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Philanthropy and prosperity --- rebuilding social capital

by Edward J. Waitzer, Chairman, Ontario Securities Commission
February 26, 1996; Canadian FundRaiser

It is ironic that at the very moment when liberal democracy and market driven economies have prevailed, both ideologically and geopolitically, growing numbers of citizens in the western world are questioning (or, worse yet, apathetic about) the effectiveness of our public and private institutions.

Jeremy Rifkin, in his most recent and somewhat apocryphal book The End of Work, argues that for the first time in history, human labour is being systematically eliminated from the production process. The social transformation promised by technological innovation could as easily prove oppressive as liberating. Moreover, the idea of a society not based on work is so remote from any notion we have about organizing large numbers of people into a social whole that we are faced with the prospect of re-thinking our social contracts. As Peter Drucker has noted, "the disappearance of labour as a key factor of production" is emerging as the key "unfinished business of capitalist society".

A similar, perhaps related challenge faces us in the governmental sector, which most people would still view as having primary responsibility for dealing with social tasks in our society. Here again, Drucker refutes conventional wisdom, noting that while the bulk of the budget in every developed country today is devoted to payments for all kinds of social services, in each such society social problems are multiplying. "Government has a big role to play in social tasks: policy maker, standard setter, and, to a substantial extent, paymaster. But as the agency to run social services, it has proved almost totally incompetent."

While it is widely recognized that demands for social services now far exceed the capacities of public budgets, the typical response continues to be a policy debate that focuses on setting ceilings or streamlining services. The fact that social services continue to monopolize the definition of welfare is only just beginning to be questioned.

Help individuals and communities attain their own ends in their own ways
Think, for example, of proposed voucher systems intended to allow parents to obtain an education for their children without specifying how or where. To work, however, such programs require a high level of civic engagement. What frequently happens instead is that systems of social service replace community, rather than foster it, forcing citizens to participate on the system's terms. This tends to diminish us in our own eyes by reducing our sense of effectiveness.

A compelling argument can be made that professional services dominate and displace local competence and solidarity; that undue emphasis on people's needs obscures their abilities. Veteran community organizer John McKnight goes further, suggesting that community and social services are bound in an inverse relationship such that as one waxes, the other must wane. Thus the growth of the welfare state may have accelerated the decline of those very communal institutions it was designed to supplement.

Rifkin notes that "the globalization of the market sector and the diminishing role of the governmental sector will mean that people will be forced to organize into communities of self-interest to secure their own futures". If, indeed, the market and public sectors are to play a reduced role in our daily lives, what will take up the power vacuum? Rifkin suggests that the choices are on the one hand an increasing "outlaw subculture" or on the other a greater participation in the "third" (i.e. voluntary) sector. Drucker concurs, referring to a separate and new "social" sector. Curiously, political leaders as disparate in their ideology as Presidents Reagan and Carter both spoke extensively of the need to foster a spirit of individual generosity and a renewed sense of communal values.

These concepts are not new
When Alexis de Tocqueville visited the United States in the 1830s, he observed the Americans' propensity for civic association as key to their unprecedented ability to make democracy work. Voluntary association forces the individual to assume responsibility for a small portion of the public business - business that affects his immediate self-interest and is therefore important to him, but that nonetheless compels him to interact with others and thus gradually see beyond his immediate self-interest to the common good.

Social scientists continue to confirm the current accuracy of de Tocqueville's observation - that the quality of public life and the performance of social institutions are powerfully influenced by networks of civic engagement which encourage the emergence of social obligation and trust. By analogy with notions of physical and human capital, such norms and social cohesion may be viewed as social capital.

There is widespread evidence that successful schools are distinguished less by their curriculum or teaching staff than by their embeddedness in a broader fabric of supportive families and communities. So, too, has informal social control, through community norms and networks, proven more effective than formal law enforcement in reducing criminality, and than various public programs in influencing urban poverty.

Norms and networks of civic engagement powerfully affect the performance of representative government. Social epidemiologists have even found that people with few social ties face greater risks of illness and mortality. Joining, in other words, is good for your health!

Research on the varying attainments of different ethnic groups consistently points to the importance of social networks. So, too, has research on the sociology of economic development highlighted the role of social networks of collaboration among firms, and between workers, investors and entrepreneurs as undergirding successful industries.

Dramatic social disengagement
Given all this evidence, it is not surprising that politicians of all stripes and social commentators otherwise as pessimistic as Rifkin increasingly find solace in a renaissance of civic participation. Regrettably, this comfort may be little more than wishful thinking. Current trends do not augur well for such salvation. In fact, whether one measures direct engagement in politics and government, organizational membership or voluntary activity, the picture which emerges in our society is one of dramatic social disengagement over the last two decades.

Robert Putnam provides us with some whimsical evidence in Bowling Alone, Revisited. Between 1980 and 1993, he points out, the total number of bowlers in the United States increased by 10 percent, while league bowling decreased by 40 percent. Lest this be thought a trivial example, he notes that nearly 80 million Americans went bowling at least once in 1993, nearly a third more than voted in the 1994 congressional elections! We are bowling alone (or at least in informal gatherings) and, in the process, foregoing the social interaction of organized leagues.

Similar data emerges in studies of political participation, organizational membership, religious affiliation, or membership in (and volunteering for) civic and fraternal organizations. Such data also reveals a close correlation between association membership and social trust, not only across time and across individuals, but also across countries.

In response, Rifkin, and others, might retort that the traditional forms of civic organization have been replaced by new organizations. Certainly one can point to a wide range of issue-oriented organizations, concerned with the rights and entitlements of various groups. I would suggest, however, that while such membership based organizations have clearly become a powerful political force, their contribution to social cohesion is less evident. For most of their members, involvement is limited to paying dues or reading a newsletter. Few attend meetings of the organization regularly, and the bonds between members tend to be to common symbols, leaders or ideals, rather than to one another.

From the point of view of social connectedness, "belonging to" an advocacy organization is just not in the same category as belonging to a civic or fraternal organization. The theory of social capital argues that associational membership should increase social trust, but this prediction is much less certain with regard to these issue-oriented organizations, in which people join together loosely to get more from government (or some other targeted institution) rather than from each other.

In Trust: The Social Virtues & the Creation of Prosperity, Fukuyama argues that successful societies are formed over generations. Hence it should not surprise us that de Tocqueville's observations still resonate with us today, just as most of us can look back over our parents and grandparents and see crucial qualities that they have transmitted to us. Unlike other forms of human capital, social capital is usually created and transmitted through cultural mechanisms such as religion or tradition. As Hegel postulated, we become who we are by being situated in a community. We should not, however, assume that the historic legacy we enjoy is a stable state.

Fukuyama ventures beyond classical economics to explain relative prosperity. He argues that the shape and success of enterprise and government also depends on national culture, which is often not rational or planned, and which includes little-studied prejudices and intuitions.

Differences between high- and low-trust societies
Focusing on the relationship of trust to corporate performance, he concludes that there are certain nations (including Germany, Japan and the USA) that enjoy relatively high levels of "spontaneous sociability", where people trust each other more. In others (including Italy, France and China), trust is relatively low. The differences appear in many ways, including how corporations are organized in these countries.

At some point, successful companies should expand beyond family and friends to raise capital and recruit senior managers. In "high trust" societies, this process has proven relatively easy; people are used to forming associations beyond the family. Hence the modern business corporation was pioneered in places like the United States. In contrast, "low-trust" countries (such as southern Italy or Taiwan) have also grown rich, but with economies based largely on familial and family-like ties.

Trust also manifests itself on the factory floor. Just-in-time manufacturing, which places responsibility on line workers, was pioneered in Japan, while Germany elevates the role of the foreman, who has discretion to reassign workers. In "low-trust" France, by way of contrast, work rules are highly codified, with a national job-classification system that grades each worker in the hierarchy and controls the progress of their careers.

The Japanese jichikai experience
Rifkin writes about the jichikai, community-based mutual help organizations including over 90 percent of all households in Japan. They are an interesting example of how a "high-trust" culture overcomes such rigidity. In the late 1930s, the Imperial Government incorporated these associations into the state machinery and, by 1940, membership was compulsory. They were used to spread wartime propaganda and control the distribution of food and other goods and services. After the war, neighbourhood groups resurfaced as self-governing associations without legal ties to the government and now exist in more than 270,000 neighbourhoods.

A local jichikai generally consists of between 180 and 400 households, with its leaders elected for two-year terms. They provide a range of services, including helping those who are ill, in need of financial assistance, or homeless. They also sponsor cultural activities and, of late, have become advocates for local issues. Since they have no formal legal recognition, they receive no public funds and rely on membership fees. Rifkin points to the Confucian tradition, with its emphasis on cooperation and harmonious relations, as having spurred such voluntary efforts.

Surely, this points us to the link between philanthropy and prosperity. One need only consider the origins of the words philanthropos - goodwill to fellow men or loving mankind, and prosperare - to cause to succeed. Prosperity requires easy exchanges which, in turn requires uniformity of treatment and certainty of application. The expansion of public order, necessary for private enterprise but also valued in its own right, reduced the risks people ran when they trusted one another, but achieving such order appears to depend, in part, on the prior factor of social capital.

There is evidence that we have been depleting our legacy of social capital
Richard Goodwin, in his classic text The American Condition, described as natural and desirable "a social condition wherein common values and shared inclinations are experienced by the individual as his own. Not only does he inhabit society, but society inhabits him."

How are we faring today? Whereas in the 1950s, social critics worried about stifling conformity (the "organization man"), today we worry about the breakdown of community bonds. The balance between individualism and community has shifted dramatically. Rights appear to have replaced responsibilities as the focal point of political (and economic) discourse.

Communities of shared values, whose members are prepared to subordinate their personal interests for the sake of larger communal goals, have become rarer. It is only communities of shared values that can generate the kind of social capital that is critical to organizational efficiency. While property rights and other economic institutions were necessary for the creation of modern business, the latter rests on a foundation of social and cultural habits that too often are taken for granted.

A society based on rational self-interest?
For example, most observers of political liberalism concede that it is not self-sustaining. The recent tragic assassination of Yitzhak Rabin was a case in point. To take the extreme example, a society built upon rational self-interest could provide no motive for an individual to risk his or her life in defense of the community as a whole. More broadly, if individuals formed communities solely on the basis of self-interest, there would be little in the way of public spiritedness, self-sacrifice, pride, charity or many other virtues that distinguish vibrant communities.

A similar argument can be made with respect to economic liberalism. As Fukuyama demonstrates, rational utility maximization is not sufficient to explain the relative performance of different economies. Just as liberal democracy works best when individualism is moderated by public spirit, so too is capitalism facilitated when individualism is balanced with a readiness to associate.

Social capital is thus critical to prosperity. Indeed the concept of social capital explains, at least in part, why capitalism and democracy are so closely related. A robust capitalist economy benefits from sufficient social capital in the underlying society to reduce transaction costs and permit enterprise to be self-organizing. In default, the state can step in to promote particular firms or sectors, but markets usually work more efficiently when private participants are making the decisions.

The challenge today is to recognize that the accumulation of social capital is subject to a ratchet-like effect - more easily turned in one direction than another. Interestingly, the infamous market speculator George Soros comes to this very conclusion in his most recent ruminations.He worries that the concept of freedom in western democracies has changed to narrow one of self-interest, which is exploited through isolationism and laissez-faire economics. He argues that while these doctrines emphasize the importance of competing within an open system, they pay insufficient attention to the preservation of the system itself. Soros views this as the central problem that confronts the world - one to which he has no answer.

At least part of the answer, however, is clear. The challenge of preserving and accumulating social capital should be foremost on our collective agenda. Hopefully, leadership begins within the charitable sector.

Based on a presentation made to the 1995 Annual Meeting of the Canadian Association of Gift Planners, Toronto, Ontario.

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