Social capital: the economy’s rocket fuel

Andy Haldane

Chief Economist, Bank of England

The Covid crisis represents the latest in a long line of moments of economic upheaval in the UK in which social capital has provided important counter-cyclical stability. It is a timely reminder that civil society matters more than is generally acknowledged and should serve as a prompt for reversing the long marginalisation of the sector from the country’s policy debate.

“There’s no such thing as society.” So said Conservative Prime Minister Margaret Thatcher in 1987, in a famous interview for Women’s Own magazine. She went on, “people must look after themselves first” and then, and only then, their neighbours. Self-interest trumped mutual interest, personal rewards aced reciprocity.

We have since moved a long way. In 2010, Conservative Prime Minister David Cameron made the “Big Society” – a plan to revitalise civil society – one of the centrepieces of his new Government. While this initiative ultimately ran aground, the shift in tone was stark and significant.

The Covid crisis has moved this dial several notches further. In March this year, Conservative Prime Minster Boris Johnson observed: “One thing I think the coronavirus crisis has already proved is that there really is such a thing as society.”[1] It is easy to see why he chose those words.

Across the world, the pandemic has prompted an outbreak of community kindness: from small acts of neighbourliness to a surge in volunteering. At a time of acute societal stress, civil society emerged stronger than ever.

“Not just during pandemics, but in response to wars, natural disasters and industrial revolutions, social capital has repeatedly served as a vital counter-cyclical societal stabiliser.”

And not for the first time. Past pandemics have tended to collapse the capitals on which capitalism is built: physical capital, like machines and factories; human capital, like jobs and skills; and financial capital, like debt and equity. As these capitals have collapsed, so too have peoples’ income and economies’ GDP. This pattern has been repeated during the Covid crisis.

Yet there is one capital that, historically and currently, has bucked these trends: social capital. Not just during pandemics, but in response to wars, natural disasters and industrial revolutions, social capital has repeatedly served as a vital counter-cyclical societal stabiliser.

The Covid crisis is the latest in a long historical line, with social capital gluing together communities otherwise at risk of coming unstuck. The physical distancing policies put in place globally to contain the spread of the disease did not, in fact, generate social distance. Instead they reinforced the sense of community purpose and social solidarity, using either physical or digital means, causing social capital to flourish.


The role of social capital and the social sector

Social capital is typically taken to refer to the network of relationships in society. These networks are, in many respects, the DNA of society. As behavioural psychologists have long known, humans are typically driven by mutual- rather than pure self-interest. They are natural co-creators of social capital. Rutger Bregman in his recent book calls this “humankind”.[2]

While social capital is built personally and locally, its benefits extend nationally and often globally in an increasingly interconnected world. Social capital is fuel for us as individuals, personally and emotionally. But it is rocket-fuel for us economically and financially too. It is the secret source of economic as well as personal growth.

The greatest engine of growth for the world economy came after the Industrial Revolution of the late 18th century. The cylinders powering this engine were physical, human, intellectual and financial capital. They combined forces to generate the greatest mass flourishing of business, commerce, innovation, job creation and, ultimately, prosperity in human history.

Yet there was one other vital ingredient in the growth recipe, the secret source of mass flourishing: social capital. The societal stresses created by the Industrial Revolution – homelessness, loneliness, family separation – risked tearing the social fabric, stymieing innovation and scuppering economic success, as they had in earlier centuries.

The reason they did not in the mid-19th century was down to the blossoming and formalisation of the charitable sector. Charity repaired the fraying of the social fabric brought about by wrenching economic and technological change; feeding the hungry, housing the homeless, befriending the lonely. That societal stitching was a key enabler of the economic expansion of the masses that then followed.[3]

More recently, this mass expansion has gone into retreat for a great many people due to rising inequalities. Both accompanying and contributing to it, there has been a depletion of social capital. This was captured by Robert Putnam 20 years ago in Bowling Alone, a lament to the loss of community capital in the US.[4]

The trend has further worsened in the two decades since. Last year, Raghu Rajan published The Third Pillar, in which he attributed much of the blame for the fracturing of society to the lack of focus on, and loss of, community and civil society.[5] The “deaths of despair” discussed so vividly by Anne Case and Angus Deaton are further disturbing diagnostics on the same societal trends.[6]

New technologies and social media mean the world has never been more closely connected. More than four billion people can access each other instantly, a genuinely worldwide web. And the total rises by an extra 750,000 new people each working day. The world, for the vast majority of its residents, is now only a click away.

But digital proximity has not, in fact, supercharged social togetherness. It may well have done the opposite, culminating in a growing epidemic of loneliness and isolation, a loosening of community bonds, a rising toll of deaths of despair, subsidence in Rajan’s third pillar and many more citizens bowling alone. A hyper-connected world has disconnected many from the mains.

Yet as this steady erosion of social capital has taken place, civil society (its societal embodiment) has largely remained on the side-lines of mainstream policy debate about causes and solutions. Relative to the public and private sectors, on which policy attention is lavished, the social sector has often been treated as an amorphous after-thought, an invisible residual.


Recognising, rewarding and rethinking civil society

At a time when the importance of social capital has never been greater but its stock appears somewhat depleted, this begs two questions. First, how can we better recognise the societal contribution of the social sector? And second, how do we invest that endowment of social capital wisely to grow it in future and repair Rajan’s third pillar?[7]

Part of the problem lies in the (lack of) measurement of social capital and the social sector’s contribution to it. What is out of sight tends typically to be out of (policymakers’ and the public’s) mind. Social capital, and the larger part of activity in the social sector, does not score in standard economic success measures, such as GDP. Those NHS volunteers and mutual aid groups receive a precisely zero weighting in the National Accounts. That is a glaring measurement gap.

It has been estimated that there are around 1 billion[8] volunteers globally and around 20 million[9] in the UK alone, but most receive a GDP score of close to zero.[10] By taking a different approach, I have estimated that the social sector in the UK may in fact contribute over £200 billion in social value each year in the UK – or around 10% of GDP. Only around one tenth of that currently finds its way into GDP.[11]

“It would be hard to think of a better time than now, with civil society again holding things together in a moment of national crisis, to recognise its contribution.”

Progress has been made over recent years. The UK’s Office for National Statistics now publishes measures of social capital, based on indicators of personal relationships, social network support, civic engagement, and trust and cooperation.[12] These complement its suite of indicators tracking societal well-being, which are now published on a weekly basis.

Companies too have made progress, moving towards a more expansive set of reporting requirement for businesses. For example, so-called “integrated reporting” provides a way for companies to report their contribution across a broader set of capitals than physical and financial, importantly including natural, human and social capital.[13]

Yet despite these gains, mainstream reporting continues to ignore social capital and significantly understates the contribution of volunteering and the social sector to the value businesses and societies create. The residual has largely remained invisible.

It would be hard to think of a better time than now, with civil society again holding things together in a moment of national crisis, to recognise its contribution. Doing so would mean broadening our measurement horizons and refocusing our sights on what is hiding in plain sight in our communities. It may mean putting well-being and broader conceptions of capital at the very centre of how we measure success, whether as companies or economies.

But if better measuring and recognising the role of social capital and the social sector is a necessary condition for success, it is far from being a sufficient one. To be successful, social action needs to be voluntary and local. But to be effective and well-directed, these actions also need supporting infrastructure.

They also need to operate in partnership with the public and private sectors. Doing that effectively requires the posing of some difficult questions about the appropriate boundaries of the market, the state and civil society: difficult analytically, and difficult politically.

The private sector operates in a largely decentralised fashion, allowing market forces and market prices to serve as a resource allocation device. This typically contributes to the efficiency of these activities, but comes at a cost: namely that the private sector under-provides public goods, from lampposts to lighthouses, due to freeriding.

The public sector operates on a unitary, centralised basis, unguided by market forces. That enables the state to side-step problems of freeriding and supply public goods on a scale and at a price better satisfying public needs, from healthcare to education. But again there is a cost: this time a lack of dynamism associated with the absence of competitive pressures.

The social sector has a structure that is a hybrid of the public and private sectors, combining elements of both market and state. Like the state, it provides public goods, largely unguided by market forces and prices. Like the market, it does so on a decentralised, and sometimes competitive, basis. The model of the civil society we operate is, in important respects, a mixed-economy model.

The question is whether that model is the right one for the 21st century. The risks are clear. Decentralisation with no market discipline runs the risks of under-providing some public goods and over-providing others. For the same reasons, it also risks that provision taking place inefficiently. This is the worst of both worlds.

This is not intended to be a criticism of the social sector which serves brilliantly huge numbers of people and has done so for so many years. But it is meant to beg questions about whether our existing civil society model is fulfilling its potential. Are these classic market failures amenable to policy interventions which could expand the provision of public goods and do so even more effectively?

Consider for instance the way in which civil society might open up access to an even larger army of volunteers than already exists via the establishment of a structured programme. Since 2009 the National Citizen Service (NCS) has offered precisely such a three-to-four week programme of structured volunteering for 16 to17-year-olds. But civic service should be a lifelong pursuit, covering every stage of the lifecycle, and open to all.

To achieve that, the NCS could be expanded, in both duration and age coverage.[14] It could provide a structured national programme of volunteering, implemented on a decentralised basis alongside local charities. This would help mobilise millions more volunteers, including those currently under-represented. To them, it would offer in return fulfilment and training.

To support that, national civic service could usefully be recorded and rewarded – perhaps through the use of a digital civic passport. It’s a model that already exists for young people in Scotland and elsewhere around the world. With that passport, the door is then opened to thinking imaginatively about ways in which volunteer activity might be encouraged. One way of doing so, which again already exists in parts of England and in Scotland, would be a system of “digital time credits” for the time spent volunteering which can then be used on certain activities.

These are tentative suggestions about how a 21st-century model of civil society might look. Lasting solutions will require more detailed analysis and evidence-gathering and a wide angle lens on the respective roles of the public, private and social sectors and the way they can best act in partnership – a process likely best served by the establishment of a new Commission on Civil Society.[15]

[1] C Sephton & J Rice, “Coronavirus: Boris Johnson reveals 20,000 ex-NHS staff have returned to help fight Covid-19”, Sky News, 1 April 2020

[2] R Bregman, Humankind: A Hopeful History, Bloomsbury Publishing, 2020

[3] A Haldane, “Ideas and Institutions – A Growth Story”, Speech given at the Oxford Guild Society, 23 May 2018

[4] R Putnam, Bowling Alone: The Collapse and Revival of American Community, Simon & Schuster, 2000

[5] R Rajan, The Third Pillar, William Collins, 2019

[6] A Case & A Deaton, Deaths of Despair and the Future of Capitalism, Princeton University Press, 2020

[7] For a discussion of the apparent pre-Covid depletion of social capital see: M Whittaker, “Time to reverse our (social) capital losses”, Pro Bono Economics, February 2020.

[8] UN Volunteers, The thread that binds: Volunteerism and community resilience, 2018 State of the World’s Volunteerism Report, 2018

[9] NCVO, UK Civil Society Almanac 2020, 2020

[10] A Haldane, “In giving, how much do we receive?  The social value of volunteering”, Speech given at a Pro Bono Economics lecture to the Society of Business Economists, London, 9 September 2014

[11] A Haldane, “The Third Sector and the Fourth Industrial Revolution”, Pro Bono Economics 10th Anniversary Lecture, 22 May 2019

[12] ONS, Social capital in the UK: 2020, February 2020

[13] R Simnett & A L Huggins, “Integrated reporting and assurance: where can research add value?”, Sustainability Accounting, Management and Policy Journal, Vol. 6, No. 1, pp. 29-53, 2015

[14] A Haldane, “The Third Sector and the Fourth Industrial Revolution”, Pro Bono Economics 10th Anniversary Lecture, 22 May 2019

[15] C Giles, “Voluntary work comes under spotlight in UK’s virus recovery”, Financial Times, 30 August 2020