International Journal of Economy, Management and Social Sciences, 3(1) January 2014, Pages: 60-64

TI Journals

International Journal of Economy, Management and Social Sciences

ISSN
2306-7276

www.tijournals.com

Social Capital Critical Role in Financial Crisis Periods

Ehsan Mehrabanfar 1, Ershad Maneshi 2
1,2

Faculty of science, technology & Management, Amirkabir University of Technology, Tehran, Iran.

AR TIC LE INF O

AB STR AC T

Keywords:

During the history of economics -in ancient times or in current trades which have changed mostly
in complexity and acceleration- the social capital have been always a significant pillar in
development of regulations, trade costs, & individual or organizational gain and loss. The key role
that Social Capital, which itself brings along the word "capital", plays in economic exchanges
became more apparent after 2008 crisis and after then, many scientists confirmed the importance of
trust and other forms of social capital in economics. Social capital track in countries before and
after a crisis indicates reduction of social capital. This attitude requires to a better understanding of
the concept of social capital, and investigation social capital relationship with financial crisis. This
study aims to discuss the effect of social capital different forms on initiating a crisis and the trend
of that after ending.

Social Capital
Trust
Capital
Financial Crisis

2014 Int. j. econ. manag. soc. sci. All rights reserved for TI Journals.

1.

Introduction

Social capital can be considered as an important and effective phenomenon in management, because of its significant role in many aspects
of human life, it has been the topic of discussion even after decades of its structure, in a way that many researchers have conducted roles of
social capital in different areas such as culture, education, economics, Knowledge management, innovation, policy making and crisis
management. Since many of the organizational phenomenons are under the influence of social capital, modern organizations cannot play
their roles in the complex path of modern economy without paying enough attention to social capital forms.
Since social capital has taken the place of human capital, its importance has become much more transparent, i.e. in the modern era. Social
capital is not made easy but it might be lost easy. Other capitals can be turned into other forms of capital such as physical and fiscal capital,
but all of these capital need social capital for be structures integrated. Therefore, reduction of this capital can lead to more costs on other
capitals. Organizations which work more on their relationship and communication structure and on trust and common social norms of the
organization along with the regulations and customs and their common points, can hope to bear less impact from the current crisis.
Economic in modern era is based on psychology and behaviors of its players. Crisis as a change is brought by an odd event in the physical
capitals but condition will become worse when major group of players start losing their social capital, i.e. their trust to future, then this
zombie disease expands rapidly. Governments start to interfere to control the system, they try to maintain capitals but always social capital
is reduced. This function of loss will cause the next crisis come to happen easier. This chain of connection in economics is the basic point
in the view point of social capital. This study aims to discuss the effect of social capital structure in the chain events of a crisis and answer
to the question of social capital role in a crisis is bigger than physical capitals or not?

2.

A Review on the Concept of Social Capital

The word "Social Capital" was first used in sociology literature and studies conducted in the area of society (Naphiet & Goshal, 1998). It
was first conducted in Jacobs' studies on society (1965). He suggested that social capital is essential for survival and functioning of
neighborhoods in cities, which is because of social capital's significant role in facilitating of the development of vast communication
networks over time, and then this network will be a basis of trust, cooperation in city neighborhoods (Jacobs, 1965).
Later, an American sociologist, James Coleman, described this definition in a more ambiguous way than Jacobs. He suggested that all
organizations have two things in common: one is to have some sort of social structure and the second is to facilitate some behaviors:
personal or organizational behaviors (Coleman, 1988).
In the analysis and explanation of social capital, Coleman is interested more in the application of social capital rather than its content. In his
mind, social capital is a part of social structure, which lets an individual reach his goals via that capital. He has also defined three forms of
social capital: Commitments, Expectations and the ability to trust. In this analysis he has emphasized on the great importance of the ability
to trust in the environment and the level of commitments taken by each individual (Coleman, 1990).
* Corresponding author.
Email address: e.mehrabanfar@gmail.com, ershad505@gmail.com

Social Capital Critical Role in Financial Crisis Periods

61

Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 3(1) January 2014

Upon more studies on social capital, a consensus was achieved on its definition; this definition states that social capital is a sign of the
ability of its owner on gaining benefits from being a member of different social structures (Portes, 1998). The main discussion of the social
capital theory is the communication network which is considered as a valuable source and makes its members to gain a joined capital
(Bourdieu, 1985).
After a better look at what we can see in social capital theories, we can make it into two categories (Sandefur & Laumann, 1998; Adler &
Kwon, 2000; Lesser, 2000):
1- Egocentric or Psycho Centric Theories (Granovetter, 1973; Burt, 1992; Coleman, 1990);
2- Socio Centric Theories (Fukuyama, 1997; Putnam, 1995).
These two approaches are different on individual or the main players of the action-based scenarios. According to the Ego Centric theory,
the main player is the person who assigns the resources from social networks or relationships he finds best suited. According to the second
category or the Socio Centric theory, the main player is a group such as an organization or a society and the social capital can be found in
"the internal relationships forming their structure" (Adler & Kwon, 2000, p92).
Following this approach, Dess and Shaw (2001) defined social capital as a public commodity (Organizational resource) rather than a
private commodity (personal resource). Considering many definitions that different people suggest, Portes (1998) concluded that there is no
constant formula for the social capital. But it obvious that social capital shows internal connections of the communication network; and this
communication network facilitates to reach to the resources (Nahapiet & Ghoshal, 1998).
Despite the different definitions of social capital, it is measured by participation rate in group and social activities and the existence of
mutual trust. Although the idea of social capital seems simple, but there's no doubt that it affects much more immense concepts. Social
capital idea has found its way to many areas such as economy, politics, family, organization and even natural disasters.
Three dimensions are assigned to social capital: Structural, cognitive, and relational (Nahapiet & Ghoshal, 1998).
1- Structural Dimension: This dimension points to the structure of the connection of people, which includes the connection of the members
of the network along with the whole structure of the network. This concept affects other factors such as structural pits, concentration and
network mass.
2- Cognitive Dimension: This dimension is achieved through the common language and discussions of the members. This common
language and discussion of the members leads to mutual understanding of the people and thus makes their relationships much more
productive.
3- Relational Dimension: This dimension is very useful. It defines the connections of the network based on the mutual trust of the
members, the existing norms and the common identity they share. In other words, this dimension deals with the nature or the quality of the
network relationships.
These three indices are each explained through elements that were specified by Nahapiet & Goshal (1998), which have been explained
thoroughly in the table 1.
Table 1: Considered indices for the organization's social capital (Nahapiet & Ghoshal, 1998)
Num

Social Capital Dimensions

The indices and their definitions

1
Cognitive Dimension
2

4
Relational Dimension

Structural Dimension

Common Language and codes

Existence of common organizational values, goals and vision
Common Anecdotes
Existence of recognition and participation based on common experiences, memories or anecdotes
Trust
Existence of relationships based on mutual honesty and trust and the amount of trust between coworkers
Norms
Treating participation as a necessity; Existence of group work setting in different activities;
Existence of spirit of criticism; Existence of the spirit of commitment and enthusiasm; Existence
of the spirit of forgiveness and dedication between the co-workers
Commitments and Expectations
Having commitment towards the goals of the library; Preferring the library's benefits over other's
benefits
Identity
Feeling as a member of the organization family; Having interest in working for the library;
Preferring to work in the current department rather than others
Work Relationships
Existence of earnest personal relationship between the staff; Having some sort of friendship
outside of work
Group Relation's Structure
Existence of good work relations in the library; Existence of cooperation and consultation between
different departments of the library
Proper Organization
Existence of facilitating communication structure in the organization; Valuing teamwork; Valuing
moral values such as honesty and trust; Emphasizing on friendly relationships between the staff

Ehsan Mehrabanfar and Ershad Maneshi

62

Int ernational Journal of Economy, Mana ge ment and Soci al Sci ences , 3(1) January 2014

Many theories have been presented for the definition of the social capital, and the summary of those theories are presented in table 2.
Table2: A summary of all the presented theories on social capital (Eduardo Bueno, 2004)
The approach of the social capital
Economic Development Theories

Social Commitment and Morality

Corporate Supervision

Intellectual Capital

3.

Main Ideas
Confidence, civilized behavior and association make social
networks stronger which leads to stable economic
development.
Social capital explains the degree of social integration in
respect to the society and its functions and groups. This is
based on values, and behaviors such as self-confidence,
participation, security, principles, morals and compromise.
Morality and corporate supervision have a positive impact
on gaining social capital, since they increase solidarity and
overcome market flaws.
Social capital is a component of intellectual capital, which is
based on a number of values and indices such as: selfconfidence, loyalty, honesty, compromise, transparency,
solidarity, accountability, trust and morality.

Original conducted researches

Putnam (1994), Knack and Keefer (1997),
Stiglitz
Coleman (1990); Newton (1997); Chang (1997);
Kawachi et al. (1997); Bullen and Onyx (1998);
Joseph (1998); Cortina (2000); Baron (2001)
Baas (1997); Sen (1997);Zingales (2000); Rajan
and Zingales(2000)
Nahapiet and Ghoshal (1996); Koening (1998);
Prusak (1998); Lesser and Prusak (1999); Lesser
(2000); Cohen and Prusak (2001); Kenmore
(2001); Lesser and Cothrel (2001); McElroy
(2001)

Social Capital's Role in Economy

In ancient Greece, the existing trust and mutual credibility between two parties decreased trade costs and made benefits for both parties.
This approach was based on their well-known philosopher's thoughts at the time. Then, rich people had more credit and were the most
trusted. In the 5th century AC, due to the fading of social norms, stronger rules for establishments were conducted. The emersion of many
law-making officials and law interpreters, who played the role of the lawyers of that era, was the first result of this approach, which raised
trade costs significantly (Karayiannis, 2012).
According to the neo-classic theory of economy, production is a subordinate of capital and workforce. Although, it is assumed in this
theory that there are no trade costs in place, the productivity of the workforce must be taken into account. In other words, the reason why
we see such different variety of GDPs growth rate is the productivity of the workforce.
Studies have also shown that there is a direct relationship between economic growth and the social capital. According to a study, conducted
by Knack and Keefer (1997), an increase of 1 percent in GDP as an index in macro-economy- for each 12 percent increase in mutual trust
is indicated. Since mutual trust is considered as the most important index in social capital evaluation, there is a direct relationship between
social capital and economy.
The reasons for the introduction of social capital in economy are as follows:

Difference between the market at the companies' nominal value;

The lack of a theoretical consensus in professional and academic conventions on the principles of intangible capitals'
measurement and management;

The economic recessions caused by modern economy's tangible crisis;

And finally the fact that the relationships are not all like an official contract, based on the financial models, which are conducted
with the purpose of maximizing the investor's profit, in short term. These relationships are based on unofficial values such as
confidence, loyalty, and morality (Tymon & Stumpf, 2003).
Some Scientists believe that the social capital is much more important than physical and human capital. That is because in the modern era
economy which is dependent on fast variations and having competitive advantages which comes from tangible capital- it is the intangible
capital that can make this competitive advantage in organizations.
On the other hand, social capital is a sort of capital that can be turned into physical and human capital; in other words, capitals can be
invested on social capital, then social capital can itself make other forms of capital or maintain their stability.
Just like Physical and human capital and unlike financial capital, this capital needs maintaining. Otherwise, it will lose its efficiency over
time. Also, just like human capital and unlike physical capital, social capital doesn't have a depreciation rate. It is possible that this capital
may suffer from depreciation if not used in a long time; not only will it not be depreciated for being used, but also it will get stronger. This
capital is considered as a public commodity rather than a private one. And it involves the risk of one of the members, who owns this
commodity, throwing it away (Adler & Kwon, 2000).

4.

Social Capital in Financial Crisis

Based on a study, conducted by Anderson (2009) on 99 neighborhoods in Iowa state in United States after the financial crisis, he concluded
that, not only is the defect in social capital caused by losing jobs, but also by the defect in other economical indices. These indices in small
neighborhoods can include the closure of a school, environment pollution or a natural disaster. The studies conducted by Gaurav and
Hoogeveen (2000) in Malaysia, Philippines and Indonesia, between 1997 and 2000 and during the global financial crisis, show the
relationship between financial crisis and social capital. Also, in a study conducted by Dr, Mazharul Islam and Professor Chamuri Siwar

Social Capital Critical Role in Financial Crisis Periods

63

Internat ional Jour nal of Economy, Mana ge ment and Social Sciences , 3(1) January 2014

(2010) in Malaysia and on 2000 families, we can witness the decrease in indices that are targeting social capital. Of course there is a big
difference between the two crises, but the result of both is the same (Islam, 2000).
In another study, conducted by Katarzyn Growiec (2010) in Iceland and in a 26 year time period and based on EVS (European Values
Study), on family connection and trust indices, it was witnessed that the growth in these indices was decreased due to the 2008 financial
crisis, even though they still showed a positive economic growth rate.
During the 2008 financial crisis, which occurred due to the improper risk distribution and management, the responsible involved
governments in this crisis couldn't uphold their main responsibility. However, many have pointed out the loss of trust in this crisis.
Economy Nobel Prize winner Joseph Stiglitz has stated that:"This crisis is the fruit of disastrous leap in dishonesty." Although, the right
way of saying that is that this phenomenon is the result and outcome of an incident that has happened and it is not the cause (Tonkis, 2009).
In financial crisis conditions we are witness to a defect in social indices such as social capital. In studies, recently conducted in Euro Region
during the financial crises, this idea was confirmed. Steven Philip Kramer, the professor of Grand Strategy at the National Defense
University of the United States, believes that European Union has turned into a mechanism for social regression, widespread
unemployment, and poverty instead of advancing social development in the Europe (Kramer, 2012, p.86).
Based on a poll, which was taken by Institut fr Demoskopie Allensbach (IFD Allensbach) in January 2011, 50% of Germans do not trust
and believe in the European Union and more than 70% of the poll takers believed that Germany could have no future through the European
Union (Guerot & Henard, 2011, p.7). Of course, this is just the level of concern in Germany, which is a country that has lived through the
crisis and suffered less damage than other countries like Greece, Italy and Spain.
Different domestic industries are facing problems such as the decrement of economic growth in the recent years, along with the anticipation
of the International Monetary Fund (IMF) of the negative growth in the following year, and the financial crisis in funding investments.
Social capital is a forgotten capital among other physical capitals in these situations.

5.

Conclusion

The mutual relationship between financial crisis and social capital can easily be seen. If a crisis occurs, the social capital weakens and this
weakening leads to an increase in costs and a change in rules and intensity in morbid competition between the organizations, loss of mutual
trust and professional morality in commerce. This mutual relationship goes on without interruption, until a new balance point appears.
However, if the financial crises continue to live on and the social capital weakens, the effect of this lingering crises remains and even after
years it will stay in minds. In other words, what we call culture and define as success waste, are going to be affected after that. Social
values, affected by this process, will suffer change in a way that honesty, as the main component of professional morality and trust, loses its
value and alternatives will take the place of these values.
Given the discussed crisis in the Europe and social capital, we can witness the direct effect of the crises on social capital. Therefore, the
idea that the presence of a crisis accents the need of guarding the social capital makes sense. By conducting a review on inflation and
economic growth indices and comparing these to the current economic situation in Iran, the presence of a crisis is explicit. Therefore, the
same danger that's threatening Europe from the financial crisis, awaits us too. In Iran we are witness to a great defect in social capital and
many other signs that approve this point.
In an organizational view not sufficient attention is being given to this issue, so that the senior managers of organizations see issues only in
a physical and financial capital sense; while understanding the fact that, this issue will harm the organization as a whole and decrease other
capitals and total productivity, can lead to planning short and long term evaluations for social capital variables in organizations and
implementing strategic programs to improve them.

References
[1]

[2]
[3]
[4]
[5]
[6]
[7]
[8]
[9]
[10]
[11]

Adler, P.S., & Kwon, & Seok-Woo, S. (2000). The Good, the Bad, and the Ugly: KNOWLEDGE & SOCIAL CAPITAL: FOUNDATIONS AND
APPLICATIONS, Eric L. Lesser, ed. Butterworth-Heinemann, Boston, MA, pp. 89-115, Marshall School of Business Working Paper No. MKT 0309.
Bourdieu, P. (1985). The forms of capital", in Richardson, J.G. (Ed.), Handbook of Theory and Research for the Sociology of Education,
Greenwood, New York, NY, pp. 241-258.
Burt, R.S. (1992). Structural Holes: The Social Structure of Competition, Harvard University Press, Cambridge, MA.
Coleman, J.S. (1988). Social capital in the creation of human capital, Lesser E.L. (Ed.), Knowledge and Social Capital: Foundations and
Applications, Butterworth-Heinemann, Oxford, pp. 17-41.
Eduardo, B., MariPaz, S., & Rodriguez, O. (2004). The role of social capital in today's economy: Empirical evidence and proposal of a new
model of intellectual capital", Journal of Intellectual Capital, Vol. 5 Iss: 4, pp. 556 574.
Gaurav, D., & Hoogeveen, H. (2000). El Nio or El Peso? Crisis, Poverty, & Income Distribution in the Philippines", World Bank, Working Paper
No. 2466.
Growiec, K., Vilhelmsdittir, S., & Cairns, D. (2012). "Social Capital and the Financial Crisis: The Case of Iceland", CIES e-Working Paper, N 138,
Lisboa, CIES-IUL, p19.
Guerot, U., & Henard, J. (2011). What Does Germany Think About Europe?, European Council on Foreign Relations, (ecfr.eu), pp1-104.
Granovetter, M.S. (1973). The strength of weak ties", American Journal of Sociology, Vol. 78, No. 6, pp 1360-80.
Islam, M.M., & Siwar, C. (2000). "Malaysia: Impact of Financial Crisis on Social Capital, A paper presented at the Malaysian Inter-University
Symposium", Hotel Equatorial, Bangi, p 38.
Karayiannis A. D., & Aristides N. (2012). "Morality, Social Norms, and the Rule of Law as Transaction Cost-Saving Devices: The Case of
Ancient Athens", European Journal of Law and Economics, vol. 29, no. 1, pp. 1-23.

64

Ehsan Mehrabanfar and Ershad Maneshi

Int ernational Journal of Economy, Mana ge ment and Soci al Sci ences , 3(1) January 2014

[12]
[13]
[14]
[15]
[16]
[17]
[18]

Knack, S., & Keefer, P. (1997). Does Social Capital Have an Economic Payoff? A Cross-Country Investigation. Quarterly Journal of Economics,
112 (4): 1251-1288
Lesser, E.L. (2000). Leveraging social capital in organizations", in Lesser, E.L. (Ed.), Knowledge and Social Capital: Foundations and Applications,
Butterworth-Heinemann, Burlington, MA, pp. 3-16.
Nahapiet, J. & Ghoshal, S. (1998). Social capital, intellectual capital and the organizational advantage, Academy of Management Review, Vol. 23
No. 2, pp. 242-66.
Portes, A. (1998). Social capital: its origins and applications in modern sociology, Annual Review of Sociology, Vol. 24, pp. 1-24.
Tymon, W.G & Stumpf, S.A. (2003). Social Capital in the success of Knowledge workers, Career Development Turner International, Vol. 8(1), pp
1220.
Tonkis, Fran (2009). Trust, confidence and economic crisis, Intereconomics, 44 (4), pp 196-202.
Sandefur, R.L. & Laumann, E.O. (1998). A paradigm for social capital, Rationality and Society, Vol. 10, No. 4, pp. 481-501.