Social Capital

Article byNanditha Saravanakumar
Reviewed byDheeraj Vaidya, CFA, FRM

Social Capital Definition 

Social capital refers to a network of relationships created by a group of people that helps them achieve common goals and lead a comfortable life. Humans are social creatures, and such a voluntary association benefits the members in the long run, adding value that an individual cannot otherwise achieve.

Social Capital

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Social Capital (wallstreetmojo.com)

Social capital is now of huge significance in private and professional circles. Even business organizations and employees are using it to accomplish shared tasks. However, though mostly advantageous, such a network does have its disadvantages. This can prove negative to many other sections of society.

Key Takeaways

  • The meaning of social capital is the mutual relationships created between a group of people with something in common. It is referred to as ‘capital,’ as the relationships thus formed are assets to its members.
  • More often, such associations do not have any monetary or economic goals. That is, their actions or activities do not directly have any financial correlation.
  • It is not possible to easily quantify or measure such a type of capital, as it is intangible and based on relationships. However, some methods include the group’s headcount, cohesion, and trust between the members.

Social Capital Theory Explained 

The social capital theory states that social relationships and networks can provide invaluable resources to the participants involved and leads to development. That is the aim of building social capital – development, productivity, and overall growth. 

When people with the same goals come together as a group, they can pool their resources, share information, and collaborate at a community level. For example, students’ unions in colleges and schools, an association of professionals in the same occupation or organization, etc. 

But how exactly can people form such effective associations? The answer is networking. Usually, in smaller companies, the employees are often asked to refer or recommend potential candidates for recruitment. This ensures that more responsible or appropriate candidates only apply, as it is a matter of reputation for the existing employee. Also, this would increase the reach and scale of recruitment.

Social capital works like a chain, adding more components along the way and building a strong network.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Types 

According to the American political scientist Robert D. Putnam, there are two components or types of social capital – bonding and bridging. Another researcher Daniel P. Aldrich described a third type, the linking capital.

  1. Bonding capital – This type is formed between homogenous groups of people, i.e., people with the same objectives and tasks. For example, people who work in the same organization can bond and form an association.
  2. Bridging capital – In this type, a relationship is formed between heterogeneous groups. That is, the mainstream interests might be different, but there can be some commonalities. A dance group and a band partnering to conduct an event can be an example.
  3. Linking capital – This is the bond or relationship between a citizen and a government official or bonds between people at different levels of power hierarchies. 

Examples 

The following examples will give a better idea of the topic:

Example #1

Consider a market for books. There are three market leaders – publishers, P, Q, and R. The market has smaller publishers, too, accounting for less than 3% of the market share. However, Z, a new entrant in the market, introduced a new publishing model that would maximize the authors’ profits.

The model also aimed to convert readers or buyers into more than just customers and set up online groups and meetings where people could join and communicate. Slowly, publisher Z started setting up outlets where people could meet physically and network. The outlets worked like communities where people could stay for as long as they wanted to, and they even served food to the customers.

Hence, the publisher, Z, was building social capital where like-minded people could meet and bond.

Example #2

A new study published in the New York Times shows that friendships between the rich and the poor can reduce poverty levels. The study analyzed 72 million people (almost 84% of the population from 25 to 44 years) in the United States and their Facebook friendships.  

The study was able to explain why some neighborhoods were able to perform well and climb up the income ladder. It established that if poorer children grew up in communities where almost 70% of their friends or social groups were wealthy, the poorer children were more likely to make a 20% higher income.

The researchers of the study found that this ‘economic connectedness’ had a more profound effect on the kids than other factors like school, family, etc. Thus, even if not conscious, networking positively influences a class of society.

Advantages And Disadvantages 

Social capital has many benefits, which is why it is popular. It helps a group of people voice their concerns, share information, and build relationships and trust. In addition, social networking can help improve an individual’s contacts and help them in the future.

Especially in an organization, it can help increase employees’ productivity and facilitate open communication. Similarly, in non-professional areas, like neighborhoods or residential communities, it can also ensure a community’s safety and security concerns.

On the other hand, the demerits of such a type of association can be pretty serious. The best examples mentioned in such a case are drug cartels, mafia, and gangs, which can harm certain groups of people. This is because they can exert their power and take unlawful and unethical measures. Another common example is established organizations in a market barring entry to new competitors. This is known as negative social capital.

Social Capital vs Cultural Capital vs Human Capital

Human capital implies the economic value of an individual’s skills or intellect. Their knowledge, experience, and expertise can be valuable to them and the group or organization they belong to. In some companies, the employees are sometimes referred to as human resources or capital, as they have individual economic significance.

Cultural capital is similar to human capital, except the former has a cultural correlation. Any particular culture has its attributes and qualities it values. Sometimes, this can also include the titles or degrees held by people.

Compared to this, social capital focuses on the relationships between people of a group and the advantages such associations can offer. Hence, the emphasis on individual qualities is lesser.

Frequently Asked Questions (FAQs)

1. What is the social capital theory?

According to the theory of social capital, social relationships between similar or like-minded people can become valuable assets to community members who voluntarily come together. The aim of such capital is to exchange information and collaborate resources, thus increasing overall productivity and efficiency.

2. How to build social capital?

Voluntary social networks built by people are mostly not formal organizations or associations. Instead, they are social groups or communities that add to the capital through networking, word-of-mouth, etc. Existing members are added to the network when they identify other potential members.

3. How to measure social capital?

Since social capital is based on relationships and doesn’t have any direct financial or economic implication or correlation, it is not possible to measure it. However, some commonly practiced and simultaneously debatable methods include measuring the group size, the level of trust, and cohesion between members.

This article has been a guide to Social Capital & its definition. We explain its examples, advantages, disadvantages, & comparison with cultural & human capital. You can learn more about it from the following articles –

Reader Interactions

Comments

  1. Sam Oboh says

    Great publication

Leave a Reply

Your email address will not be published. Required fields are marked *