Social Capital and Community Governance∗

Samuel Bowles and Herbert Gintis

University of Massachusetts and Santa Fe Institute
Amherst, Massachusetts, 01003

November 21, 2001

Abstract
Social capital generally refers to trust, concern for ones associates, a will-
ingness to live by the norms of one’s community and to punish those who
do not. While essential to good governance, these behaviors and disposi-
tions appear to conflict with the fundamental behavioral assumptions of eco-
nomics whose archetypal individual—Homo economicus—is entirely self-
regarding. By community governance we mean the structure of small group
social interactions—distinct from markets and states—that, along with these
more familiar forms of governance, jointly determine economic and social out-
comes. We suggest that (i) community governance addresses some common
market and state failures but typically relies on insider-outsider distinctions
that may be morally repugnant; (ii) the individual motivations supporting com-
munity governance are not captured by either the conventional self-interested
preferences of Homo economicus or by unconditional altruism towards one’s
fellow community members; (iii) well-designed institutions make commu-
nities, markets and states complements, not substitutes; (iv) with poorly de-
signed institutions, markets and states can crowd out community governance;
(v) some distributions of property rights are better than others at fostering
community governance and assuring complementarity among communities,
states and markets; and (vi) far from representing holdovers from a premod-
ern era, the small scale local interactions that characterize communities are
likely to increase in importance as the economic problems that community
governance handles relatively well become more important.
∗ For a symposium to appear in the Economic Journal, along with companion papers by Steven
Durlauf, Ernst Fehr, Edward Glaeser, David Laibson, and Bruce Sacerdote. Thanks to Katie Baird,
Michael Carter, Jeff Carpenter, Christina Fong, Yujiro Hayami, and Elisabeth Wood for help and
comments, as well as to the John D. and Catherine T. MacArthur Foundation for financial support.
The authors may be contacted at bowles@econs.umass.edu, http://www-unix.oit.umass.edu/˜bowles,
and hgintis@mediaone.net, http://www-unix.oit.umass.edu/˜gintis.

1
Social Capital and Community Governance 2

1 Introduction

Social capital generally refers to trust, concern for one’s associates, a willingness to
live by the norms of one’s community and to punish those who do not. These behav-
iors were recognized as essential ingredients of good governance among classical
thinkers from Aristotle to Thomas Aquinas and Edmund Burke. However, po-
litical theorists and constitutional thinkers since the late 18th century have taken
Homo economicus as a starting point and partly for this reason have stressed other
desiderata, notably competitive markets, well-defined property rights, and efficient,
well-intentioned states. Good rules of the game thus came to displace good citizens
as the sine qua non of good government.
The contending camps that emerged in the nineteenth and early twentieth cen-
turies, advocating laissez faire on the one hand or comprehensive state intervention
on the other as the ideal form of governance, defined the terms of institutional
and policy for much of the Twentieth century. Practically-minded people who, by
conscience or electoral constraint had adopted less dogmatic stances in favor of
seeking solutions to social problems, never accepted the cramped intellectual quar-
ters of this debate. But it flourished in academia, as a glance at mid or even late
twentieth century comparative economic systems texts will show. The shared im-
plicit assumption of the otherwise polarized positions in this debate was that either
the market or the state could adequately govern the economic process. There was
nothing else on the menu, and mix and match was out of the question. But the
common currency of this debate—inflated claims on behalf of spontaneous order
or social engineering—now seems archaic. Disenchanted with utopias of either the
left of the right, as the century drew to a close, and willing to settle for less heroic
alternatives, many came to believe that market failures are the rule rather than the
exception and that governments are neither sufficiently informed or sufficiently ac-
countable to correct all market failures. Social capital was swept to prominence not
on its merits, but on the defects of its alternatives.
Those to the left of center are attracted to the social capital idea because it
affirms the importance of trust, generosity, and collective action in social problem
solving, thus countering the idea that well-defined property rights and competitive
markets could so successfully harness selfish motives to public ends as to make
civic virtue unnecessary. Proponents of laissez faire are enchanted because it holds
the promise that where markets fail—in the provision of local public goods and
many types of insurance for example—neighborhoods, parent teacher associations,
bowling leagues, indeed anything but the government, could step in to do the job.
American liberals, along with social democrats and market socialists, might
not have joined in had limits of governmental capacity and accountability not been
unmistakenly demonstrated in the bureaucratic arrogance and the dashed hopes of
Social Capital and Community Governance 3

five year plans the world over. Conservatives might have been less avid if their once
idealized institutions had fared better. But the Great Depression early in the past
century, as well as growing environmental concerns and rising inequalities at its
close, tarnished the utopian capitalism of the textbooks. The demise of these twin
illusions of the past century thus cleared the intellectual stage for social capital’s
entry.
Thus, a decade ago otherwise skeptical intellectuals and jaded policy makers
surprised and impressed their friends by touting the remarkable correlation between
choral societies and effective governance in Tuscany, warning of the perils of a
nation that bowled alone, and quoting Alexis de Tocqueville on America as a nation
of joiners. President George Bush, the elder, urged Americans to turn away from
government to the “thousand points of light” of a vibrant civil society, and then First
Lady Hillary Clinton told us that “it takes a village to raise a child.” The World
Bank dedicated a website to the subject.
The social capital boom reflected a heightened awareness in policy and aca-
demic circles of real people’s values, which are not the empirically implausible
utility functions of Homo economicus, of how people interact in their daily lives, in
families, neighborhoods, and work groups, not just as buyers, sellers, and citizens.
and of the bankruptcy of the ideologically charged planning-versus-markets debate.
Perhaps social capital, like Voltaire’s God, would have to have been invented
had it not existed. It may even be a good idea. A good term it is not. Capital
refers to a thing that can be owned—even a social isolate like Robinson Crusoe had
an axe and a fishing net. By contrast, the attributes said to make up social capital
describe relationships among people. “Community” better captures the aspects of
good governance that explain social capital’s popularity, as it focuses attention on
what groups do rather than what people own. By community we mean a group
of people who interact directly, frequently and in multi-faceted ways. People who
work together are usually communities in this sense, as are some neighborhoods,
groups of friends, professional and business networks, gangs, and sports leagues.
The list suggests that connection, not affection, is the defining characteristic of a
community. Whether one is born into a community or one entered by choice, there
are normally significant costs to moving from one to another.
The term community makes it clear that understanding trust, cooperation, gen-
erosity and other behaviors emphasized in the social capital literature requires the
study of the structure of social interactions, and underlines the fact that the same
individuals will exhibit different levels and types of social capital depending on the
social interactions in which they are engaged. This social structural approach to
social capital may be contrasted with the more individual-based approach developed
in the companion paper by Glaeser, Laibson and Sacerdote (2002).
In the next section we propose an alternative framework which we term “commu-
Social Capital and Community Governance 4

nity governance.” We begin with some examples, and describe some experimental
evidence demonstrating the plausibility of the underlying behavioral assumptions.
Quite apart from the econometric problems stressed by Durlauf (forthcoming) in
his companion paper, we doubt that the commonly used survey instruments are re-
liable predictors of actual behaviors. For example, Glaeser, Laibson, Scheinkman
and Soutter (2000) found that the standard questions about trust, popularized by
Fukuyama (1995) and others, are entirely uninformativre about either the respon-
dent’s experimental behavior in a trust experiment for real money or the respondent’s
daily behavior (willingnes to loan posessions to others, etc). We then turn to some
endemic problems with community governance and challenges to be addressed by
those who share our conviction that policy design should recognize and enhance the
complementarities among markets, states and communities.1 We close with some
speculations about the future importance of communities.
We will attempt to show that (i) community governance address market and state
failures but typically relies on insider-outsider distinctions that may be morally
repugnant; (ii) the individual motivations supporting peer monitoring and other
aspects of community governance are not captured by either the conventional self-
interested preferences of Homo economicus or by unconditional altruism towards
one’s fellow community members; (iii) well-designed institutions make commu-
nities, markets and states complements, not substitutes; (iv) with poorly designed
institutions, markets and states can crowd out community governance; (v) some
distributions of property rights are better than others at fostering community gover-
nance and assuring complementarity among communities, states and markets; and
(vi) far from representing holdovers from a premodern era, the small scale local
interactions that characterize communities are likely to increase in importance as
the economic problems that community governance handles relatively well become
more important.

2 Community Governance

Communities are part of good governance because they address certain problems
that cannot be handled either by individuals acting alone or by markets and govern-
ments.
In some of Chicago’s neighborhoods studied by Felton Earls, Robert Sampson,
and Steven Raudenbush (1997) for example, residents speak sternly to youngsters
skipping school, creating a disturbance, or decorating walls with graffiti. Residents
are also willing to intervene to maintain neighborhood amenities such as a local
1 Similar proposals are advanced by Ouchi (1980), Hayami (1989), Ostrom (1997), and Aoki and
Hayami (2000).
Social Capital and Community Governance 5

firehouse threatened with budget cuts. These are all examples of what the authors
term “collective efficacy.” In other neighborhoods residents adopt a more hands-
off approach. Sampson, Raudenbush and Earls found considerable variation in the
neighborhood levels of collective efficacy, with examples of rich and poor, black
and white neighborhoods exhibiting both high and low levels. Remarkably, ethnic
heterogeneity was considerably less important in predicting low collective efficacy
than were measures of economic disadvantage, low rate of home ownership, and
other indicators of residential instability. Where neighbors express a high level of
collective efficacy, violent crime is markedly lower, controlling for a wide range
of community and individual characteristics, including past crime rates. Chicago’s
neighborhoods illustrate the informal enforcement of community norms.
The Toyama Bay fishing cooperatives in Japan studied by Erika Seki and Jean-
Philippe Platteau Platteau and Seki (2001) illustrate another aspect of community
problem solving. Faced with variable catches, as well as the high level and changing
nature of skills required, some fishermen have elected to share income, informa-
tion and training. One coop which has been highly successful since its formation
thirty-five years ago consists of the crews and skippers of seven shrimp boats. The
boats share income and costs, repair damaged nets in common, and pool informa-
tion about the changing location and availability of shrimp. Elder members pass on
their skills, and the more educated younger members teach others the new high tech
methods using Loran and sonar. The coop’s income- and cost-pooling activities
allow its boats to fish in much riskier and higher yield locations, and the skill- and
information-sharing raises profits and reduces productivity differences among the
boats. Fishing, off-loading the catch, and marketing by individual boats are syn-
chronized to increase the transparency of the sharing process and make opportunistic
cheating on the agreement easy to detect.
The plywood workers who own their firms in Oregon and Washington benefit
from both the peer-monitoring of the Chicago neighbors and the risk-pooling of the
fishermen. They elect their managers and require of their members ownership of
a share of the firm as a condition of employment and employment in the firm as
a condition of ownership. Before the industry moved to the South Eastern United
States, these coops had successfully competed with conventionally organized firms
in the industry, both union and non union, for two generations, their success largely
attributable to high levels of work commitment and savings on managerial monitor-
ing of workers (when one firm converted to cooperative ownership the supervisory
staff was cut by three quarters). The econometric analysis of Ben Craig and John
Pencavel (1995) indicates that total factor productivity (output per unit of labor and
capital combined) is significantly higher than in their conventional counterparts.
When faced with cyclical downturns in the demand for plywood the coops, unlike
their competitors, do not fire or layoff workers, but rather elect to take cuts in either
Social Capital and Community Governance 6

wages or hours, thus pooling the cyclical risk among all members rather than im-
posing it on a few (see also Pencavel 2000), and for other examples Hansen (1997),
Ghemawat (1995), and Knez and Simester (1998).
As these examples suggest, communities solve problems that might otherwise
appear as classic market failures or state failures: namely, insufficient provision
of local public goods such as neighborhood amenities, the absence of insurance
and other risk-sharing opportunities even when these would be mutually beneficial,
exclusion of the poor from credit markets, and excessive and ineffective monitoring
of work effort. Communities can sometimes do what governments and markets
fail to do because their members, but not outsiders, have crucial information about
other members’ behaviors, capacities, and needs. Members use this information
both to uphold norms (work norms among the plywood workers and the fishermen,
community behavioral norms in Chicago) and to make use of efficient insurance
arrangements that are not plagued by the usual problems of moral hazard and adverse
selection (the fishermen and the plywood workers). This insider information is most
frequently used in multilateral rather than centralized ways, taking the form of a
raised eyebrow, a kind word, an admonishment, gossip or ridicule, all of which may
have particular salience when conveyed by a neighbor or a workmate whom one is
accustomed to call one of “us” rather than “ them.”
Communities thus may make an important contribution to governance where
market contracts and government fiats fail because the necessary information to
design and enforce beneficial exchanges and directives cannot effectively be used
by judges, government officials, and other outsiders. This is particularly the case
where ongoing relationships among community members support trust, mutual
concern, or sometimes simply effective multilateral enforcement of group norms.
This idea, old hat in sociology, long predates recent interest in social capital even
among economists. A generation ago, Kenneth Arrow and Gerard Debreu provided
the first complete proof of Adam Smith’s conjecture two centuries earlier on the
efficiency of invisible hand allocations. But the axioms required by the Fundamental
Theorem of Welfare Economics were so stringent that he stressed the importance
of what would now be called social capital in coping with its failure:

In the absence of trust…opportunities for mutually beneficial cooper-

ation would have to be foregone…norms of social behavior, including
ethical and moral codes (may be) …reactions of society to compensate
for market failures. (Arrow 1971):22.

Communities are one of the ways these norms are sustained (Bowles and Gintis
1999, Bowles and Gintis 1998).
Social Capital and Community Governance 7

3 Communities and Incentives

The task of comparative institutional analysis today, having left behind the plan vs.
market debate, is to clarify what class of problems are handled well by differing
combinations of institutions. Advances in contract theory, mechanism design, game
theory and related fields now allow economists to say quite a bit about this. Markets
are attractive because of their ability to make use of private information. so where
comprehensive contracts may be written and enforced at low cost, markets are often
superior to other governance structures. Moreover, where residual claimancy and
control rights can be closely aligned, market competition provides a decentralized
and difficult to corrupt disciplining mechanism that punishes the inept and rewards
high performers.
Like markets, the state is relatively well suited for handling particular classes
of problems. In particular, the state is attractive because it alone has the power to
make and enforce the rules of the game that govern the interaction of private agents.
Therefore in cases where an economic process will be effective only if participating
is mandatory (e.g., participating in a social insurance program, or paying for national
defense).
Communities, however, may solve problems that both states and markets are
ill-equipped to address, especially where the nature of social interactions or of the
goods and services being transacted makes contracting highly incomplete or costly.
Community governance relies on dispersed private information often unavailable to
states, employers, banks, and other large formal organizations to apply rewards and
punishments to members according to their conformity with or deviation from social
norms. An effective community monitors the behavior of its members, rendering
them accountable for their actions. In contrast with states and markets, communi-
ties more effectively foster and utilize the incentives that people have traditionally
deployed to regulate their common activity: trust, solidarity, reciprocity, reputation,
personal pride, respect, vengeance, and retribution, among others.
Several aspects of communities account for their unique capacities as gover-
nance structures. First, in a community the probability that members who interact
today will interact in the future is high, and thus there is a strong incentive to act
in socially beneficial ways now to avoid retaliation in the future. Second, the fre-
quency of interaction among community members lowers the cost and raises the
benefits associated with discovering more about the characteristics, recent behavior
and likely future actions of other members. The more easily acquired and widely
dispersed this information, the more will community members have an incentive
to act in ways that result in collectively beneficial outcomes. Third, communi-
ties overcome free-rider problems by its members directly punishing ‘anti-social’
actions of others. Monitoring and punishment by peers in work teams, credit asso-
Social Capital and Community Governance 8

ciations, partnerships, local commons situations, and residential neighborhoods is

often an effective means of attenuating incentive problems that arise where individ-
ual actions affecting the well being of others are not subject to enforceable contracts
(Whyte 1955, Homans 1961, Ostrom 1990, Tilly 1981, Hossain 1988, Dong and
Dow 1993, Sampson, Raudenbush and Earls 1997).
To the extent that economists have sought to undersand how communities work
they have treated individuals as self interested, and considered models in which self
interested agents would cooperate even in interactions that at first glance appear
to have defection as a dominant stategy. We have explained elsewhere why we
find these explainations inadequate (Bowles and Gintis 2001, Gintis 2000a, Bowles
2002). By contrast, many behavioral scientists outside of economics have sought
to explain communities by relations of altruism, affection, and other non-self-
regarding motives. Many of these approaches, however, have treated the commu-
nity organically without investigating whether or not its structural characteristics
are consistent with conventional notions of equilibrium based on intentional action.
In this section we introduce a model using the methodological individualism and
equilibrium orientation of economics (specifically, game theory), together with a
particular strand of those stressing other-regarding preferences, namely the com-
monly observed human proclivity for enforcing group norms, even at a cost to
oneself. We introduce non-self-interested motives because we believe explaining
how communities enforce norms through mutual monitoring requires going beyond
this traditional model of the individual actor. The treatment of social penalties by
Besley and Coate (1995) and of peer pressure by Kandel and Lazear (1992) reflect
a similar dissatisfaction with the conventional behavioral model. Communities of-
ten are capable of enforcing norms, we suggest, because a considerable fraction
of members are willing to engage in the costly punishment of shirkers without a
reasonable expectation of being personally repaid for their efforts. We call this
behavior strong reciprocity. A strong reciprocator is predisposed to cooperate with
others and punish non-cooperators, even when this behavior cannot be justified in
terms of self-interest. We review the considerable evidence that strong reciprocity
motives are common in Bowles and Gintis (2000). See also Fehr and Gächter
(2000,forthcoming) and Gintis (2000b).
An extensive body of evidence suggests that a considerable fraction of the pop-
ulation, in many different societies, and under many different social conditions,
including complete anonymity, are strong reciprocators (Henrich, Boyd, Bowles,
Camerer, Fehr, Gintis and McElreath 2001). We here review laboratory evidence
concerning the public goods game, the game structure most relevant to the problems
of community governance. For additional evidence, including the results of dicta-
tor, ultimatum, common pool resource and trust games, see Güth and Tietz (1990),
Roth (1995), and Camerer and Thaler (1995). The public goods game consists of
Social Capital and Community Governance 9

n subjects under conditions of strict anonymity. Each subject is given w ‘points,’

redeemable at the end of the experimental session for real money. Each subject
then places some number of points in a ‘common account,’ and keeps the rest. The
experimenter then gives each subject a fraction q ∈ (1/n, 1) times the total amount
in the common account. Contributing is thus an altruistic act, because it increases
the average payoff to the group (q > 1/n) at the expense of the individual (q < 1).
Contributing nothing to the common account is a dominant strategy in the public
goods game if subjects are self-interested. Public goods experiments, however,
show that only a fraction of subjects conform to the self-interested model. Rather,
subjects begin by contributing on average about half of their endowment to the
common account.
If the game is continued over several rounds, however, contributions tend to
fall. In a meta-study of twelve public goods experiments Fehr and Schmidt (1999)
found that in the early rounds, average and median contribution levels ranged from
40% to 60% of the endowment, in the final period (usually round ten) 73% of all
individuals (N = 1042) contributed nothing, and many of the remaining players
contributed close to zero. The explanation of the decay of cooperation offered by
subjects when debriefed after the experiment is that cooperative subjects became
angry at others who contributed less than themselves, and retaliated against free-
riding low contributors in the only way available to them—by lowering their own
contributions (Andreoni 1995). Experimental evidence supports this interpretation.
When subjects are allowed to punish noncontributors, they do so at a cost to them-
selves (Dawes, Orbell and Van de Kragt 1986;Sato 1987; Yamagishi 1988a,b,1992;
Ostrom, Walker, and Gardner, 1992).
Fehr and Gächter (2000), for instance, set up a ten round public goods game
with n = 4 and costly punishment, employing three different methods of assigning
members to groups. Under the Personal treatment, the four subjects remained in
the same group for all ten periods. Under the Stranger treatment, the subjects
were randomly reassigned after each round. Finally, under the Perfect Stranger
treatment the subjects were randomly reassigned and assured that they would never
meet another subject more than once (in this case, the number of rounds had to
be reduced from ten to six to accommodate the size of the subject pool). Subjects
earned an average of about $35 for an experimental session.
Fehr and Gächter (2000) performed their experiment for ten rounds with pun-
ishment and ten rounds without. Their results are illustrated in Figure 1. We see
that when costly punishment is permitted, cooperation does not deteriorate, and in
the Partner game, despite strict anonymity, cooperation increases almost to full co-
operation, even on the final round. When punishment is not permitted, however, the
same subjects experience the deterioration of cooperation found in previous public
goods games.
Social Capital and Community Governance 10

The contrast between the Partner effect and the two Stranger effects is worth
noting. In the latter case punishment prevented the deterioration of cooperation,
whereas in the former case punishment led to an increase in participation over
time, until near full cooperation was achieved. This result suggest that subjects
are motivated by the personal desire to punish free riders (the Stranger treatment),
but are even more strongly motivated when they there is an identifiable group, to
which they belong, whose cooperative effort is impaired by free riding (the Partner
treatment). The prosociality of strong reciprocity is thus more strongly manifested,
the more coherent and permanent the group in question.

20
With Punishment Without Punishment
18

16 Partner

14
Stranger
12
Average Contribution

10
Perfect Stranger

0
0 2 4 6 8 10 12 14 16 18 20
Periods

Figure 1: Average Contributions over Time in the Partner, Stranger, and Perfect
Stranger Treatments when the Punishment Condition is Played First
(adapted from Fehr and Gächter, 2000).

The frequency with which subjects paid to punish other group members raises
serious doubts about the adequacy of the standard behavioral model, for in the
perfect stranger treatment (or in the final periods of other treatments) the dominant
strategy is to contribute nothing and to refrain from punishing. Indeed, strategically,
punishment is identical to the contribution to the public good. Both are forms of
altruism—a benefit conferred on others at a cost to oneself. The fact that subjects
avidly punish low contributors, and display considerable negative affect when asked
why they do so, suggests that they are responding emotionally—specifically, they
Social Capital and Community Governance 11

are acting on feelings of anger.

Our own experiments (Bowles, Carptenter and Gintis 2001, Bowles and Gintis
2001) make it clear that the willingness to punish low contributors in perfect stranger
public goods games is not based solely on altruistic feelings towards those who will
benefit from the fact that those punished contribute more in subsequent rounds.
Similarly, the fact that low contributors respond positively to punishment is not
explained simply by their desire to avoid payoff reductions in the future. We think
it likely that punishment triggers shame by those who have shirked and that this
emotional reaction to punishment (and not simply payoff maximization) is part
of the reason for the effectiveness of punishment. The public goods experiiments
suggest that human motivations include the reciprocal preferences that may sustian
mutual monitoring and high levels of cooperation even in communities of substantial
size (Bowles et al. 2001). Attention to these and other non-standard preferences is
long overdue in economics. But if non-standard motives are part of the way that
communities work, they are also implicated in community failures.

4 Community Failures

Like markets and governments, communities also fail. The personal and durable
contacts that characterize communities require them to be of relatively small scale,
and a preference for dealing with fellow members often limits their capacity to
exploit gains from trade on a wider basis. Moreover, the tendency for communities to
be relatively homogeneous may make it impossible to reap the benefits of economic
diversity associated with strong complementarities among differing skills and other
inputs. Neither of these limitations is insurmountable. By sharing information,
equipment, and skills, for example, the Japanese fishermen exploited economies of
scale unattainable by less cooperative groups, and reaped substantial benefits from
the diversity of talents among the membership. Similarly cooperation in the local
business networks in what is called “the third Italy” along with their associated local
governments allow otherwise unviably small firms to benefit from economies of
scale in marketing, research and training allowing their survival in competition with
corporate giants. But compared to bureaucracies and market, which specialize in
dealing with strangers, the limited scope of communities often imposes inescapable
costs.
A second “community failure” is less obvious. Where group membership is the
result of individual choices rather than group decisions, the composition of groups
is likely to be more culturally and demographically homogeneous than any of the
members would like, thereby depriving people of valued forms of diversity. To
see this imagine that the populations of a large number of residential communities
Social Capital and Community Governance 12

are made up of just two types of people easily identified by appearance or speech,
and that everyone strongly prefers to be in an integrated group but not to be in
a minority. If individuals sort themselves among the communities there will be
a strong tendency for all of the communities to end up perfectly segregated for
reasons that Thomas Schelling (1978) pointed out in his analysis of neighborhood
tipping. Integrated communities would make everyone better off, but they will
prove unsustainable if individuals are free to move. See Young (1998) and Bowles
(2002) for models demonstrating this result.
Economists use the terms “market failures” and “state failures” to point to the
allocative inefficiencies entailed by these governance structures, and so far our dis-
cussion of these along with community failures has conformed to the canon. But
like markets and states, communities often fail in other, sometimes more egregious
ways. Most individuals seek membership in a group of familiar associates and feel
isolated without it. But the baggage of belonging often includes poor treatment of
those who do not. The problem is exacerbated by the group homogeneity resulting
from the neighborhood tipping community failure above. When insider-outsider
distinctions are made on divisive and morally repugnant bases such as race, reli-
gion, nationality or sex, community governance may contribute more to fostering
parochial narrow-mindedness and ethnic hostility than to addressing the failures of
markets and states. This downside of community becomes particularly troubling
when insiders are wealthy and powerful and outsiders are exploited as a result.
The problem is endemic. Communities work because they are good at enforcing
norms, and whether this is a good thing depends on what the norms are. The recent
resistance to racial integration by the white residents of Ruyterwacht (near Cape
Town) is as gripping an account of social capital in action as one can imagine
(Jung 1998). Even more striking is Dov Cohen’s (1998) study of U.S. regional
differences in the relationship between violence and community stability. With
Richard Nisbett (1996) he has described a “culture of honor” that often turns public
insults and arguments into deadly confrontations among white males in the South
and West, but not in the North. Cohen’s research confirms finding that in the North,
homicides stemming from arguments are less frequent in areas of higher residential
stability, measured by the fractions of people living in the same house and the same
county over a five year period. But this relationship is inverted in the South and
West, residential stability being positively and significantly related to the frequency
of these homicides where the culture of honor is strong.
Social Capital and Community Governance 13

5 Enhancing Community Governance

Many adherents of the liberal philosophical tradition—whether conservative advo-

cates of laissez faire or their social democratic and liberal socialist critics—have
for these reasons seen communities as anachronistic remnants of a less enlightened
epoch that lacked the property rights, markets and states adequate to the task of
governance. In this view communities are not part of the solution to the failures
of markets and states, but part of the problem of parochial populism or traditional
fundamentalism. Many holding this view have long since rejected any dogmatic
adherence to either pole of the planning versus markets opposition. But these an-
chors still moor the ship of good government as firmly as ever, debate now centering
on the optimal location along the resulting continuum.
Those advocating social capital, or as we would prefer, community governance,
as an important aspect of policy-making and institution-building have come to be
dissatisfied with this view, doubting (with Kenneth Arrow) that states or markets,
in any combination, can be so perfected as to make norms redundant, and believing
that the substantial drawbacks of this third form of governance can be attenuated
by adequate social policy. Many have also pointed to cases where efforts to perfect
the market or assure the success of state interventions have destroyed imperfect
but nonetheless valuable community-based systems of governance, suggesting that
policy paradigms confined to states and markets may be counterproductive.
Unlike the utopian capitalism of textbook neoclassical economics and the utopian
statism of its subbranch called welfare economics, which for the past fifty years has
imagined that governments have both the information and the inclination to offset
market failures, there can be no blueprint for ideal community governance. As
Elinor Ostrom (1990), James Scott (1998) and other field researchers have stressed,
communities solve problems in a bewildering variety of ways with hundreds of
differing membership rules, de facto property rights, and decision=making proce-
dures. But the above cases may suggest some of the elements that are frequently
found in well-governing communities and which might form part of a public policy
aimed at enhancing the desirable aspects of community governance.
The first, strongly supported by our experimental evidence, is that members
of the community should own the fruits of their success or failure in solving the
collective problems they face. The Japanese fishermen, skippers and crew alike,
own shares in the output of their coop and hence directly benefit from its success
in a way that employees on fixed wages would not. Among the Chicago residents,
communities in which home ownership is common exhibit much higher levels of
“collective efficacy” even after controlling for a large number of demographic and
economic variables. The most likely explanation is that home owners benefit fully
from their neighborhood improvement interventions, not only from the improved
Social Capital and Community Governance 14

quality of life but from the enhanced value of their homes. This interpretation
is consistent with the fact that Sidney Verba and his collaborators (1995) found
that controlling for a large number of demographic and other variables, U.S. home
owners are more likely to participate in local but not national politics, and Edward
Glaeser and Denise Depasquale (1999) found in a sample of German individuals
that changes in home ownership predict changes in levels of civic participation.
Finally, the plywood worker-owners’ success would be inexplicable were it not for
the fact that as residual claimants on the income stream of the coop, each own the
results of the others efforts. As these examples suggest, in order to own the success
of one’s efforts, community members must generally own the assets with which
they work, or whose value is affected by what the community does.
Second, as we have seen in the public goods with punishment experiments, the
unraveling of cooperation that often afflicts communities can be averted if oppor-
tunities for mutual monitoring and punishment of noncooperators are built into the
structure of social interactions. Policies to increase the visibility of the actions of
peers in communities, along with policies to enhance the effectiveness of forms of
multilateral sanctioning of shirkers may thus contribute to cooperative solutions to
problems, even if a majority of members are self-interested. Hunter-gatherer bands
that share food often practice the custom of eating in public, an effect of which is to
make violations of the sharing rule evident to all. The Toyama Bay fishers practice
of off-loading their catch at the same time likewise contributes to transparency in
implementing their sharing rule.
An important feature of models in which cooperation in sizable groups is sus-
tained by the punishment of shirkers is that multiple equilibria typically exist. When
cooperation is common, the costs incurred by civic-minded punishers is small, and
they can easily persist in a population, while when cooperation is uncommon, those
who punish shirkers will incur heavy costs and will be likely to be eliminated by any
plausible evolutionary process (Boyd, Gintis, Bowles and Richerson 2001). This
suggests that a heterogeneous population with some civic-minded members, ready
to punish those who violate norms, and some self-interested members, may exhibit
high or low levels of cooperation depending not on the distribution of types in the
population but rather on the recent history of the group.
In 1754, David Hume (Hume 1898[1754]) advised “that, in contriving any
system of government…every man ought to be supposed to be a knave and to have
no other end, in all his actions, than his private interest.” But he was appealing to
prudence, not to realism. His next sentence reads: it is “strange that a maxim should
be true in politics which is false in fact.” However if, as Hume realized, individuals
are not uniformly selfish, but rather are sometimes given to honorable sentiments,
then prudence and realism alike might recommend an alternative dictum: policy
makers and constitution builders should know that populations are heterogeneous
Social Capital and Community Governance 15

and the individuals making them up are both versatile and plastic, and that good
policies and constitutions are those that support socially valued outcomes not only by
harnessing selfish motives to socially valued ends, but also by evoking, cultivating,
and empowering public spirited motives.
There is a third desideratum for enhancing community governance. The cases
above and hundreds like them suggest that well-working communities require a
legal and governmental environment favorable to their functioning. The Chicago
residents’ success in reducing crime could hardly have been realized had the police
not been on call. The Japanese fishing coops numbering more than a thousand work
within national and prefectural environmental and other regulations which they are
free to complement by locally made rules, but not to override. A comparison of
Taiwanese and South Indian farmer-managed irrigation organizations shows that
the greater success of the former is due to the effective intervention of national
governments in providing a favorable legal environment and handling cases in which
the informal sanctions of the community would not be adequate (Lam 1996, Wade
1988) Similar community-governmental synergy is found in Tendler’s study of the
delivery of health care (1997) and Ostrom’s account of urban infrastructure (1996),
both in Brazil. The fact that governmental intervention has sometimes destroyed
community governance capacities does not support a recommendation of laissez
faire.
The face-to-face local interactions of community are thus not a substitute for
effective government but rather a complement. Neglect of this point no doubt ex-
plains some of the popularity of the social capital concept. A Gallup Poll recently
asked a large national sample of Americans “Which one of the following groups
do you think has the greatest responsibility for helping the poor: churches, private
charities, the government, the families and relatives of poor people, the poor them-
selves, or someone else?” They also asked if inequalities in income and wealth were
“acceptable” or “a problem that needs to be fixed.” While the sample was evenly
split between the government on the one hand and all of the non-governmental re-
sponses on the other, those unconcerned about the level of inequality were almost
three times as likely to support the private approach than the government solution.2
Those favoring the social capital option in this case were seemingly more motivated
by the fact that it would shrink government than by the hope that it would reduce
inequality.
Thus both a legal and governmental environment that complements the distinc-
tive governance abilities of communities and a distribution of property rights that
2 Christina Fong, personal communication (1999) of her analysis of data from the Gallop Poll
Social Audit Survey “Haves and Have-Nots: Perceptions of Fairness and Opportunity,” a randomly
selected national sample of 5001 adults between April 23 and May 31, 1998.
Social Capital and Community Governance 16

makes members the beneficiaries of community success are key aspects of policies
to foster community problem-solving. Developing an institutional structure such
that states, markets and communities are mutually enhancing is a challenging task,
however. For example, where property rights are ill-defined and informal con-
tractual enforcement is essential to mutually beneficial exchange, more precisely
defined property rights may reduce the multifaceted and repeated nature of interper-
sonal contact on which community governance is based (Bowles and Gintis 1998).
Similarly, there is considerable evidence that attempts to induce higher levels of
work effort, compliance to norms, or environmental conservation by mobilizing
self-interested motives through the use of fines and sanctions may undermine reci-
procity and other social motives (Fehr and Gächter 2000, Bewley 1995, Gneezy
and Rustichini 2000, Cardenas, Stranlund and Willis 2000), as well as other sources
cited in Bowles (1998).
A fourth element in the community/good governance package: active advocacy
of the conventional liberal ethics of equal treatment and enforcement of conventional
anti-discrimination policies. That it is not unrealistic to hope that communities can
govern effectively without repugnant behaviors favoring “us” against “them” is
suggested by the many examples of well-working communities that do not exhibit
the ugly parochial and divisive potential of this form of governance, including all
of those above.
Other ways of empowering communities can be imagined, but some should be
resisted on grounds that they heighten the difficult tradeoffs between good gover-
nance and parochialism mentioned above. For example, Alesina and La Ferrara
(1999) found that among U.S. localities, participation in church, local service and
political groups as well as other community organizations is substantially higher
where income is more equally distributed, even when a host of other possible influ-
ence are controlled. Their finding suggests that policies to increase income equality
would enhance community governance. But they also found that racially and eth-
nically diverse localities, measured by the probability that two randomly selected
members of the population would be of different racial or ethnic groups, had sig-
nificantly lower levels of participation. One may hope that pro-community public
policy would not seek to increase racial and ethnic homogeneity of groups for this
reason.
But simply resisting government policies that homogenize is not sufficient.
If Alesina and La Ferrara’s results, and others like them, suggest that successful
communities are likely to be relatively homogeneous, then a heavy reliance on
community governance, in the absence of adequate counteracting policies, could
promote higher levels of local homogeneity simply because the success of groups
and their likely longevity will vary with how homogeneous they are. Thus a com-
petitive economy in which worker-owned cooperatives are common is likely to
Social Capital and Community Governance 17

exhibit more homogeneous workplaces than one made up of conventional firms.

The combination of within-group homogeneity and between-group competition,
while effectively promoting some desirable forms of governance, seems a recipe
for hostile “us versus them” sentiments. Dilemmas such as this are not likely to
disappear.

6 Economic Evolution and the Future of Community Gover-

nance

The age of commerce and the dawn of democracy were widely thought to mark the
eclipse of community. Writers of all persuasions believed that markets, the state,
or simply ‘modernization,’ would extinguish the values that throughout history
had sustained forms of governance based on intimate and ascriptive relationships.
According to the romantic conservative Edmund Burke (1955[1790])

…the age of chivalry is gone. That of Sophisters, economists, and

calculators has succeeded.…Nothing is left which engages the affection
on the part of the commonwealth…so as to create in us love, veneration,
admiration or attachment.

The liberal Alexis de Tocqueville (1958) echoes Burke’s fears in this comment on
democratic culture in America during the 1830’s:

Each [person]…is a stranger to the fate of all the rest…his children and
his private friends constitute to him the whole of mankind; as for the
rest of his fellow citizens, he is close to them but he sees them not…he
touches them but he feels them not; he exists but in himself and for
himself alone…

For the socialists Marx and Engels (1972[1848])

The bourgeoisie…has put an end to all feudal, patriarchal, idyllic re-

lations. It has pitilessly torn asunder the motley feudal ties that bound
man to his “natural superiors,” and has left remaining no other nexus
between man and man than naked self-interest…[I]n place of the num-
berless indefeasible chartered freedoms, it has set up that single, un-
conscionable freedom—free trade. (p. 475)

Many who predicted the demise of community based their argument on the
notion that communities owe their existence to a distinct set of pre-modern ‘val-
ues’ that were bound to be extinguished by economic and political competition in
markets and democratic states, or as Marx put it by “the icy waters of egotistical
Social Capital and Community Governance 18

calculation.” Modern writers as well have stressed that the parochialism on which
communities thrive require cultural commitments that are antithetical to modern
social institutions. Talcott Parsons’ sociological system, to mention one prominent
example, consistently attributes ‘particularistic’ values to more primitive levels of
civilization, and ‘universalistic’ values to the more advanced.
Fred Hirsch refers to the waning of precapitalist moral codes in similar vein:
This legacy has diminished with time and with the corrosive contact of
the active capitalist values. As individual behavior has been increas-
ingly directed to individual advantage, habits and instincts based on
communal attitudes and objectives have lost out. Hirsch (1976):117–
118.
We do not doubt that markets and democratic states represent cultural envi-
ronments in which some values flourish and others wither. Indeed, the dismay
concerning their effects, expressed so long ago by Burke, Marx and de Tocqueville,
may have been prescient. But the basis for the rise, fall, and transformation of
communities, if we are correct, is to be sought not in the survival of vestigial values
of an earlier age, but in the capacity of communities, like that of markets and states,
to provide successful solutions to assist in solving contemporary problems of social
coordination.
Far from being an anachronism, community governance appears likely to as-
sume more rather than less importance in the future. The reason is that the types of
problems that communities solve, and which resist governmental and market solu-
tions, arise when individuals interact in ways that cannot be regulated by complete
contracts or by external fiat due to the complexity of the interactions or the private or
unverifiable nature of the information concerning the relevant transactions. These
interactions arise increasingly in modern economies, as information intensive team
production replaces assembly lines and other technologies more readily handled
by contract or fiat and as difficult to measure services usurp the preeminent role,
as both outputs and inputs, once played by measurable quantities like kilowatts
of power and tons of steel. In an economy increasingly based on qualities rather
than quantities, the superior governance capabilities of communities are likely to
be manifested in increasing reliance on the kinds of multilateral monitoring and
risksharing exemplified above.
But the capacity of communities to solve problems may be impeded by hier-
archical division and economic inequality among its members. Many observers
believe, for example, that the limited inequality between managers and workers in
the Japanese firm is a key contributor to information sharing between management
and production workers (Aoki 1988). Dayton-Johnson and Bardhan (2002) have
found that farmer members of irrigation organizations in Tamil Nadu, India and
Social Capital and Community Governance 19

Guanajuato, Mexico are more likely to cooperate in making efficient use water if
status and class inequalities among them are limited. We survey other evidence
as well as the theory underlying these comments in Baland, Bardhan and Bowles
(2002) and Bardhan, Bowles and Gintis (2000). These results may reflect the same
behavioral regularities underlying experimental results showing that cooperation
in two-person non-repeated prisoners dilemma games declines dramatically when
the degree of conflict of interest implicit in the payoff matrix increases (Axelrod
1970, Rapoport and Chammah 1965).
If we are right that communities work well relative to markets and states where
the tasks are qualitative and hard to capture in explicit contracts, and the conflicts
of interest among the members are limited, it seems likely that extremely unequal
societies will be competitively disadvantaged in the future because their structures
of privilege and material reward limit the capacity of community governance to
facilitate the qualitative interactions that underpin the modern economy.

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