Financial capital, the focus of so much media attention these days, is a result of, but does not produce, social capital. Our economic woes will not be solved until we come to understand the pillars upon which wealth rests.

Banks aren’t lending because of trust in one another. As a result, they aren’t lending to farmers, home owners, and others who need financial capital. Social capital is the strength of relationships, the willingness to act on trust. It is, what Francis Fukuyama define as “a set of informal values or norms shared among members of a group that permits cooperation among them. If members of the group come to expect that others will behave reliably and honestly, then they will come to trust one another. Trust is like a lubricant that makes the running of any group or organization more efficient.”

So, why don’t they trust one another? First, several of them have collapsed in recent weeks causing huge loses in other banks. But, more important, it is almost impossible to know what assets and liabilities are on their books because of investment vehicles that are almost impossible to analyze. This piece of British humor describes the problem as well as any intellectual dissertation:

Next year (I assume nothing will happen until after the new congress and president are in office) congress must rewrite legislation governing all financial institutions to increase transparency. This has to includes limits on complexity of instruments. Then, they will be more trustworthy.

Rule governed/rule conforming behavior is more trustworthy than behavior that is based only on individual self-interest. It is why we have rules and referees on the football field. The age of “unfettered capitalism” is over. Let’s have capitalism that is transparent and governed by rules that create trustworthy behavior and healthy competition.

Social capital is not the result of simple good morals. It is the result of a system designed to elicit trustworthy behavior.

TP[1]PT Fukuyama, Francis. The Great Disruption Human Nature and the Reconstitution of Social Order, The Free Press, New York, 1999. p. 16.