Critics are right when they point to the importance of social capital.

Why a strong society can make us all richer


By Harriet Maltby 

Economic success doesn't have to come at the expense of honesty, humanity and friendship, writes Harriet Maltby in CapX. Social capital is important, not because free markets overlook it, but because they need it. Studies have shown that more trusting countries have higher investment rates and economies better able to encourage innovation. For capitalism’s greatest attributes, trust is key.

Tweet

• Why a strong society can make us all richer
• The economic importance of trust is well documented
• Critics are right when they point to the importance of social capital

What is capitalism? A quick glance at its most inflammatory criticism and it is a ‘deadly cancer’, whose existence is a force ‘ravaging the earth’, securing the ‘reckless rule of wealth at the expense of the common good’.

For those who reject the system outright, its major crime is that it can account only for the material, leaving no space for humanity, society, or qualities like honesty or friendship. In the setting of the average American family, capitalism demands that old Grandpa Simpson be shipped off to a home, not for not making sense, but for not making cents.

Increasingly however, such criticism is not confined to the sphere of the radical. Softer criticism is often wrapped in the language of a ‘need for reform’. Mark Carney has spoken on how market fundamentalism can erode social capital: those qualities of honesty and friendship, our humanity, the strength of society. The delivery may be more subtle; it may ignore the fact that many of the examples from the financial crisis illustrate less the excesses of capitalism and more the results of catastrophic market failure, but the criticism is the same. Capitalism is too much about the greedy, and not enough about Granny.

Yet look around the world and we see the opposite. From every corner of the globe, every continent, among rich countries and poor, it holds that the stronger a nation’s social capital, the higher on average its GDP per capita. Moreover, data analysis from the Legatum Prosperity Index™ shows that this relationship is anything but weak, it is strong. Far from capitalism undermining social capital, it is the wealthy capitalist economies whose social capital is most pronounced.

When we look specifically at humanity, honesty, and friendship – the attributes critics feel most threatened by capitalism – the relationship grows even stronger. Take our benevolent intent (in the form of the act of donating to charity), the extent to which we trust each other (generalised social trust), and the strength of our social support networks (family and close friends) and the link to wealth is even more conspicuous.

Setting the data and its conclusions aside, the problem with the critics’ account of capitalism is that it treats social capital as some form of desirable good that is external to the system. It is not external. Capitalism without social capital is like democracy without the secret ballot: fatally undermined. Social capital, and in particular, its main ‘output’ or ‘proxy’ (generalised social trust), is not a phenomenon that can be separated from a successful capitalist free market system. Indeed, without it, such a system would fail to function effectively.

..............

Readmore: www.capx.co