Social Capital

What is 'Social Capital'

Social capital is an economic idea that refers to the connections between individuals and entities that can be economically valuable. Social networks that include people who trust and assist each other can be a powerful asset. These relationships between individuals and companies can lead to a state in which each thinks of the other when something needs to be done.

BREAKING DOWN 'Social Capital'

Along with economic capital, social capital is a valuable mechanism in economic growth. As technological advancements continue to make the world smaller and the global population more interconnected, companies rely on social capital more than ever to drive business. While in decades past, companies could rely on persuasive marketing to get customers in the door, in the 21st century, those customers are plugging into social networks and relying on their peers to direct them to a provider when a business need arises.

Examples of Social Capital

Social capital permeates many aspects of the business world, including companies acquiring new customers and individual job-seekers finding employment. A person who knows somebody at a company where he is applying for a job and uses this connection to secure the position has benefited from social capital in his employment search. Likewise, an insurance agent who joins a local church or civic organization and uses the relationships he builds within to acquire new clients and increase his book of business has also employed social capital.

Companies such as Airbnb and Uber have harnessed social capital to grow their market shares and become major disruptive forces in their industries. Both companies rely on the power of social networks not only for marketing but for quality control, as users contribute public reviews of provider quality and vice versa.

Bonding vs. Bridging Social Capital

Bonding and bridging represent two forms of social capital. Bonding social capital is social capital that arises from the connections formed by homogeneous groups, such as employees within a single company or enthusiasts of a specific hobby. Bridging social capital, by contrast, results when members of different groups forge connections to share ideas and information.

Negative Effects of Social Capital

Social capital can also have negative effects. For example, negative social capital results when a social network is used for manipulative or destructive purposes that affect the economy negatively, such as when a group colludes to fix market prices. Nefarious groups, such as gangs and drug cartels, use social capital to strengthen bonds within the group and to reach out to like-minded individuals to increase their ranks. Moreover, the presence of such groups can decrease the overall social capital in a neighborhood or city, which causes local businesses to suffer, as potential customers avoid these areas on account of their less-than-stellar reputations.

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