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I think, it is also one of the bases for high levels of official corruption in many Latin American countries. The Brazilians, for example, have to say that there is one morality for the family and another morality for the street. And the level of morality that one exercises for the people that one does not know is simply different from the way you treat family members. And this is why in Brazil, especially in poor Northern parts of Brazil, you get this very unfortunate combination of family-owned very oligarchic businesses connected with highly corrupt politics of that part of Latin America. Again, this is the parallel that is repeated and takes different forms in different parts of the world.
So, in China kin groups are extremely large. In Southern China you can get lineages, for people trace their ancestors back to a single ancestor, centuries of generations ago. So, that gives you a very large pool of labor to go from. In Southern Italy cooperation tends not go beyond nuclear family, which is then a very much limited kind of social cooperation that’s possible.
One responds to this kind of observation about cultural differences in industrial organization simply to say: “These are pre-modern societies. They haven’t developed a modern rule of law, but every modern society organizes itself based on a formal commercial code and a court system. You don’t need this kind of reliance on cousins and nephews and relatives and friends from school in order to do business.” And I think this is largely right. One of the big transformations that we want to bring about in the process of development is the set of formal rules that make business relationships transparent and make the relationship between citizen and government accountable and transparent and the like. So, we don’t question that in many respects we want to replace social capital with formal institutions. However, even in the United States, even in a very high-tech post industrial society you can see the workings of social capital that facilitate certain kinds of entrepreneurship. There was a very interesting study by Anna Lee Saxenian who teaches at the urban planning department at Berkley comparing the development of the Silicon Valley to Route 128 area in Boston. Basically she argues that it was social capital that over the long run made Silicon valley the generator of entrepreneurship and ideas of innovations in a way that, you know, that Route 128 was never fully able to replicate.
And the source of this was actually quite interesting. It was not in the first instance based on anything like kinship, it was rather based on a certain culture in the Bay Area where people made use of things like common educational groups. For example, most of semi-conductor companies in that region were preceded by Fair Child Semiconductor. So, a lot of great people that became industrial giants in that region were actually all colleagues of each other. A lot of them went to engineering school together at Stanford or at Berkley and had these close relationships. But, I think, anyone who is familiar with open source software or the general culture of Silicon Valley understands that there is a norm of reciprocity that exists, which, in some ways, may have come out of the hippy culture of the 1960-s, that is very intent on informal sharing of valuable intellectual property.
There is a famous story between AMD and Intel, the two giants in the manufacturing of CPUs, where AMD got a piece of capital equipment six months earlier than Intel. And its engineers spent the next several months breaking down this thing and trying to figure out how the machine works. And when Intel engineers got the same machines, they simply went to their colleagues at AMD and said: “How do you make this thing work?” And the AMD engineers told them. Now, if you think about this from a rational utility maximizing model it makes no sense. These companies are absolute competitors to one another. So, they have no reason to give free intellectual property to a competitor. And yes, they did this. And the reason why they did this was a normative one. There was a norm of reciprocity... And again, this is the same one that underlines the Linux operating system. All these programs were contributed freely at their time and put all this code to a public domain under the assumption that this norm of reciprocity will ultimately benefit them, with the favours that they did to other people would come back in the form of intellectual property that would be readily available. And Saxenian argues that, in many respect, this is the basis for...you know, Silicon Valley is understood as intensely itemised and competitive, but she argues that it is this kind of social capital — engineers sharing intellectually property — was that part of the lubricant that facilitated the takeover of the Valley over the long run.
Now, we get to this part of the world. And it seems to me that all post-communist countries have a special problem with social capital and trust, because of the legacy of Marxism-Leninism. Marxism-Leninism was a political system that is deliberately designed to deplete social capital. The theory was that the party and state were the central organizing structure in all society and that the state would then deliberately break the bonds that hold together trade unions, businesses, churches, private organizations of all sorts, and replace those horizontal connections between ordinary people with vertical connection between individuals and the state itself, even reaching bounds of the most basic social unit, which is a family. So, if you remember Pavel Morosov, in Moscow...I guess..don’t know if they still have it there... I know they have had a statue, I don’t know if it still exists. But you think about this. Pavel Morozov was celebrated because he turned his family in to NKVD. So, it is again that lesson that loyalty to the top is more important than any kind of vertical loyalty. And, unfortunately, the Bolsheviks had 70 years to inculcate these kind of norms and to destroy...You know, I think that Russian Empire in 1917 was relatively weak in social capital compared to other parts of Western Europe, to begin with. And what real civil society there was deliberately destroyed in the process of the commoditisation of the state by the communist party. So, when communism collapsed, there was a much greater lack of social capital in this part of the world, that is manifested in quite a lot of ways: the lack of the rule of law. You have formal rules, but anyone, I think, who understands how legal system works, understands that there is an extremely important normative component here. If people at the top of the judicial and the political hierarchy do not have the norm that says: you have yourself to obey the law, then nobody at the lower levels of the hierarchy is going to obey the law. And therefore, the enormous difficulties that had been experienced in establishing the rule basis of formal system in this part of the world were very much affected by the depletion of informal social capital, that is cooperative habits. The rate of crime, simple crime, mafia and street crime that emerged after the breakdown of communism, I think, was another manifestation that the only kind of controls that existed on people in many communist countries was the formal repressive ones of the police apparatus. And once this apparatus was gone, you did not have the internal set of values that make people want to be law abiding, whether or not the policemen are looking.
It’s very interesting, if you look at the society, which, I believe, has a high degree of social capital like Japan. Japan is one of the safest countries in the world. In terms of ordinary crime, it’s not safe, because you have a lot of policemen per capita or a lot of draconian punishments. I think it is safe largely because you have neighbourhoods where people watch each other and are able to enforce an informal normative order, without resort to formal enforcement. And I think it is those kinds of informal norms that were very much lacking in the post-communist world. That is the problem. This is the question: What do you do to get more social capital. And, if this analysis is correct, how do you develop these norms and restore degree of trust both between citizens, and also between citizens and their government. And this is, I think, one of the most difficult problems. And I’ll tell you why it is difficult from the public policy standpoint. Social capital can be generated within an economic system. If you come through the standard introductory game theory, you will know that in the well watched up prisoners’ dilemma game the Nash equilibrium does not produce a social optimum and in the iterated prisoners game they have gradual evolution of the norm of reciprocity. In plain English all that means that in ordinary interactions between people there will be a self-interest in developing a norm of reciprocity, because, in the long run, if you remember, who has been honest, this builds on itself and creates a foundation for social trust. But the conditions, under which you can have a spontaneous generation of trust, are very specific.
Eleanor Ostrom, in her book on common pool resources indicates in a number of ways that it works best in small communities, ones that are bounded, ones that are stable and ones that are relatively homogeneous in terms of ethnicity, religion, other kinds of diversity. Therefore, the spontaneous generation of this kind does not happen in diverse, large, global types of societies. Where does it leave you? I think that leaves you with a relatively limited set of tools to increase the level of social trust. It really has to do a lot with getting the state right. Because the role of the state can either destroy social capital or create the basis for social capital, depending precisely on its extent or the way that it intervenes in the society. We have already been through the ways, in which an overly interventionist state undermines social capital. That was the whole experience of Marxism-Leninism. The French state that led to the low trust society was another case when the centralized state took on too many responsibilities that should have been left to the market or to civil society. And therefore, injured in the long term people’s spontaneous ability to cooperate. On the other hand, the absence of the state, the absence of basic formal rules that provide basic public goods like safety in the streets or the rule of law, or the set of formal rules by which people can interact is also very disruptive for social capital. Because it is really that set of formal boundaries to human behaviour that then allows spontaneous generation of trust and norms among the groups of people. And so, at the very minimum it seems to me that, although, the truth of the matter is that often social capital is result of the non-rational factors: shared religion, shared ethnicity, shared experiences of a national trauma, for example, that produce the society where people can understand and work with each other and in other ways. You can not use that as a matter of public policy. What you can do is to create conditions under which that spontaneous generation has a better chance of taking off.
I don’t know where that leaves Ukraine. But certainly it cannot hurt that you now have a mobilized civil society that in a very important political confrontation was able to call the Ukrainian government to account. And I believe, that in the long run...you know, I believe that it’s the birth, it’s the germ of a developing degree of social capital in your society. So, all I wanted to say is that if you want more social capital, keep it up. And, I did promise to get back to the question of education. Final issue is, in fact, that social capital is often a by-product of a certain kind of education. A professional education is not simply the transmission of some facts and knowledge, and techniques. It is also a moral education in norms that place the professional standards above the self-interest of the professional. And that, in a way, is a definition of professionalism. And I think, in fact, that one of the things that having this kind of higher education does is that it inculcates certain norms, which again becomes an important source of social capital. And I guess that’s what brings me back full-circle to your project, to EERC and to the all good work that your are doing in educating the new generation of professional economists here in Ukraine. Thank you.
