Social Capital: the Effectiveness of a Community Network

One possible definition of social capital is “the effectiveness of actively-exercised, mutually beneficial relationships in the network that forms a community.” This is consistent with Michael Woolcock’s definitions: “the information, trust, and norms of reciprocity inhering in one’s social networks” (Woolcock, 1998) and “the norms and networks that enable people to act collectively” (Woolcock & Narayan, 2000). Adler & Kwon (2002) provide a list of many other proposed definitions. Each person contributes to the social capital of his community by attending to the relationships that form his network. We can estimate the effectiveness of these relationships according to the amount of time that we dedicate to building and maintaining them. This is time well spent in giving and receiving, in which the gift honors both the donor and the recipient. Therefore, both parties contribute equally to the social capital of their community when they share their time in mutually beneficial ways. If the two parties disagree as to the benefit, then the social capital contributed is the lesser benefit experienced by each of them; after all, an unwelcome gift is no gift at all, and may even be injurious. Now contrast giving and receiving with taking and restoring (giving back): it is injurious to take what is not given, and restoring what was taken merely alleviates the injury; these transactions honor neither party, nor do they contribute to the social capital of the community.

Many of our daily activities help us to build social capital. We must begin to recognize these activities as valuable, and not merely as indulgent or unproductive. We build social capital not only through voluntary service and philanthropy, but also through work (paid or unpaid) and local commerce. Among our peers, friends and family, and within our community, all of our civic service and social engagement, our gift-giving and our informal trade also build social capital. However, a gift given and then returned accomplishes nothing, as neither do the sale and return of goods in commerce. In general, in the exchange of gifts or goods for sale, only personally-added value and other value added locally within the community contribute to social capital. In the case of a business, the value added is attributable to employees (including the business owners, when contributing their time), and social capital is built mutually by employees and customers; likewise it is built by employees and suppliers, some of whom may also be customers. Business profits and interest payments do not contribute to social capital, but contribute as plus and minus to financial capital, which is something else entirely. Philanthropists contribute social capital in direct proportion to the value of their donations but inversely to the value of their time; they contribute social capital according to the personal time-equivalent value of their donations.

Whenever we contribute social capital to our community, we also build, in equal measure, our own social capital (reputation) within the community. This is a measure of our level of participation in and our stature within the community, of the responsibility we take for the health and strength of our community, and of the confidence and trust that others in the community place in us. For business owners, it is a measure of customer loyalty (goodwill), and also a measure of locally-produced value that their businesses circulate within the local economy. It stands to reason, then, that the social capital contributed by each person is a reasonable guide to estimating their level of participation in the local economy and their capacity to do business within the community. Participation in the market economy entails both debit and credit transactions, corresponding respectively to the buying and selling of goods and services. The anticipated volume of these transactions determines the extent of need for transaction capacity within any type of accounting system (e.g., nominal pocket money or checking account balance, debit/credit limit, working capital, current account, etc.). Thus, there is a close connection between our social capital and our capacity for conducting business within the community.

Reputation and Credit: Recognition for Doing Good

There is a close relationship between social capital, reputation and credit. Credit is the acknowledgement and recognition that we give to each other for achievements, valuable contributions and other good works. Sadly, we have forgotten this, and we have allowed the concept of credit to become attached to money (the medium and/or measure of market exchange). In so doing, we have lost the ability to recognize the value of all that we receive without payment, without which we would have nothing to exchange, no economy and no life. Similarly, we have forgotten that currency is any medium and/or measure for recognizing the flow of value (e.g., Jefferson: “Information is the currency of democracy.”). We have allowed the concept of currency also to become attached to money. However, money is not the only kind of currency, as exchange is not the only kind of flow. Credit is not merely an estimate of capacity for debt-service, as banks would have it. We must return to the more general sense of credit as reputation for actually doing good, for contributing to the vitality of the living systems in which we participate.

The sun does not receive payment in exchange for the energy it provides to the earth. However, it has such a solid reputation for reliably providing this energy that we take it completely for granted. Plants do not receive payment for photosynthesis, by means of which they provide us with food, clothing, shelter, fuel, medicine and much more. However, they have a reputation for providing incredible abundance and diversity of valuable products. So do the animals, and even people working under miserable conditions. Community organizations and volunteers typically do not receive payment for their many essential services, certainly not commensurate with the value of these services. Family members do not receive payment for household work; neither is the value of this work recognized as contributing to the economy. The solution to the problem of how to recognize these flows of value is not more creative use of exchange accounting, because this would entail further enclosure and exploitation of the commons and strengthening of our present disastrous hierarchical systems of domination. The solution is to give recognition, reputation and credit for all of this unrecognized flow of value.

Credit is a measure of recognition for the capacity of people and businesses to participate in the economy. However, more fundamentally, this recognition establishes the reputation of all participants (not only people and businesses) for their contributions to the economy, not only to the production/consumption economy of market exchange, but additionally to the natural economies of family, community, culture, bioregion and planet. To account for these contributions, the key is to develop quantitative measures of system health, and to recognize the extent to which various kinds of participation in these systems contribute to such measures. This is how we can begin to recognize these living systems as valuable both in their own right and for their service to us. This is how we can learn to contribute to the health of these systems, instead of merely exploiting them as externalities. We need to think about what makes life worth living, and start using measures that correlate with vitality, diversity, resilience, abundance, joy, etc. We need to stop using economic measures that promote scarcity, exploitation and fear. We need to recognize that the market economy is only a part of the human economy, which in turn is only a fraction of the natural economy of the planet.

Time: Measured on a Clock

When time is recorded honestly, inflation is impossible. There might be some wiggle-room for inflating overtime, hazardous-duty time, and the like, but we need to be honest about it so that we can avoid confusion when we say that time really means clock time. Click here for an amusing anecdote about time.

F-Cash: an Accounting System for Federal Reserve Debt Money

The kind of money that most people are accustomed to using is called Federal Reserve Debt. This can exist either as Federal Reserve Notes (paper money) or as an account balance in a bank account. For our convenience and for the purposes of this project, we shorten the name “Federal Reserve Debt Money” to “Bank Money” or “F-Cash.” F-Cash is created by banks when they make loans, and it is cancelled when the loans and interest are repaid. The net effect of borrowing money and paying back the loan with interest is that all of the money is canceled that was created (the principal value of the loan), and so is a portion of the interest that was paid by the bank to the Federal Reserve (“the Fed”). In order to counterbalance this, banks must make new loans as fast as they collect principal and pay interest to the Fed. Banks make loans and create new money in order to allocate business transaction privileges. They make loans in proportion to their estimate of the borrower’s potential capacity to produce profits. The Fed sets and adjusts interest rates so that net profits (after taxes and interest) are possible when businesses operate efficiently. If the Fed were to overestimate global economic growth and set interest rates to exceed this, the financial system might collapse. When collapse is imminent, the Fed makes money easier to lend, so that banks will make additional loans to stimulate economic growth and to help pay interest on existing loans. This is called inflation, and it is unavoidable in a financial system based upon debt and interest, because there is never enough Bank Money on the planet to pay back all of the debt.

F-Cash is used for several purposes, some of which conflict with each other. For example, it is used to measure the economic production of a business, and it is used also to measure the value of the capital assets employed by the business for economic production. You might well wonder who really owns the capital assets of a business, if most of its profits go to pay interest. For example, when you buy real estate with a bank loan, you hold the title but the bank holds a mortgage; who really owns the property? In a debt and interest-based financial system, the only value of capital assets is their capacity for economic production. We are heavily conditioned to think in this way also, which seriously undermines our understanding of the value of human, social, and natural capital. This so warps our values that we admire the miser for his hoard more than the donor for his generosity, and we value the squander of non-renewable resources (economic efficiency) more than the stewardship of renewable resources (ethical responsibility). In general, we value exploitation over generosity, and scarcity over abundance. These are direct consequences of the design and the implementation of the global financial system in which we all participate. Our financial system based on debt and interest makes these destructive values essential to short-term economic survival, and leads inevitably and directly to human suffering and to social and ecological disaster. Click here for an excellent article on this subject by Karim Benammar.

Bank Money dollars are used also as the unit of currency in accounting systems for commerce among businesses. Other currencies may be used just as easily, as often they are. Such mutual credit systems facilitate local, national, and global commerce. By excluding people from the mutual credit system (which is both typical and unreasonable), and by labeling people merely as consumers and workers, we introduce artificial inflows and outflows of money into the mutual credit system. However, inflows and outflows are impossible in a true mutual credit system. In order to balance the inflow of money from “consumers,” and the (generally smaller) outflow of money for “external costs” such as labor, imported materials, interest and taxes, we must introduce yet another artificial outflow of money called “free cash flow,” the unallocated portion of net profits. When we allow for these inflows and outflows, we are not using a true mutual credit system. In some parts of the world, true mutual credit systems exist, which are not restricted to use by businesses, but allow people and local government also to participate. It is no wonder that central banks and central governments disapprove of this, as it may interfere with their ability to collect interest and taxes. However, mutual credit systems should not be dismissed out-of-hand, because their use does not lead inevitably and directly to the social and ecological disaster inherent in the debt and interest-based global financial system. By allowing people and local government to participate in community-based mutual credit systems as buyers, sellers, workers, service providers, and generally, as investors in the community, we gain the ability to understand the flow of money into and out of the community. By “internalizing” as much as possible of the flow of value within the local economy, we take responsibility for building the self-reliance of the community. By accounting separately for local and external flows of value, we gain the ability to re-focus our efforts in ways that strengthen our community and reduce our external dependencies and environmental impacts. We can use a mutual credit system, such as T-Cash/C-Cash (which see below), to account for local commerce and even for profits invested in capital assets for local production. Obviously, we are constrained to use F-Cash for external cash flows and for profits invested elsewhere.

T-Cash and C-Cash: Accounting Systems for Community Commerce and Local Economy

T-Cash and C-Cash are accounting systems for local currency (flow of value). T-Cash is measured in “Personal Hours,” while C-Cash is measured in “Community Dollars.” T-Cash might be used as an accounting system for personally-added value of goods and services, while C-Cash might be used for locally-added value within a community. Either one (or both together) could also be used as a community currency. A community currency could operate in the same way as an F-Cash mutual credit system or bank line of credit. The main differences between a T-Cash (or C-Cash) ledger and a bank account are: (1) there is zero interest to pay on debit balances and zero interest to receive on credit balances, (2) there is a credit limit equal to the debit limit, and (3) T-Cash/C-Cash cannot be used for import/export or converted to F-Cash. The ledger serves to keep money circulating strictly within the community, by suggesting a debit/credit limit on each account proportional to the account holder’s contribution to the social capital of the community. By weighting recent contributions to social capital more than those in the distant past, we recognize that debit and credit limits naturally dissipate when someone drifts away and stops participating in the community. Eventually, both excess credit and excess debt might need to be written off. Such a community accounting or currency system can be used as an educational, analytical, and practical tool for building community self-reliance.

It is possible to use C-Cash to account for locally-added value within the community without actually creating a separate community currency. This could be done by matching every C-Cash ledger transaction with a corresponding F-Cash mutual credit system transaction of equal value. In fact, if the mutual credit system were used strictly for locally-added value transactions, it would make a separate C-Cash ledger unnecessary. This goes to show that C-Cash (and likewise T-Cash) could easily be implemented using existing banking systems, and that its use does not necessarily imply the creation of a separate community currency. Analogously to matching C-Cash ledger and mutual credit accounts, we might think of C-Cash as envelopes containing Federal Reserve Notes (paper money), sealed and signed with the promise to keep the envelopes within the community. The envelopes would be merely labels to mark those Federal Reserve Notes which are being used to account for locally-added value within the community. The analogy breaks down, however, when we need to account for C-Cash debits (negative amounts of C-Cash). For this reason, it is more convenient to use a ledger than physical envelopes. In addition, a ledger makes it easier to keep C-Cash circulating strictly within the community. If Federal Reserve Notes ever lost their value, the contents of the envelopes would become irrelevant; these are merely the “Emperor’s new clothes.” We might as well have agreed in the first place not to put Federal Reserve Notes in the envelopes. Besides, if the envelopes really contained Federal Reserve notes, someone would have to keep paying bank interest on them, just as we are accustomed to paying for the privilege of using F-Cash. By agreeing to put nothing of value inside the envelopes, we would be using the envelopes themselves as a form of currency. Please keep in mind that this “thought experiment” is only an analogy to help with understanding the purpose of C-Cash (and likewise T-Cash); it would be absurd actually to use such envelopes as a form of currency.

It may be preferable for community-building purposes that we use T-Cash measured as time (hours) whenever possible, rather than C-Cash measured as money (dollars). Time cannot be inflated arbitrarily, so this would prevent inflation of T-Cash. On the other hand, F-Cash is inflated all the time, whenever banks lend money to pay interest on other debts, and C-Cash might become inflated merely by association through the use of the name “dollar.” Social capital is measured as time shared for mutual benefit, so if we were to use personal contribution to community social capital as guidelines to T-Cash credit/debit limits, then it would be consistent that we measure T-Cash in the same way that we measure social capital (as time). Perhaps when we need a conversion factor between T-Cash and C-Cash or F-Cash, we should use a living wage as a basis, or use a round number such as $10/hour. To someone who objects that his time is worth more than $10/hour, we might answer that this is true because of his capital investment in education and training, so that the excess value of his time above $10/hour should be accounted for using C-Cash and not T-Cash. As social capital is created, through time shared in mutual benefit, at the lesser rate that the two parties value money as time, perhaps a living wage is a reasonable guide to this value. T-Cash and/or C-Cash might eventually become accepted locally in partial payment for goods and services. If so, it might be reasonable to accept T-Cash in payment only for the personally value-added portion of a transaction, and C-Cash in payment only for any additional locally value-added portion. As long as the community is not completely self-sufficient, F-Cash will be needed for the import/export portion of the transaction. Used in this way, T-Cash and C-Cash might encourage the socially-sustainable employment of labor and ecologically-sustainable use of local resources for production. Even without being used for payment, however, T-Cash/C-Cash could serve a useful role as a measure of the portion of local commerce that contributes to the social capital of a community, and C-Cash could be used to measure the portion of local commerce that represents money circulating within the local economy.

Links to Information about Social Capital

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