By Chris | March 9, 2008
I’m in a group in my economics department that discusses microeconomics literature and research ideas. During our last meeting we discussed “Does Social Capital Promote Industrialization? Evidence From a Rapid Industrialization” by Edward Miguel, Paul Gertler and David Levine. This 2005 paper used evidence from Indonesia to dispute an earlier conclusion by Putnam (1993) that social capital is critical for economic growth. It seems intuitive that having relationships with the right people is a major asset for aspiring entrepreneurs. Strong relationships generate trust which facilitates business transactions. Short-run conflicts of interests disappear in the face of long-term relationships. Wide social nets provides an entrepreneur with access to many knowledgeable individuals, eliminating some of the problems of asymmetric information. I don’t have the statistics, but it is well known that most seed money for new business comes from family and friends.
How is it possible that social capital didn’t drive growth in Indonesia? It is true that some aspects of social networks can discourage entrepreneurship. Social norms may discourage competition with established businesses and pressure people into staying in their current line of work. How many parents are pleased when their children drop out of college or quit a good job to pursue a start-up? However, I think Migeul et al. comes to it’s startling conclusion by choosing poor measures of social capital. Scout groups, places of worship, art groups, and credit cooperatives aren’t good proxies for the type of social capital that is likely to drive entrepreneurship.
We all know that social capital is important. My brother quit his investment banking job and recently launched RightChannelRadios.com. If you are looking to purchase a CB radio and antenna or have some e-commerce expertise you could share with him, you should check it out. In the process you’ll be illustrating one way social connections impact economic growth.