Social Capital: An Introductory Note

Welcome to my first post on the ‘Social Capital’, which is the foundation of my subsequent blogs on the ‘Economics of Mutuality’.

This blog is the beginning of an exploration into how business must be conducted. We explore whether whether Milton Friedman’s assertion that the sole purpose of business is to make profit has any truth to it. As an introductory note, I would like introduce the readers to social capital, a limitless but untapped resource. This is to serve as a foundational text for the blogs to follow. Stay tuned!!

Multinational’s are today’s superpowers, with their income exceeding that of entire countries. Therefore, the dynamics of their function are crucially important to the well being of humans. Just like a chain is as strong as its weakest link, the lowest paid employee in the value chain of an MNC determines the strength of the corporation itself. The natural argument against this would be a compromise on profits with increased well being for those at the lower rungs of the ladder. However, what would happen if we extend our minds in understanding economics in a fundamentally different way?

The typical way of looking at economics is via the prism of ‘land, labour, capital and entrepreneur’. Of these, capital is the most poorly defined and understood. Capital has four components namely (i)natural, (ii)social, (iii)financial and (iv) human capital. Of these, financial capital is the most well understood and measured whereas social capital is the least well understood and measured. Social capital is an infinite resource that exponentially increases with individuals getting together. People’s regard for one another is the most valuable source of well being and ‘relational poverty’ has greater consequences than ‘financial poverty’. Therefore, the view that satisfying the natural hunger of a starving man to end poverty is incomplete. The relational hunger of the individual must also be met. Indeed, the man needs bread to exist, but to live he needs relationships which is the essence of ‘social capital’. The adage, ‘it takes a village to raise a child distils this idea very well.

In 1947, the Mars Inc. report entitled ‘ExploringMutuality’ outlined the company’s commitment to mutuality of services and benefits among consumers, distributors, competitors, suppliers, government bodies, employees and shareholders. Note how shareholders came at the very end. Mars is strongly focused on ‘mutuality’ which might seem like the less ‘profitable’ way of doing things, but by harnessing the infinite resource of ‘social capital’, Bruno Roche, chief Economist at Mars. Inc argues that even long-term profitability is ensured. A Copernican revolution is needed in multinational corporations. Today, money is at the centre and relationships revolve around it. It needs to be the other way round so that relationships are at the centre and money is only a tool to facilitate relationships, not a way to define them.

Returning to the relevance to value chains, Mars. Inc. has developed radical corporate thinking right from its inception at a time when profit is commonly regarded as sufficient reason for function and shareholder benefit was the only focus. Mars. has effectively reversed this notion popularised by Milton Friedman in its operations and believes that responsible growth rather than ‘purposeless growth’ is the way forward.

Welfare economics, behavioural economics and social psychology are some of the disciplines from which these ideas are inspired. A new social welfare function is sought under the realisation that social capital has largely been a missing element of main-stream economics and has therefore been omitted from most research. Within behavioural economics, the concept of ‘Reciprocity’ is gaining traction in light of its potential applications. The prospects of social norms are well documented and research by the BIT (Behavioural Insights Team) or the Nudge Unit is now making direct contributions to UK government decisions. In 1979, Prechter wrote in the ‘Elliott Wave Theorist’ that social mood (or norms as in behavioural economics) drive financial, macroeconomics and political behaviour, in contrast to the notion that such events drive social mood. This distils the importance of the ‘people-element’ in an economy.

Despite the apparent similarity of Mars Inc.’s vision to CSR, it has little or no overlaps at all because CSR often becomes a ‘box-ticking’ exercise for firms. Mutuality however, relies on untapped social capital which draws from the collective spirit of people coming together, a resource that does not deplete. In the words of Adam Smith, there are ‘evidently some principles’ in that nature of man ‘which interest him in the nature of man, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it, except the pleasure of seeing it’. This is the essence of what ‘social capital it’ and we intend to develop this foundational principle and see it outworked in modern corporate culture.