Social capital isn’t new, but everything about it is.

Social capital isn’t a new concept, but everything about how we can create, value, promote and exchange social capital is new.

10 min read  ·  January 16th, 2009

Rumblings about social capital have been bouncing through a variety of websites focusing on strategy, Internet business, marketing and cultural trends over the past couple months; granted, while the idea of social capital is not new, the recent collapse of the financial markets has created a renewed interest in how social capital is created, measured, leveraged and related to other forms of capital.

Since, according to Ronald Burt “social capital is the Wild West of academic work”, I see no reason not to add to the discussion.

Social capital is “capital” in only the loosest sense of the word.
Social capital is created by interpersonal transactions that form a relationship between two parties. That relationship creates a form of capital that is:

Difficult to value.

Social capital is a poor asset: because social capital is held through a relationship between two parties, its value is subject to different valuations by each party and revaluation at any time by either party without the other’s agreement. Relationships change and value can disappear in the blink of an eye; each party has the ability to create a mark-to-market evaluation of the past, present and future estimate of the value available to exchange in the relationship at any time.

Michael Cayley insightfully points out that “social capital is ego centric”; since social capital is relative to individuals, it will be difficult to find a meaningful benchmark and measurement to compare across individual relationships. While Social Capital Value-Add (SCVA) is a brave approach to measure the social capital held in corporations using NPV, WACC and other traditional corporate finance tools; is it possible to create any meaningful valuation of our “personal social capital”? How do we value the multitude of factors that factor into our decisions to value and exchange social capital? Can a relationship really be priced? Do we change the nature of and value of social capital simply by attempting to value it?

Are “social capital assets” substantively different from “social capital liabilities”?

Difficult to exchange.

Social capital is a pretty poor currency. While we understand the idea of social capital in an informal sense, the idea has yet to garner universal formal acceptance. Since its value is difficult to measure at any point in time and subject to unannounced, non-public and non-agreed revaluation, social capital suffers as a medium of exchange and can be difficult to cash in and exchange for other assets. Although social capital can be exchanged outside of the original relationship (have you ever asked a friend to do a favor for a friend?), it is more troublesome to exchange one’s social capital at par value with any degree of confidence.

How good can social capital be as a currency if we accept that it is not universally understood or accepted as a medium of exchange?

Pooling destroys value instead of creating value.

Adding more land to an existing plot of land and adding more money to an existing investment fund allows the owners of those resources to take advantage of certain opportunities (including efficiencies of scale) to create incremental value.

But pooling social capital among individuals in an organization limits the ability for any individual to exchange their individually-held personal capital for use by the organization. The social capital of the firm does not equal the aggregate social capital held by its individuals: instead of creating a reputation (i.e. association) premium, individual social capital trades at a discount to par value when it is exchanged for corporate use. It shouldn’t have to be this way, but it most often is.

Why? Even if social capital can amplify the corporation’s assets, the way personal social capital is spent by a company reduces a person’s control over how it is used, and the resulting value created is spread diffusely across the organization (even if you do accrue substantial personal benefits within the organization) A specific example: can you ask a friend to do a favor for your company in the same way they would do a favor for you?

As Ethan has pointed out, this inefficiency is “a major organizational design failure”. Learning how to design organizations that reduce (or even eliminate) the “deadweight loss” of the social capital transactions within and between companies may be the greatest opportunity for a 21st century capitalist.

Social capital isn’t a new concept, but everything about how we can create, value, promote and exchange social capital is new.

A great deal of the conversation about social capital focuses on the role that the Internet and online networks have played in its development and use today. But the premise that social capital is something new is misleading and neglects the much more expansive idea of social capital.

Social capital existed far before the Internet, broadband and our new communication mediums; the new media environment, the opportunities for self-publishing or blogs did not create a new source of capital.

It has existed ever since people started trading their time, thoughts, skills, energy and passion in return for the same; but what is different today is our expanded scope and scale to create, display, promote and value social capital, especially at the personal level.

In today’s economy everyone that creates anything that people use need to understand how social capital is created, valued, promoted and exchanged.

Need proof?

Do any of those questions seem relevant to recent conversations? I thought so.

This is just the start.

I would be surprised if the debate about social capital ended here. I’ll start with a couple follow-up questions in addition to the ones I’ve already raised; feel free to take an idea or create new ones, but please add to the conversation: comment on this post, create your own, link to your own thoughts, praises and rebuttals. A couple ideas on my mind:

I’m looking forward to the discussion…

A month ago Justin Kistner (@justinkistner) kicked off an email conversation between Ethan Bauley (@ethanbauley), Nate DiNiro (@unclenate), Barry Tallis (@barrytallis) and myself (@tdavidson) to bring together a number of diverse conversations about social capital. After some exciting conversation over email we decided to take the private conversation public to engage a broader audience; and since this is by no means a “single voice”, I’m looking forward to a continued discourse here in the public sphere. Enjoy…

Background Sources and Reading (Compiled by Justin and Ethan)

UPDATED JAN 23: I love learning from the cloud; thanks to everyone that have pointed out corrections and past work that I missed.

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