It’s more than a century since American school supervisor Lyda Hanifan coined the term social capital to define intangible social connections vital for community cohesion and productivity.
Economists have long recognised its importance. But they have never effectively incorporated it into their models.
“Monetary indicators (of social capital) are very rare,” Rob Smith of the Midsummer Analytics and International Institute for Sustainable Development told an IMF conference about intangible capital in Washington on 16 November. “There has been very little effort been put into valuing social capital.”
This is now changing. UN Secretary General Antonio Guteres called last year for a new way of measuring GDP that took into account intangibles including the environment and social capital. Economists are trying to quantify and add it to national income data.
Wilson called for national statistics offices across the world to standardise non-monetary measures of social capital; contribute to research into the monetisation of social capital and incorporate social capital in their work programmes.
“The international statistical system can help by taking the measurement of social capital seriously, which has, arguably, never been more important,” he said.
Smith said that counting public spending on justice and law order as capital might be one way of quantifying a part of society’s social capital.
The objectives of these efforts are noble. But the road to hell is paved with good intentions.
IMF managing director Kristalina Georgieva said at the start of the conference that measuring intangible capital including social capital is difficult.
But it’s more than that. It’s impossible.
If something has no physical characteristics, how can you pretend to measure it coherently and objectively?
An intangible is only perceptible at the level of the individual and one person’s view of its value will inevitably diverge from that of another. And this is a subjective evaluation that science cannot validate.
It’s all a matter of taste. Often it’s the product of prejudice. And it can change over time.
Any quantification of an intangible’s value based on aggregating the subjective estimates of individuals (which is the only way it can be done) will be wrong and is likely to be misleading.
A state making a decision using a calculation made in this way of the stock of a country’s social capital may introduce its own subjective evaluation of a particular social activity. For example, investment in security could be deemed to be a priority in a police state and presented in national accounts as a contributor to national prosperity when it’s invariably the opposite..
The impossibility of measuring social capital and the hazards of even attempting it should lead economists to rethink where they are heading.
Economics should stick to what can be scientifically measured: physical assets. And the most poorly-quantified tangible component of every economy is its actual and potential physical infrastructure, the foundation of value creation and social cohesion through history.
That’s what the world needs, not economic models that present imaginings as tangible facts.
But that isn’t happening. Confronted by their models being consistently invalidated and their theories being both illogical and lacking in empirical support, economists are seeking ways of staying relevant in a world where intangible industries rule.
They are on a mission to become the Wizards of Oz of our times, pretending to control something, like social capital, that actually doesn’t exist outside their minds..
It can’t end well for any one.