3.18 Why “Social Capital” Is so Terribly Important
55
In many cases, we can’t buy social capital (or only to a limited extent), but social
capital creates added value.
Moreover, we cannot automatically generate a certain amount of social capital by
doing certain things. Similarly to reputation and respect, these things are given to us
by others. They depend on the effects of social interactions. Note that the amount of
social capital within a system also determines its resilience or failure. Social capital
influences both the probability and extent of damage. This became clear to me at a
seminar of ETH Zurich’s Risk Center,
64 when we discussed the disproportional effect
of large disasters on public opinion. Plane crashes and terror attacks, for example,
matter a lot to people, while they seem to feel less threatened by everyday risks such
as car accidents or fatalities caused by smoking. Therefore, it is often believed that
“size matters”, in the sense that large disasters make people respond irrationally or
even in panic.
However, having studied the phenomenon of panic for some time, I came to a
different conclusion. People realize that the damage is not just physical in nature.
Social capital can be damaged, too. For example, a large-scale disaster often reduces
public trust in the risk management of companies or public authorities, particularly
if it was caused by unprofessional conduct or corruption. While people care about
such things, no insurance company covers damage to social capital.
Hence, we must protect social capital similarly to how we protect economic capital
or our environment. Social capital can be destroyed or exploited, but this should be
prevented. In order to do this, we must learn to measure social capital and to quantify
its value. Quantifying the value of our environment also helped to protect it.
3.19 Trust and Power
To stress the importance of social capital, it is important to acknowledge that the
financial crisis resulted from a loss of trust. Banks did not trust other banks anymore
and did not want to lend out money; customers did not trust their banks anymore and
emptied their bank accounts; banks did not want to give loans to companies anymore;
people did not want to invest in financial derivatives anymore—the list goes on. In
the end, the resulting financial meltdown cost an estimated $15 trillion at least.
65 So,
trust is highly valuable and when it erodes, the economic losses are tremendous. To
give another example, the recent loss of trust in US cloud storage companies due
64 The Risk Center brings together experts in probability theory and experts in complexity and
network theory.
65 See http://blogs.wsj.com/economics/2012/10/01/total-global-losses-from-financial-crisis-15-tri
llion/; http://www.bernerzeitung.ch/wirtschaft/standard/200-000000000000DollarLast/story/248
65034.
55
In many cases, we can’t buy social capital (or only to a limited extent), but social
capital creates added value.
Moreover, we cannot automatically generate a certain amount of social capital by
doing certain things. Similarly to reputation and respect, these things are given to us
by others. They depend on the effects of social interactions. Note that the amount of
social capital within a system also determines its resilience or failure. Social capital
influences both the probability and extent of damage. This became clear to me at a
seminar of ETH Zurich’s Risk Center,
64 when we discussed the disproportional effect
of large disasters on public opinion. Plane crashes and terror attacks, for example,
matter a lot to people, while they seem to feel less threatened by everyday risks such
as car accidents or fatalities caused by smoking. Therefore, it is often believed that
“size matters”, in the sense that large disasters make people respond irrationally or
even in panic.
However, having studied the phenomenon of panic for some time, I came to a
different conclusion. People realize that the damage is not just physical in nature.
Social capital can be damaged, too. For example, a large-scale disaster often reduces
public trust in the risk management of companies or public authorities, particularly
if it was caused by unprofessional conduct or corruption. While people care about
such things, no insurance company covers damage to social capital.
Hence, we must protect social capital similarly to how we protect economic capital
or our environment. Social capital can be destroyed or exploited, but this should be
prevented. In order to do this, we must learn to measure social capital and to quantify
its value. Quantifying the value of our environment also helped to protect it.
3.19 Trust and Power
To stress the importance of social capital, it is important to acknowledge that the
financial crisis resulted from a loss of trust. Banks did not trust other banks anymore
and did not want to lend out money; customers did not trust their banks anymore and
emptied their bank accounts; banks did not want to give loans to companies anymore;
people did not want to invest in financial derivatives anymore—the list goes on. In
the end, the resulting financial meltdown cost an estimated $15 trillion at least.
65 So,
trust is highly valuable and when it erodes, the economic losses are tremendous. To
give another example, the recent loss of trust in US cloud storage companies due
64 The Risk Center brings together experts in probability theory and experts in complexity and
network theory.
65 See http://blogs.wsj.com/economics/2012/10/01/total-global-losses-from-financial-crisis-15-tri
llion/; http://www.bernerzeitung.ch/wirtschaft/standard/200-000000000000DollarLast/story/248
65034.