The Perils of Buying Social Capital Locally.

Author:Murphy, Ryan H.
  1. Introduction

    Advocates of buying local argue that doing so is beneficial for instrumental reasons. First, for what can be characterized as a "mercantile" rationale, they argue that keeping money in the local economy can make everyone richer, an argument that does not withstand the scrutiny of basic economic analysis (Lusk and Norwood 2011; Gibson 2015). Advocates also claim that buying local has environmental benefits via a smaller environmental footprint, an argument that appears not to be true empirically (McWilliams 2009; Sexton 2009).

    This paper explores a third instrumental reason: that buying local causes localities to accumulate social capital, defined as the strength of social networks and the norms and trust that go along with them. (1) Its importance, championed if not pioneered by Fukuyama (1996) and Putnam (2000), is today almost taken for granted. However, recent research (especially Satayanath, Voigtlaender, and Voth 2017 and Acemoglu, Reed, and Robinson 2014) suggests that indicators we associate with social capital may often have negative effects. While academically the focus has been on the benefits of social capital, among the negative outcomes social capital may produce are "terrorism, organized crime, clientelism, economic inefficiencies, rigid communities that stifle innovation and are dysfunctional within broader societies, ethnic rivalries, and unjust distribution of resources" (Warren 2008, p. 123). Landolt and Portes (1996) presented an earlier statement on the potential problems with social capital, raising issues such as social capital facilitating the exclusion of outsiders. I discuss recent evidence as it relates to buying local and raise other concerns suggesting that, to whatever extent buying local enhances social capital, it may be a net negative. To argue that buying local is instrumentally beneficial because it enhances social capital, one first needs to show that the society does not already have too much of it. It should be noted that Trigilia (2001) first raised the concern that social capital accumulated via buying local may not be unambiguously beneficial, but did so narrowly in terms of market power and its imposition of social pressures against innovation.

    It should be emphasized, however, that skepticism toward social capital should not be taken as an argument for atomistic capitalism. Where social capital is not present, individuals do not retreat to be by themselves. They retreat to their families (Banfield 1958; cf. Fukuyama 1996, pp. 61-145). The tension lies in the manner in which the circle of trust is extended beyond the family, not the degree of atomism of the individuals composing the society. Rather than atomism, what is pertinent is whether the relationship between social capital and social welfare is monotonic.

    The negative effects of social capital may be thought of in more than one way. Primarily, I will discuss the negative effects of what is generally thought to be beneficial--for example, the interconnectedness of a society. Another possible dimension is that certain social capital may be thought of as being perverse, whereby it actually facilitates criminal activity, as in Rubio (1997). This dimension will arise in section 4, which discusses how buying local may be interpreted as heightening awareness of in-group and out-group distinctions. However, while these mechanisms differ, they are complementary, not offsetting.

  2. Buying Local and Social Capital

    While social capital as a concept has a long history--dating at least to Tocqueville (2)--I will focus on its conceptualization by Fukuyama (1996) and Putnam (Putnam, Leonardi, and Nanatti 1993; Putnam 2000). Social capital, often measured by civic engagement and associational membership, (3) creates networks of individuals, enabling trust and large-scale cooperation. Fukuyama claims that social trust explains the remaining 20 percent of economics that neoclassical economics cannot explain (1996, pp. 13-22). And according to Putnam, Leonardi, and Nanatti, "economics does not predict civics, but civics does predict economics, better indeed than economics itself' (1993, p. 157). It has also been argued that social capital, thought of as "informal institutions," deserves the credit often given to formal institutions (Williamson 2009).

    Fukuyama sees trust as a means of drastically reducing transaction costs. In low-trust societies like much of Southern Europe, businesses are centered on the family, the group of people safe for an individual to trust. The transaction costs of working with those outside the family are often prohibitively high, preventing cooperation and the gains from trade. Similarly, in China, firms cannot last long, since, out of a lack of trust, they are never handed over to professional managerial teams. Instead, once the founder retires or passes away, the firm's fortunes are in the hands of the founder's children, who may not be of the same entrepreneurial quality. The failure of firms to scale to the size one sees in high-trust societies like Germany and the United States is a substantial static cost that prevents otherwise modernized societies from reaching the technological frontier.

    Putnam argues more generally that social capital underlies the quality of institutions. Social context shapes the performance of institutions, which ultimately leads to social outcomes. In their foundational work, Putnam, Leonardi, and Nanatti (1993) find that differences in outcomes between states in Northern Italy and Southern Italy, where much else is held constant, are explained by their differences in civic traditions. Civically engaged networks of citizens enable accountable governance, which in turn enables economic performance and other social improvements.

    Buying local, whether by familiarity, empathy, or repeated dealings, is said to build trust and to enhance social capital. Typically, encouraging the accumulation of social capital is difficult; simple subsidies for civic organizations have unclear and possibly negative effects (Rothstein 2005, pp. 92-128). A keyhole solution for accumulating social capital would thereby be of great interest in public policy. The literature on buying local and social capital claims to have found that solution. Feenstra (1997) argues that local food systems with desirable characteristics "enhance social equity and democracy for all members of the community." She explores several means of encouraging local food so as to combat agribusiness and the corporate control that impair communities, according to other authors she cites.

    Goetz and Rupasingha (2006) argue that empirically, the presence of Walmart reduces social capital stocks because it "responds to market opportunities and by definition ignores the local externalities it creates within communities." Using an instrumental variable technique, they find that the initial number of stores and each added store per 10,000 people negatively impact social capital, as measured by an index comprised of associations per 10,000, presidential voting in the 2000 election, nonprofits per 10,000, census participation, and church adherence. The number of stores reduces the index by about 10 percent of a standard deviation per 10,000 and the additional store per 10,000 reduces it by 15 percent of a standard...

To continue reading