Economic Progress, Social Regress? A Small World Approach.

A central issue in the debate regarding the relevance of social capital is whether the decline in social embeddedness that has attended modernization over the last forty years in the U.S. is as harmful as Putnam, among others, claim it to be. Critics of Putnam’s thesis argue that various arms-length institutions fulfill the roles performed by social capital thereby mitigating the negative impact of its recent decline. We develop a framework that provides insight into when such institutions may be adequate and when they might not. We find that if market (economic) and non-market (social) interactions differ in their payoffs but are interlinked through the modernization of the economy, the optimal level of modernization in market interactions will be higher than that in non market interactions. Further, market supporting institutions are likely to increase the divergence between economic and social interactions since analogs for market institutions that constrain opportunistic behavior are usually non-existent in social contexts. In this sense, economic progress may be accompanied by social regress.