The returns to societal capital


Dietrich Vollrath over at his website [via Brad Delong]:

Brad DeLong had a recent post that contained a number of ideas regarding how we view redistribution in a market economy. I picked up on some comments he made towards the end of that post, in which he points out that much of our prosperity comes from a stock of societal capital that we unknowingly rely on every day. And because that societal capital is unseen and uncompensated, we are all in some way overpaid for what we do.

When he says societal capital, I think of it in two broad categories:

  1. Trust: I think this is much of what DeLong has in mind. We are lucky to be in the “trust” or “cooperate” equilibrium in our repeated game of exhanging goods and services. If you like, call it the “stag hunt” equilibrium Nick Rowe talks about. Regardless, we benefit from the decisions of our ancestors to play this equilibrium, so that it is the default. If you want to say this is due to some institutions, or culture, or pure luck, it doesn’t matter. We’ve found our way to the trust equilibrium, and benfit from that immensely.2.
  2. Scale: He doesn’t mention this explicitly, but I think it is as relevant as trust. Scale influences the potential profits from innovations, and so is crucial to growth. Bigger market, more profits, more incentives to innovate. But scale is not the same thing as trust, or institutions, or culture. If you doubt that, ask yourself why no firm is spending millions to get into New Zealand, paragon of free market institutions, but they are falling all over themselves to do business in China. Living in the US, or EU, or China, is to reap the benefits of living with scale.

The heart of DeLong’s point is that neither trust nor scale are things that are owned by any firm or individual. You could say that we inherited them from our ancestors, or you could say these are emergent properties, or you could say that they are designed by the institutions we choose for ourselves. Regardless, trust and scale are “ideas” in the broadest sense, and are inputs into the production process in that trust and scale mean our set of rival inputs (labor, capital) can produce more with them than without.

How is it that scale and trust mean we are overpaid?

More here.