Social Capital, Economic Growth and Quality of Government: The Causal Mechanism

What makes a democracy work and which are the causes behind economic growth? One answer is given by Robert D. Putnam in his book about regional reforms in Italy during the 1970s and 1980s, which by now must be considered as a ‘modern classic’. Putnam’s theory, which is both complicated and sophisticated, is centred on the concept of social capital. The main thrust is that a working democracy depends on a population that is engaged in different social networks and forms of voluntary association. In such a vibrant civil society, they learn how to trust each other and thereby get training in the noble art of overcoming problems of collective action. Norms of trust and reciprocity created by social networks increase social trust that works to increase the intensity as well as the quantity of the networks, resulting in a virtuous circle that, in its turn, fosters a better working democracy. Weak or few social ties spurs distrust and set the society into a more vicious circle leading to a dysfunctional democratic process. Putnam’s theory bridges in an interesting and fruitful way insights from non-cooperative game theory with the Durkheimian sociological tradition of the social sciences where such vicious and virtuous circles have very long historical roots. At the aggregate level, the theory finds clear empirical support. If one encounters a city, a region or a country with the type of high levels of social capital that Putnam describes, the likelihood that there will be a better working democracy is very strong. Theoretically, it also makes sense, especially considering the increased interest within game theory in the many problems of how to explain the existence of ‘multiple equilibria’. Another reason is the amount of experimental work showing that real life agents base their strategy not on trying to exploit other agents, but on what they think the other player(s) will do. Things such as credibility, signals about trust and ‘history of play’ turn out to be of great importance. The real strength of the social capital theory is the