What Is Social Capital?

with Larry Kotlikoff

Last week I appeared on my friend Larry Kotlikoff’s podcast, Economics Matters. It was a fun conversation in which Larry gave me the opportunity to talk about my intellectual origins and my present political location. While clearly I’ve changed some of my views, some of them have remained constant, including my view that what I call “social capital” can explain a lot about transgenerational inequality.

In the following excerpt from my conversation with Larry, I give an account of social capital and what I believe is its power to explain the subtle relationship between social segregation and income inequality. The acquisition of knowledge and skills can help an individual acquire wealth, but the social environment into which that individual is born and within which they mature will have consequences for their ability to acquire that knowledge and those skills in the first place, and then to put them to work in a productive fashion. Even if you have skills and competence, you may find it difficult to put them to use if you don’t know someone who can help you get a job. And if nobody in your community has a job, and that community remains relatively socially isolated, then impoverished conditions may end up reproducing themselves from generation to generation.

That’s a simplified version of the theory. But one of the implications of this idea is that self-segregation is a recipe for disaster for poor communities, and for anyone seeking to transcend their origins. Finding a path to the larger world “out there” is sometimes easier said than done, but it’s vital if our most troubled communities are going to get their children and grandchildren out of the cycles in which they find themselves.

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LARRY KOTLIKOFF: So let's start out by talking about, since we're talking about does racial inequality persist, maybe you could describe in your mind what you think, in your view, the state of racial conflict is today in the country. Take it away.

GLENN LOURY: Okay. So what I think is, when I was in graduate school, it was the 1970s. That was a half-century ago. And at that time it was a decade after the Martin Luther King March on Washington, Civil Rights Act in 1964, Voting Rights Act, Lyndon Johnson, Great Society. It was a decade after the long hot summers of the 1960s, assassination of King, assassination of Malcolm X, of Bobby Kennedy.

So there was a lot of excitement in the air about applying the methods of economics to resolving the urban crisis, the equality crisis, and the “Negro dilemma,” Gunnar Myrdal, [An] American Dilemma. But there was that kind of talk in the air. Anti-discrimination law was relatively new. Guys like Orley Ashenfelter, James Heckman—these are labor economists, econometricians who are very venerable figures in the profession—were just cutting their teeth. And Gary Becker's influence on economics, on how you were thinking about discrimination issues, Kenneth Arrow, information-theoretic applications. This was all kind of in the air.

When I was trying to figure out what to write as a dissertation, I stumbled upon trying to model the over-generational arc of economic standing within demographically differentiated populations. So race was a kind of marker or a social convention that caused a certain degree of segregation in society. If you had a theory of growth, if you had a theory of economic dynamics, that was like a single agent or something like that. Everybody was homogeneous. That would be one thing. But if you segregated the population and you looked at different patterns of social interaction within subgroups of the population, that would be another.

So I set for myself the task of trying to write down a simple, more-or-less neoclassical growth model of income dynamics that took account of social externalities in the acquisition of human capital, which externalities were propagated through the networks of affiliation among individuals in the economy. And those networks could reflect racial identity dynamics.

So that was the problem that I set for myself. I'm going on too long. Thanks for giving me a lot of time to talk, Larry. I'm talking like I'm talking to an economist. I know most of your audience might not be economists

Well, let's just break that down just a little bit. You talked about social networks. And you developed at an early stage the concept of social capital.

I used the phrase, anyway. I mean, “develop” might be putting it too strongly. But James Coleman, the late sociologist, University of Chicago, eminent figure, does credit me. So does Robert Putnam, the political scientist—still very much with us, an influential student of government—gives give me some credit for introducing this idea. So yeah, maybe.

You want to explain what that is to the general audience, in your view?`

So human capital, social capital. Human capital [consists of] skills and productivity enhancing traits that individuals might acquire through education or through training or whatever route that enhance their earnings potential and that an analyst could use to try to explain differences in earnings in a population. Measure the human capital, correlate that to the earnings, and then account for the disparity in the earnings.

Social capital, broadly speaking, in my mind, was the idea that the amount of human capital acquired by somebody to whom you're connected would influence the cost to you of acquiring human capital yourself. This is what I try to explain in that essay that I shared with you, that human development is not just transactional. It's not just people buying stuff. It's also relational. It's people connecting with each other.

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I think the family is the clearest illustration of that, because the maturation of the infant from pre-birth is nested within this web. And you can't come in and out of it based on changing budgets or prices. It's based on how people connect, on who they relate to, on how they understand themselves, on how they identify. And I'm thinking that race—we talk about racial inequality, so what is race? It's marks on people's bodies, color of their skin, or whatever. But no, I mean, it's also identity. It's also meaning. It's significance. It has connotations. It carries implicit understanding. And those are reflected in how people connect, how they marry.

You don't even get race, you don't even get the fact of race, unless people behave in a way to produce race. They have to actually decide to produce and to reproduce the underlying physical differentiation that is the basis for race. Lemme just finish. I'm sorry to go on, but I just want to say, you asked me what was social capital and I was trying to explain that if I have a theory where skills—how well you do on the test, how much experience you have at a task—determine wages.

But if I have a process of skill acquisition that is nested within social relationships and not fully expressed through transactions, I'm gonna get patterns of inequality that have this social aspect to them. And that's what I'm trying to refer to when I use the phrase social capital.

So if you have, let's say in the extreme, people being forced to intermarry regardless of skin color, race would over time disappear, kind of by definition.

Oh, sure. That's tautological. That's right.

Well that's tautological but also something people don't think about. And you're saying that race is endogenous to the fact that this doesn't happen, that people do systematically make a distinction as to who they marry based on skin color— and also cultural aspects of what that comes along that—that's perpetuating racial differences in, let's say, background and history and opportunities, are leading to perpetuation of some of the inequality we see in the actual world. We see big inequalities in black-white health outcomes and wealth holdings and income attainment, education, quality of education, income levels.

Correct, correct. I want to say something else, because I think this gets right at the heart of the welfare economics—we're economists—meaning the normative social analysis. How do you make judgments about which state of affairs are better or worse than which other state of affairs? That's the question of welfare economics. And this gets right at the heart of the welfare economics dilemma, I think, for racial equality, which is that the prerogatives of association which actually create race—that is, I'm free. I'm a free agent. You can't do what you just got through proposing, force people to marry. That's tyrannical. That's so illiberal as to be beyond belief, even beyond the Chinese Communist Party, I should hope.

It wasn't beyond the Nazis. I mean, the Nazis wanted to—

Well, that is the exception that proves the argument.

Exactly.

That you're not gonna do that. And therefore—and I think, by the way, this applies beyond race. I think it also applies to class. Therefore, the social foundation of the inequality, it's like there's a hypocrisy built into a certain kind of egalitarianism. People say, “Oh, let everybody be equal.” But they don't really intend to marry the Cockney-speaking son of a chimneysweep. They have no intention of doing the things that would be fundamentally required to create equality, which is surrendering some of your person to the project of like a kibbutz, where everybody has to live in the same common space and, no, you can't teach your kids any more than the other people's kids are being taught, even if you have a PhD. Nobody wants to live in that world.

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