
However, even perhaps its most widely quoted critics admit that
there is something about social capital, once the content of this term
becomes clearer, that gives it the potential to be a very useful tool
even in economic analysis (Arrow 1999; Solow 1999). Our current
situation seems to be very similar to that of 1950s and 1960s, when
human capital was starting to make its way into economics and had
to face similar objections (Schultz 1961).
Furthermore, as noted by Theodore W. Schultz, one of the pioneers
of human capital, without taking human capital into account public
policies tend to be suboptimal, or in his words “so far from the mark”
(Schultz 1961: 7). Similarly, today’s discussions about the nature of
social capital have similar importance not only for academia, but also
for policymakers. Nathan Glazer, one of the co-authors of American
social policy in the second half of the 20th century, among others,
claimed that the “breakdown of traditional ways of handling distress
. . . located in the family primarily, but also in the ethnic group, the
neighborhood, the church” (Glazer 1988: 3), meaning in the structures
that are usually associated with the existence of social capital. That is
one of the main reasons for active state social policy. But the active
role of the state to the disappointment of many “seemed to be creating
as many problems as we were solving” (1988: 2) and “efforts to deal
with distress are themselves increasing distress” (1988: 3; see also
Murray 1984).
Important attempts to introduce social capital into economics have
already been made. Most famously, Gary S. Becker (1996) used the
The American Journal of Economics and Sociology
term “social capital” to provide an explanation of social relations,
mainly within a family. Some more recent contributions include works
by Peter T. Leeson (2005, 2007) and Carilli et al. (2008), who provide
original insights mainly regarding various public policies, but do not
deal with social capital in depth. They rather accept ready-made
definitions from sociology with all their lack of clarity, so they put
their conclusions at risk because of this ambiguity.
The problem of simply transferring concepts from sociology to
economics is related to the different methodological foundations of
the two disciplines. While most sociologists have no problem with
approaching social capital from the perspective of methodological
collectivism, leading to what became known as the “oversocialized”
view of sociology (Granovetter 1985), for most economists this
approach is unacceptable. This article argues that the concept of social
capital has been present in economics for quite some time, though not
under its current label, and that it was mainly the overly simplified
Homo oeconomicus view of neoclassical economics that led to “undersocialization” of the discipline (Granovetter 1985) by pushing the
individuals’ social environment into the background.
This article looks at the often neglected works of the so-called
Austrian school of economics thatflourished in the first half of the 20th
century, and is apparently still gaining more importance in economics
recently, together with other heterodox approaches.1 It is interesting to
note that this tradition achieved its greatest recognition for its capital
theory and monetary theory of business cycles. Also, it has never
accepted the Homo oeconomicus perspective, and it has always
stressed that human beings cannot be treated as atomized units (this
emphasis is what Ludwig von Mises referred to as “praxeology,” a
social science integrating partial findings of economics and sociology).
Thus, it is argued in this article that if we take the capital part of social
capital more seriously than just a mindless metaphor, then the Austrian
tradition is a place where original insights enriching our contemporary
debate can be found.2
The rest of the article is divided in four parts. The next section
provides a (re)interpretation of the concept of social capital from the
aforementioned perspective. The subsequent section answers the
most important objection raised against social capital by several
The CAPITAL in Social Capital: An Austrian Perspective 1233
economists. It is followed by a section dealing with social capital and
its relation to trust and social norms. The final section concludes.
The Nature of Social Capital
French sociologist Pierre Bourdieu, who is usually credited with the
early elaboration of the concept of social capital, defined it in 1986 as
an attribute of an individual in a social context. One can acquire social
capital through purposeful actions and can transform social capital into
conventional economic gains. The ability to do so, however, depends on
the nature of the social obligations, connections, and networks available to
you (Bourdieu 1986, cited in Sobel 2002: 139).
One can feel a certain tension already present in this early definition—a tension between social capital as an asset of an individual,
and the importance of its social context. This tension later led to two
different perspectives on social capital (Portes 1998). One group of
sociologists views social capital from the perspective of an individual.
This is an approach taken perhaps most prominently by James S.
Coleman (1988, 1990) who treats social capital as the amount of an
individual’s obligations and expectations that “can be conceived of as
a ‘credit slip’ held by A to be redeemed by some performance by B.”3
So in his case, the parallel of social and other kinds of capital is clear
and straightforward.
The second group stresses the importance of “embeddedness” of an
individual in his/her social environment. This group views social
capital rather as “features of social organizations, such as networks,
norms, and trust, that facilitate action and cooperation for mutual
benefit“ (Portes 1998: 18). Perhaps the best known member of this
group is Robert D. Putnam (1993, 2000). His approach was criticized
by Portes because of its tautological character: “As a property of
communities and nations rather than individuals, social capital is
simultaneously a cause and an effect” (Portes 1998: 19). This transition
from individual to collective (“embedded”) asset or resource was
“never explicitly theorized, giving rise to the present state of confusion” (Portes 2000: 3).4
Some authors try to reconcile these two approaches by introducing
an “all-inclusive” definition of social capital. For example, Ostrom and
The American Journal of Economics and Sociology
Ahn (2003: xvii) place individual properties such as “trustworthiness”
in the same basket with “networks” and “institutions”—all these are
viewed as “forms of social capital.” Still, it seems that this very broad
definition does not add much to the clarity of the concept.
The perception used in this article is similar to Coleman’s, but it
goes even further in stressing the capital dimension of social capital.
Social capital is an individual’s (or private) asset and, like other forms
of capital, it is created by investing scarce resources in the present to
obtain certain benefits in the future.5 An acting individual has a choice
of achieving his/her goals—he/she can try to achieve them directly,
he/she can try to accumulate some physical or human capital, or
he/she can enter into a relationship with somebody else and achieve
his/her ends through the accumulation of social capital.6
In order to be created, any capital requires the input of certain
scarce (valuable) resources. This can include goods, money, one’s
labor, or—perhaps more importantly in the case of human or social
capital—time, or more precisely, the opportunity costs associated with
time spent on the accumulation of capital (Becker 1993: 38).
We should also distinguish between capital goods and capital, “the
former refer to physical items. . . . Capital, by contrast, has no physical measure. It refers to the total value of all of the capital goods
under consideration” (Lewin 1996: 8). While physical capital can be
easily materialized in physical capital goods, human or social capital
is usually not observable in such a direct way because it is embodied
in persons themselves. Human capital investment changes the properties of one’s mind through newly acquired knowledge. Social
capital investment changes the properties of minds of people in the
social relation and their expectations of one’s future conduct. We
also cannot say that social or human capital is homogeneous “as
drops of water are in a lake” (Lachmann 1977: 198). Like physical
capital goods, social and human capital has a certain structure
that is use specific. Human and social capital is accumulated with
some purpose in the actor’s (investor’s) mind. If his/her expectation
about the future usability of his/her capital stock is wrong, then this
capital needs to be converted for some other use. In some cases,
capital is inconvertible and the investment is futile under the new
The CAPITAL in Social Capital: An Austrian Perspective 1235
“Once we abandon the notion of capital as homogeneous, we
should therefore be prepared to find less substitutability and more
complementarity.”7 Two different physical capital goods can be substitutes or complements. Similarly, investments in different people can
be either substitutes (provided these persons can be substituted from
the perspective of an existing plan, for example, achieving a certain
goal with their help), or complements. The relations of substitutability
or complementarity exist also across various kinds of capital. For
example, it is a well established fact in the sociological literature that
there is a positive correlation between the stock of social and human
capital owned by a person. In other words, these two kinds of capital
can be complementary (Coleman 1988; Lin 2001). At the same time,
various kinds of capital can be substitutes—for example, individuals
without physical and human capital can accumulate social capital to
ensure their survival.8
Still, there is one fundamental difference between social and other
kinds of capital. Physical or human capital can be accumulated by
the investor personally, without any interaction with other people.
Robinson Crusoe can make his own fishing-rod (accumulate physical
capital) and learn how to use it by trial-and-error (accumulate human
capital). The creation of social capital constitutes investment in other
people and as such requires at least two interacting individuals.9 This
is the social dimension of social capital.
The reason for capital is accumulated is the expectation of a
certain income yielded in the future. In general, this income can
have two forms: a form of an increase in productivity of one’s
efforts, or it can lead to the achievement of ends that would not be
accessible otherwise. This is also true in the case of social capital.10
Person “A” may want to invest in person “B” in order to be able to
use the resources that “B” owns—his/her physical, human, or social
capital. In the latter case, “B” serves as a “stepping stone” to get to
the resources available through “B”’s social network. Thus, the more
resources “B” owns—either directly or indirectly (through “B”’s
social capital)—the more interesting of an investment he/she will be
for “A”.
Social capital is an asset that is created by investing scarce
resources. These resources are invested by person “A” in person “B”
The American Journal of Economics and Sociology
and constitute a claim of “A” on “B” that “B” will behave in a certain
way in the future, and an obligation of “B” towards “A” to behave in
this way. The sense of reciprocity and mutual recognition of this
claim/obligation is crucial. Without them social capital does not
emerge. We can draw a simple scheme of possible interactions
between “A” and “B,” when “A” is doing a favor for “B” (providing
some scarce resources to “B”), depending on whether “A” and/or “B”
feel that a claim/obligation has been created by this action.
Table A
B: “I am obliged”
B: “I am not obliged”
(not recognized
A: “B is obliged”
Cell 1: creation of Cell 2: “malinvestment”
social capital
by A
A: “B is not obliged” Cell 3: refused
Cell 4: accepted
Social capital is created only in one of the four cases—in the
situation represented by Cell 1—if and only if both “A” and “B”
recognize the action by “A” as “investment.” The terms of the “contract” can be specified at the moment of investment, or the tacit or
explicit contract can be left open for future specification. If “B”
recognizes this obligation, social capital owned by “A” is created and
lasts as long as “B” recognizes “A”’s claim, or until this capital is
exhausted by the reciprocal action of “B.”
But is it possible to talk about “ownership” of social capital in this
case? An argument has been made that “[n]o one player has exclusive
ownership rights to social capital” (Burt 2003: 9). If person “A”
invested resources in person “B” and person “B” refuses to return this
favor in the future, then the claim of “A” is lost (situation in Cell 2). But
it should not be forgotten that ownership even in the case of physical
capital is only a social norm that can be broken. The only difference
is that in the case of physical capital this ownership is usually recorded
The CAPITAL in Social Capital: An Austrian Perspective 1237
in some register and can be enforced by formal institutions, such as
laws or courts, whereas in the case of social capital the ownership is
usually based on informal rules or customs, and its enforceability
depends on a particular setting of the social environment of “A” and
“B” (North 1990). If they belong to the same community, it can still be
possible for “A” to require that “B” behaves in a certain way to meet
his/her obligations, if there is, for example, some third-party enforcement (such as loss of reputation of “B” among other members of the
The second row of situations represents cases in which “A” is doing
a favor for “B,” but does not expect reciprocity. This situation can be
called “altruistic,” if altruism is defined as an action by “A” (in this case
not an investor, but rather a donor) that costs “A” some scarce
resources, but “A” is expending them without the expectation of
reciprocal action by “B” (a donee). Strictly speaking, these options are
not directly relevant for social capital creation, but it is important to
include the opportunity of altruistic behavior on “A”’s part in this
scheme in order to explain some questions raised by the current social
capital research.11
Again, there are two possible scenarios. “B” receives the gift and
accepts it without any further conditions (Cell 4). The transaction is
finished. “A” has received a direct satisfaction from this act, which is
in this sense similar to consumption. Thus, we can say that the
distinction between “social investment” and altruism is the one
between saving and consumption. Once scarce resources are given
away by “A” in an altruistic transaction, they cease to exist for “A” and
are not transformed into any future benefits.12 So, two transactions that
are seemingly identical for an external observer (“A” is doing a favor
to “B”) can have utterly different meanings for the parties involved—
what matters is the subjective perception of the action by the actors
An interesting case happens in Cell 3, where “A” is doing a favor for
“B” with altruistic motives, but “B” refuses to accept it, for example,
because being a subject of somebody else’s altruism is associated with
some costs (in the form of shame or humiliation). “B” might think that
he/she is obliged to pay “A” back in the future, but his/her attempt to
repay “A” will very likely be refused by “A” (if “A” acted from altruistic
The American Journal of Economics and Sociology
motives).13 We get a conflict similar to the one in Cell 2, where
expectations of both parties diverge. And again, the solution is preventing this misunderstanding by proper signals, and if signaling fails,
by renegotiating the terms of the contract.
In the previous analysis the possible ways of conduct of both parties
were treated as ideal types, or as purely analytical categories. In reality,
a mixture of motives can make it difficult to categorize a particular
action. Take, for example, a case where a parent is expending
resources on his/her child’s education. Is the parent investing, or
rather “consuming”? If it is the former, what kind of capital is created?
The answer depends on the context. It seems probable that for a child
a part of the resources creates human capital (acquiring new knowledge by the child); the rest goes to the child’s consumption (pleasure
of going to school). From the perspective of the parent, social capital
between the parent and his/her child is created only if the parent
expects some reciprocal action by the child in the future (for example,
that the child will provide him/her with an income when the parent
grows old) and when it seems likely that this expectation will be
fulfilled. If it is not fulfilled, the parent’s expectation is proved wrong
and he/she was in fact “malinvesting.” If this expectation does not
exist at all, then the parent is just altruistic and is deriving direct
pleasure from this expenditure (and thus “consuming” it, viewed from
this perspective).
The last point of this section relates to Granovetter’s (1973) well
known argument about the “strength of the weak ties.” The case he
presents is compatible with the view taken here. The level of social
capital can be perceived as a continuum, and it may well be true
that in some cases people prefer to have “strong” (or “thick”) ties
(such as among family members) and in other cases only “weak” ties
(such as among people who know each other casually), depending
on the kind of resource the investor wants to achieve. For example,
strong ties will be better to achieve physical capital or to borrow
money, but it is expensive to maintain them. Weak ties are, on the
contrary, relatively cheap to maintain, but they can serve only as a
source of a specific kind of “cheap” goods, such as information
(Granovetter 1973: 1371), that have low diffusion cost(especially in
today’s Internet era).
The CAPITAL in Social Capital: An Austrian Perspective 1239
Is Social Capital Really Capital?
As has been noted above, some economists remain unconvinced by
the parallel between social and physical capital.14
Arrow (1999: 4) argued that the creation of any kind of capital
requires, among other things, “deliberate sacrifice in the present for
future benefits” and that this condition is not met in the case of social
capital because people join social networks “for reasons other than
their economic value to the participants,” because “much of the
reward for social interactions is intrinsic” (emphasis added). Here the
distinction between investment and consumption plays a role—if one
is joining a network purely because he/she gets pleasure from interacting with its members, such as inviting them for a coffee, he/she is
expending his/her resources and gets direct satisfaction, but nothing
else. Arrow is right that in this case no social capital is created.
However, this does not preclude that the same action in a different
context can create some obligation and therefore also some social
capital, or that these two events can happen simultaneously. For
example, we might join a network because it makes us happy, but at
the same time we might think “What if it is going to be useful at some
point in the future?” Also note that Arrow does not claim that all
reward from social interactions is intrinsic.
Solow’s objection is related to the nonmaterial nature of social
capital and the problem of expressing it in some common denominator, as well as computing its rate of investment.15 Here we face the
deeper problem of the differences between neoclassical and Austrian
capital theories.16 Austrians such as Mises, Lachmann, and Hayek
stress the fact that the analysis of capital can, and in fact should, be
made in real terms because it helps in understanding the heterogeneous nature of capital and prevents confusion caused by changes in
the value of a monetary unit. According to them, it is a fallacy to think
that there is a stable common denominator for all existing physical
capital goods, such as money, because the value of this denominator
is changing in the dynamic environment of the economy, and thus it
is impossible to be summed up to derive any meaningful conclusions.
Even if we tried to measure the value of social capital in monetary
units, for example, as the monetary equivalent of time and other
The American Journal of Economics and Sociology
resources spent on our activities generating it (omitting the problems
with expressing these things in money terms), all we will know is that
the (subjective) present value of social capital that we created is higher
than the (subjective) value of the resources we had to give up.
Otherwise we would not accumulate this capital and would rather use
the resources in an alternative way.
Another point raised by Arrow (1999: 4) is the question of interpersonal transfer of social capital. We can imagine a situation where
“B” owes “A” a favor, and “A” owes “C” a favor of a similar value (for
all participants), “A” can ask “B” to repay the favor to “C.” In this case,
we can say that social capital (i.e., the obligation) was transferred from
“A” to “C.” In some cases, where the tie of social capital to a particular
person is too strong, the capital transfer can be difficult or impossible
(for example, a successful merchant can hardly transfer his network of
personal customers to his successor, if his business is based on some
genuine ability that this successor lacks). But this is not just a problem
of some conceptual difficulty with transferring social capital, but also
the issue that the members of the network do not necessarily consider
their old obligations of equal value as the newly created one.
The final objection comes from Ostrom (1999: 179). She claims that
the difference (besides those mentioned above) between social and
other kinds of capital lies in the fact that “[s]ocial capital does not wear
out with use but rather with disuse.” In other words, the more you
interact with your friends, the higher the level of social capital you
have. In the case of physical capital, the situation is exactly the
opposite. The problem is that this objection is based on blending
together “creation” and “use” of social capital. We can imagine a
situation of purely using our stock of social capital without creating
any new one—try, for example, to keep asking your friend for favors.
If the friend is not an altruist, after some time he/she will not feel
obliged anymore and he/she might refuse. This shows that the social
capital has been exhausted. In this sense, social capital behaves as
physical capital; that is, it is “worn out” with use. But Ostrom is
pointing to a different dimension of the problem. As noted earlier, her
concept of social capital is broader than the one presented in this
article and it includes “trustworthiness.” Interacting with others can
increase their trustworthiness for us and if it is considered to be a part
The CAPITAL in Social Capital: An Austrian Perspective 1241
of social capital, then she is correct that the stock of social capital can
increase with use. The next section explains why it may be useful to
keep social capital and trust separated.
Social Capital, Trust, and Social Norms
Gambetta (1988) defines trust as
a particular level of the subjective probability with which an agent assesses
that another agent or group of agents will perform a particular action, both
before he can monitor such action (or independently of his capacity ever
to be able to monitor it) and in a context in which it affects his own action
(Gambetta 1988: 217; emphasis in original).
Trust seems to be an important element of actions regarding other
people under conditions of uncertainty. For example, in cases where
there is a time difference between our present action and an expected
action by our partner.
An investor in social capital (“A”) is deciding by comparing the
value of present costs versus the present value of future benefits
(discounted by his/her subjective discount rate) multiplied by his
estimation of the probability that the other party (“B”) will behave in
a way to fulfill “B”’s obligations. The element of trust in the case of
social capital is so important because “B” is usually facing only soft
constraints (informal contracts and rules) and can relatively easily
refuse to provide repayment. Trust decreases transaction costs, thus
making a higher amount of transactions possible and more likely to
take place. But trust is not an obligation (social capital) in and of itself,
but rather a feature of this obligation, our estimation of the credibility
of this obligation for us.17
Ostrom is correct in that the more we transact with a particular
person, the higher the level of trust among us (provided the other
party proves its trustworthiness). But this is related to the amount of
information we have about the other party, about the party’s performance in the past, to our increasing ability to read and decode
information signals sent by this person, and so on. Also, as we get
closer to each other over time, we will probably tend to have more
common friends that can serve as another source of information
besides our partner himself/herself (Klein 1997).
The American Journal of Economics and Sociology
However, including more and better information under the
common label “social capital” could be misleading. Trust creates the
potential for social interactions, but not any kind of obligation. We can
believe person “B” is trustworthy, and as a result we might be more
likely to interact with such a person, but if we decide not to do so,
then the potential of trust remains vain.
Uslaner (2002) argues that there are different kinds of trust. We
approach strangers with “moralistic” or “generalized” trust that we
acquire during our socialization in childhood. But at the same time,
this “generalized” trust is modified in our interactions with particular
people (increased or lowered) by a “strategic” component of trust
based on our experience with that person. Uslaner’s “moralistic” trust
stems from moral foundations and trusting people will tend to get
more involved in “altruistic” activities, with trust being “by far the
strongest predictor of both volunteering and giving to charity”(Uslaner
2002: 136). Therefore, trust boosts not only the creation of social
capital, but also altruism because altruistic transactions also depend on
trust—for example, giving money to a beggar depends on whether we
can consider this person to be really in need, in other words, if we
trust that this person really needs our money.
So, it seems that trust is an underlying phenomenon that is connected with a great number of social activities, not only with social
capital accumulation, and its nature is related more to information and
signaling than to social capital itself. What might be misleading is that
(“strategic”) trust can partly exhibit capital-like features—as noted
above, it can, for example, increase over time (be “accumulated”). But
in this respect it is probably more related to human capital (person “A”
increases his/her knowledge about the expected behavior of person
“B”), than to social capital.18
Coleman (1987) opened another broad topic related to social
capital, namely the relation between social capital and social norms.
He regarded social capital as an important tool of internalization of
externalities of one’s action. For example, if “A” invested in “B” (“B”
owes him a favor) and “A” is a smoker and “B” is a nonsmoker (to
borrow one of Coleman’s examples), “A” will be more likely to accept
“B”’s request to avoid smoking in front of him/her because he/she
knows that he/she could lose his/her investment. Social capital makes
The CAPITAL in Social Capital: An Austrian Perspective 1243
him/her internalize the external costs of his/her action that affect “B.”19
According to Coleman, this internalization mechanism leads to the
creation of norms in situations “when actions have external effects
[and] in those cases in which markets cannot easily be established, or
transaction costs are high” (Coleman 1987: 140). Later these norms
became generalized and, he argued, in this sense norms can be seen
as a form of social capital. In a subsequent paper, Coleman went
further to assert that social capital itself has certain “public good
aspects” and that it is connected with positive externalities that accrue
to all members of a given community or social network, not only to
the “person or persons whose efforts would be necessary to bring
them about” (Coleman 1988: S116). As a result, the amount of investment in social capital will in many cases be “below optimum.”
The problem of the emergence of social norms is too broad to be
treated here. It is generally agreed that certain norms initially created
among individuals can become “generalized” norms, accepted by the
vast majority of the community or even become formalized in law
(Benson 1993; Hayek 1973). It is a task for “norm entrepreneurs”
(Sunstein 1995) to discover the potential benefits of new norms. Good
ways of doing things tend to be imitated; bad ways tend to be
abandoned. Social capital relying on the self-interest of both parties
can certainly serve as a source of social norms.
However, one should be careful when talking about externalities of
social capital. It is true that social capital has wide “network effects”
(Liebowitz and Margolis 1994). For example, the more members join
a network, the better for the current members because the pool of
resources that are available to them is much wider, even if they did not
have to do anything to attract these new members. However, Liebowitz and Margolis (1994) call network externalities “an uncommon
tragedy” and suggest several solutions to internalize them. One way is
the ownership of this network. The private owner then will be able to
internalize all these benefits and to optimize the size of the network.20
The second way of internalization is what they describe as “internalizing through transactions.” Let us illustrate this process by the
following example. Coleman (1988: S116) argued that many school
associations among parents in the United States depend on the
involvement of mothers without full-time jobs who devote their free
The American Journal of Economics and Sociology
time not only to organizing such activities for the benefit of their
children, but also for the benefit of children of parents who are not so
involved. If such a mother decides to take a full-time job, the benefits
might be high for her, but other parents will suffer a loss. This is
certainly true, but the case does not have to end here. The mother
who decided to take the full-time job will now probably have less time
to work for the school association, but she might (if she wants to keep
the association alive), for example, donate some money as a compensation for her withdrawal and some other parent can accept the
position instead of her. This seems to be a Pareto optimal improvement, as the school association after the change will be led by the
parent with lower opportunity costs to his/her time. Therefore, such
a transaction can eliminate the negative externalities of the act of
withdrawal on other parents and yet increase the efficiency through
improved division of labor among the members of the community.
The main problem of the contemporary discussions about social
capital is certain confusion that is preventing this concept from
playing a greater role in economic analysis. This paper offered some
thoughts on possible clarifications of the concept of social capital,
taking into account the similarities between contemporary sociological research and economic capital theory. The analysis suggests that
the main problem of integration of social capital into mainstream
economics stems from the overly narrow view of human beings
traditionally endorsed by the neoclassical tradition. It is only in recent
decades that neoclassical economists began to discover what had
been missing in their analysis. But there are some other traditions of
economic thought, namely, the Austrian School, that did not accepted
the view of Homo oeconomicus and therefore can serve as an inspiration for mainstream economists to rediscover the “social roots” of
their discipline.
This is not to claim that the process of integration will be a smooth
one. There still remain deep shadows that need to be illuminated.
First, is the problem of measuring the level of social capital among
individuals. Although we argue that this obstacle is not a fundamental
The CAPITAL in Social Capital: An Austrian Perspective 1245
or conceptual one, without a proper way of measuring it, it might be
difficult to bring the concept of social capital down to field applications. Second, is the significance of social capital for the creation and
acceptance of social norms.
There is no doubt that social capital matters to economists in a wide
variety of fields.21 The policymakers now have to decide how to react
to it. It is precisely in this field of policy implications that further
research is most urgently needed.
1. See Mises ([1949] 1996), especially the introduction, and ([1957] 1985 for
the main principles of this approach, and Boettke and Coyne (2005) or Boettke
and Leeson (2003) for its integration into contemporary social research.
2. See also a special issue of the Review of Austrian Economics on
economic sociology and social capital (Vol. 21, No. 2–3, September 2008).
3. Coleman (1990: 306). This is perhaps the most explicit formulation of
what he means by social capital. Other definitions he provides at different
places are much less clear. See Lin (2001, especially Chapter 1) for an analysis
of Coleman’s various definitions.
4. However, I do acknowledge that this tension between individual and
social asset might be unavoidable, given the social nature of social capital and
that it may present the greatest strength of the concept. I owe this point to a
referee of this journal.
5. See Lachmann’s definition of capital: “Something is capital because the
market, the consensus of entrepreneurial minds, regards it as capable of
yielding an income” (Lachmann [1956] 1978: xv). One should, however, not be
misled by the words “entrepreneurs” and “income.” In Lachmann’s perspective, everyone who deals with uncertainty can be considered an entrepreneur,
regardless of his social position or the formal laws of a country. Income can
also be understood in a broader sense than just in monetary terms—as
“psychic” or “subjective” income (Mises [1949] 1996: 289 ff).
6. See Lin’s definition: “[S] ocial capital is an investment in social relationships through which resources of other actors can be accessed and
borrowed” (Lin 2001: 24).
7. Lachmann (1977: 198), complementarity meaning “a property of means
employed for the same end, or a group of consistent ends,” and substitutability “indicates the ease with which a factor can be turned into an element
of an existing plan” (1977: 200).
8. Portes (2000) uses the term “fungibility” of different kinds of capital.
For practical examples of substitutability of various kinds of capital, see, for
example, Fafchamps (1992) or Cordery (2003: 103).
The American Journal of Economics and Sociology
9. This explicit definition could evoke doubts on whether it is “moral” to
treat other people as subjects in which one can invest (and perhaps treat them
as means to someone’s ends). But one could also argue that this investment
is not different from any other kind of voluntary exchange. If both parties
involved, i.e., the investor and the subject of the investment, agree with this
exchange, no moral problem arises. See also similar discussion in Schultz
(1961) in a section eloquently called “Shying Away from Investment in Man”
or in Becker (1993: 16).
10. There is plenty of evidence that social capital (though defined in a
way broader that in this article) matters for economic performance—see
Putnam (1993, 2000), Knack and Keefer (1997), or Peters and Stringham
11. For example, the claims that not every relation among people has to
be purely calculated—see Burt (2003: 24) who asserts that “[e] fficiency mixes
poorly with friendship. Judging friends on the basis of efficiency is an
interpersonal flatulence from which friends will flee.”
12. The fact that the resources are in fact really consumed by “B” does not
play any role here. What matters is that they cease to exist for “A,” but “A”
derives satisfaction from it (which is what distinguishes a gift from a theft or
a natural disaster).
13. The reason “A” is likely to refuse repayment is that if “A” attaches high
(moral) value to altruism and “B” tries to “degrade“ “A”’s action to “mere”
investment, “A” can feel offended. Also for external observers the real motivations of “A” are hidden and can be guessed only indirectly—from “A”’s
reaction to the behavior of “B.” If “A” accepted repayment of “B,” it would
show that “A” was not giving, but rather investing.
14. The critical remarks in this section are based on Arrow (1999), Solow
(1999), and Ostrom (1999). But the criticism of the first two authors should
not be exaggerated. Their reflections are very brief (3 and 4 pages, respectively) and Solow (1999: 6), warns that his notes should be “taken more
as suggesting an agenda for discussion and research than as finished
15. “Any stock of capital is an accumulation of past flows of investment,
with past flows of depreciation netted out. What are those past investments in
social capital? How could an accountant measure them and cumulate them in
principle?” Solow (1999: 7).
16. See Hayek (1941: 49, points 10A and 10B).
17. See Coleman (1988: S119), who says that social capital is made up,
among other things, of “obligations and expectations, which depend on
trustworthiness of the social environment” (emphasis added).
18. This is certainly not the only possible perspective; see, for example,
Nooteboom’s (2002, especially Chapter 2) various approaches to trust. I thank
a referee of this journal for pointing me to this source.
The CAPITAL in Social Capital: An Austrian Perspective 1247
19. Social capital is thus a kind of “collateral.” Altruism has the same
“internalizing” result—if “A” were altruist, he/she would refrain from smoking
in front of nonsmokers who asked him/her to do so.
20. As many social networks have some geographical dimension, for
example, in the form of residential communities, such an owner can be, for
example, a developer of this area. See Foldvary (1994) for examples of
provision of “public” goods through private communities. Virtual networks,
such as “community sites” on the Internet ( or
also do have a private owner.
21. See, for example, the results of the following studies: Chalupnicek and
Dvorak (2009) dealing with the collapse of mutual societies providing sick
insurance in 19th-century England; Gruber and Hungerman (2005) examining
crowding-out effects between the state and private charity during the Great
Depression; Leeson (2005) describing the influence of implanted colonial
institutions on Africa’s poor economic growth; or Ostrom and Gardner (1993)
studying self-governing irrigation systems in Asia.
Arrow, Kenneth J. (1999). “Observations on Social Capital.” In Social
Capital—A Multifaceted Perspective. Eds. P. Dasgupta and I. Serageldin.
Washington, DC: World Bank.
Becker, Gary S. (1993). Human Capital—A Theoretical and Empirical Analysis with a Special Reference to Education. Chicago: University of Chicago
——. (1996). Accounting for Tastes. Cambridge: Harvard University Press.
Benson, Bruce L. (1993). “The Impetus for Recognizing Private Property and
Adopting Ethical Behavior in a Market Economy: Natural Law, Government Law, or Evolving Self-Interest.” Review of Austrian Economics 6(2):
Boettke, Peter J., and Christopher J. Coyne. (2005). “Methodological Individualism, Spontaneous Order and the Research Program of the Workshop in
Political Theory and Policy Analysis.” Journal of Economic Behavior and
Organization 57: 145–158.
Boettke, Peter J., and Peter T. Leeson. (2003). “An ‘Austrian’ Perspective on
Public Choice.” In Encyclopedia of Public Choice. Eds. C. Rowley and F.
Schneider. Boston: Kluwer Academic Publishing.
Burt, Ronald S. (2003): “The Social Structure of Competition.” In Foundations
of Social Capital. Eds. E. Ostrom and T. K. Ahn. Cheltenham: Edward
Elgar Publishing.
Carilli, Anthony M., Christopher J. Coyne, and Peter T. Leeson. (2008).
“Government Intervention and the Structure of Social Capital.” Review of
Austrian Economics 21(2–3): 209–218.
The American Journal of Economics and Sociology
Chalupnicek, Pavel, and Lukas Dvorak. (2009). “Health Insurance Before the
Welfare State—The Destruction of Self-Help Through State Interventionism.” Independent Review 13(3): 367–387.
Coleman, James S. (1987). “Norms as Social Capital.” In Economic
Imperialism—The Economic Approach Applied Outside the Field of Economics. Eds. G. Radnitzky and P. Bernholz. New York: Paragon House
——. (1988). “Social Capital in the Creation of Human Capital.” American
Journal of Sociology (Supplement) 94: S95–S120.
——. (1990). Foundations of Social Theory. Cambridge: Harvard University
Cordery, Simon. (2003). British Friendly Societies 1750–1914. Basingstoke:
Palgrave Macmillan.
Fafchamps, Marcel. (1992). “Solidarity Networks in PreindustrialSocieties:
Rational Peasants with a Moral Economy.” Economic Development and
Cultural Change 41(1): 147–174.
Foldvary, Fred. (1994). Public Goods and Private Communities—The Market
Provision of Social Services. Brookfield: Edward Elgar Publishing.
Gambetta, Diego. (1988). “Can We Trust Trust?” In Trust: Making and Breaking Cooperative Relations. Ed. D. Gambetta. Oxford: Basil Blackwell.
Glazer, Nathan. (1988). The Limits of Social Policy. Cambridge: Harvard University Press.
Granovetter, Mark S. (1973). “The Strength of Weak Ties.” American Journal
of Sociology 78(6): 1360–1380.
——. (1985). “Economic Action and Social Structure—The Problem of Embeddedness.” The American Journal of Sociology 91(3): 481–510.
Gruber, Jonathan, and Daniel M. Hungerman. (2005). “Faith-Based Charity
and Crowd Out During the Great Depression.” Cambridge: NBER
Working Paper No. 11332.
Hayek, Friedrich A. von. (1941). The Pure Theory of Capital. Chicago: University of Chicago Press.
——. (1973). Law, Legislation and Liberty (Vol. I—Rules and Order). Chicago:
University of Chicago Press.
Klein, Daniel B. (Ed.). (1997). Reputation—Studies in Voluntary Elicitation of
Good Conduct. Ann Arbor: University of Michigan Press.
Knack, Stephen, and Philip Keefer. (1997). “Does Social Capital Have an
Economic Payoff? A Cross-Country Investigation.” Quarterly Journal of
Economics 112(4): 1251–1288.
Lachmann, Ludwig M. (1977). Capital, Expectations, and the Market Process:
Essays on the Theory of the Market Process. Menlo Park: Institute for
Humane Studies.
——. (1978 [1956]). Capital and Its Structure. Menlo Park: Institute for
Humane Studies.
The CAPITAL in Social Capital: An Austrian Perspective 1249
Leeson, Peter T. (2005). “Endogenizing Fractionalization.” Journal of Institutional Economics 1(1): 75–98.
——. (2007). “Balkanization and Assimilation: Examining the Effects of StateCreated Homogeneity.” Review of Social Economy 65(2): 141–164.
Lewin, Peter. (1996). “Time, Change and Complexity: Ludwig M. Lachmann’s
Contributions to the Theory of Capital.” Advances in Austrian Economics
3 [pagination based on on-line version, URL:
~plewin/lach1195.pdf, accessed 11-01-2009].
Liebowitz, S. J., and Stephen E. Margolis. (1994). “Network Externality:
An Uncommon Tragedy.” Journal of Economic Perspectives 8(2): 133–
Lin, Nan. (2001). Social Capital: A Theory of Social Structure and Action. New
York: Cambridge University Press.
Mises, Ludwig von. ([1957] 1985). Theory and History: An Interpretation of
Social and Economic Evolution. Auburn: Ludwig von Mises Institute.
——. ([1949] 1996). Human Action: A Treatise on Economics. San Francisco:
Fox and Wilkes.
Murray, Charles. (1984). Losing Ground: American Social Policy 1950–1980.
New York: Harper Collins.
Nooteboom, Bart. (2002). Trust—Forms, Foundations, Functions, Failures
and Figures. Cheltenham: Edward Elgar Publishing.
North, Douglass C. (1990). Institutions, Institutional Change and Economic
Performance. Cambridge: Cambridge University Press.
Ostrom, Elinor. (1999): “Social Capital: a Fad or a Fundamental Concept?”
In Social Capital—A Multifaceted Perspective. Eds. P. Dasgupta and
I. Serageldin. Washington, DC: World Bank.
Ostrom, Elinor, and T. K. Ahn. (2003). “Introduction.” In Foundations of Social
Capital. Eds. E. Ostrom and T. K. Ahn. Cheltenham: Edward Elgar
Ostrom, Elinor, and Roy Gardner. (1993). “Coping with Asymmetries in
theCommons: Self-Governing Irrigation Systems Can Work.” Journal of
Economic Perspectives 7(4): 93–112.
Peters, Dorothy, and Edward Stringham. (2006). “No Booze? You May Lose:
Why Drinkers Earn More Money Than Nondrinkers.” Journal of Labor
Research 27(3): 411–421.
Portes, Alejandro. (1998). “Social Capital: Its Origins and Applications in
Modern Sociology.” Annual Review of Sociology 24: 1–24.
——. (2000). “The Two Meanings of Social Capital.” Sociological Forum 15(1):
Putnam, Robert D. (1993). Making Democracy Work—Civic Traditions in
Modern Italy. Princeton: Princeton University Press.
——. (2000). Bowling Alone—The Collapse and Revival of American Community. New York: Simon and Schuster.
The American Journal of Economics and Sociology
Schultz, Theodore W. (1961). “Investment in Human Capital.” American
Economic Review 51(1): 1–17.
Sobel, Joel. (2002). “Can We Trust Social Capital?” Journal of Economic
Literature 40(1): 139–154.
Solow, Robert M. (1999). “Notes on Social Capital and Economic Performance.” In Social Capital—A Multifaceted Perspective. Eds. P. Dasgupta
and I. Serageldin. Washington, DC: World Bank.
Sunstein, Cass R. (1995). “Social Norms and Social Rules” (John M. Ohlin Law
and Economics Working Paper No. 36). Chicago: University of Chicago.
Uslaner, Eric M. (2002). The Moral Foundations of Trust. Cambridge: Cambridge University Press.

Get PDF - Wiley Online Library