Social Capital as Credit

Ross Mayfield writes:

Social capital, or aggregate (connected) reputation, is a form of credit. Some formal transactions can be supported by social capital. Informal transactions are rarely underpinned by financial credit or legal agreement and instead rely entirely social capital. We all have our internal calculators keeping tacit track of who is wronging and righting, the health of the relationships and adjusting our actuarial tables according to experience.

Sometimes a service arises to make a portion of this explicit, such as Ebays or Slashdots reputation system. Scaled reputation systems to date are, in fact, subjective proxies a set of localized decisions that result in a visible emergent pattern the pattern itself being open to interpretation. But if there is enough social agreement to play the rating game, they decrease transaction risk and increase liquidity. Not just for those with better ratings, but for the network or market as a whole.

Using social capital to underpin transactions is an iterative approach. It only works if there will be future transactions and each occurs within the context of a social network. Game theory holds the best strategy is to trust but verify with each iteration. This presents greater risk up front, but builds trust and reputation with each iteration, so over time transaction risks and costs decrease.

In absence of formal credit, social capital is the norm. Micro-markets, more traditional cultures and third world countries practically run on social capital as a result.

The point is you cant monetize social capital in aggregate, because it operates at a micro-scale. You can foster social capital for the value of its emergent patterns and what it enables: the flow and production of other tangible and intangible assets. The value of social capital is local, but its impact is global.

Interesting points. Maybe what we need is a Google for social capital. Just as Google provides a common interface for documents on the Web, we need a common interface to search for the online reputation for a person – through the blog, comments on other blogs, Amazon reviews, eBay record, Slashdot posts.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.