A Reformed European Model -
Social Capital as Competitive Advantage

Thesis presented to the Faculty of Arts of the
University of Zurich for the degree of Doctor of
Philosophy

by

Michael Leicht

of Trun, GR
Zurich, 2000

Contents

CONTENTS ... 3
LIST OF FIGURES  ... 5
PREFACE  ... 6
INTRODUCTION  ... 8

PART I: COOPERATION, SOCIAL CAPITAL AND SOCIAL INTEGRATION ... 10

1. SOCIAL DILEMMAS AND THE PROBLEM OF COOPERATION  ... 11
Modelling Social Dilemmas  ... 13
Solving Social Dilemmas  ... 16

2. THE MORAL FOUNDATIONS OF LIBERALISM  ... 20
The Evolutionary Approach and the Moral Sense  ... 22
Limits to the Evolutionary Approach and the Need for Constructivism  ... 28
Moral Learning and Social Justice  ... 31
Summary of Moral Sources of Social Capital  ... 39

3. THE NEED FOR FEDERAL POLITICAL INSTITUTIONS  ... 42
Megalothymia, Amour-Propre and the Need for Political Institutions  ... 42
Personalism and the Principles of a Federalist Polity  ... 47

4. SOCIAL CAPITAL - CONCEPT, PRODUCTION, DISTRIBUTION AND DEPRECIATION  ... 50
The Concept of Social Capital: Its Origins From Karl Marx Onwards  ... 51
Excurse: The Structure/Agency Problem  ... 61
Social Order, Cooperation Virtues and Transaction Costs  ... 67
Production of Social Capital  ... 72
Distribution of Social Capital  ... 80
Depreciation of Social Capital  ... 81

5. SOCIAL INTEGRATION  ... 90
Markets, Civil Society, the State and Culture  ... 90
Social Capital as Precondition to Capitalism and Democracy  ... 96

PART II: GROWTH THEORY AND EMPIRICAL RELEVANCE OF SOCIAL CAPITAL  ... 100

1. GROWTH THEORY ...  101
Growth Theory and Social Capital  ... 103

2. PREVIOUS EMPIRICAL STUDIES AND OWN APPROACH  ... 105
3. DESCRIPTION OF VARIABLES  ... 110
4. RESULTS AND INTERPRETATION  ... 116

PART III: HOW CAN WE FOSTER THE ACCUMULATION OF SOCIAL CAPITAL IN EUROPE? ...  125

1. THE EUROPEAN MODEL OF SOCIETY AND THIRD WAY POLITICS  ... 126
Globalisation and Varieties of Capitalism  ... 126
Beyond Left and Right  ... 131

2. THE FUTURE OF SOCIAL COHESION IN EUROPE - A COUNTERFACTUAL SCENARIO  ... 138

3. SOCIAL POLICY ACTIONS ON THE NATION STATE LEVEL  ... 145
Social Welfare and Competitiveness  ... 146
Reform of the Welfare State ...  150
The Unemployment Problem  ... 154

4. ACTIONS AT A EUROPEAN SCALE  ... 164
Economic and Monetary Union  ... 168
European Social Policy  ... 182
European Anti-Discrimination Measures  ... 189
European Regional and Cohesion Policy  ... 195
A Federal Europe  ... 199

PART IV: AN INTERNATIONALLY COOPERATIVE EUROPE  ... 213

GLOBAL PLAYER EU  ... 213
GLOBAL GOVERNANCE AND THE NEED FOR A WORLD STATE  ... 218

CONCLUSION  ... 230

LITERATURE ...  233

Introduction

Unemployment, social exclusion and a welfare state which has reached its limits are signs of a deep crisis of our European society. But at the same time we are living in a post-ideological world of politics were the limits of debate are set by arguments about effectiveness in public policy. Important for politics of the ′radical centre′ is whether there has been a decline in so-cial cohesion and how civil society and politics are interrelated. Thus in a time of deep sea-change of the social fabric and the need for a new political organisation we may learn from Alexis de Tocqueville that the two are only two sides of the same coin:

"In the long run political society is nothing else than the mirror image of civil so-ciety." (von der Gablentz, 1997).

Hence the problems we are facing today demand solutions for which the nation state is not anymore adequate. Solutions must start already at a smaller level and must go often beyond the reach of the nation state. Therefore the need for a ′reformed European model′. For starting to think about such a reformed model Tocqueville is also a good starting point for other rea-sons. He saw man as being a social animal living in community.

"La société communale existe chez tous les peuples, quels que soient leurs usages et leurs lois; c′est l′homme qui fait les royaumes et crée les républiques; la com-mune paraît sortir directment des mains de Dieu (Tocqueville, De la démocratie en Amerique, 1835: S. 1.58; Chapter 5; quoted in a handout of Prof. E. Holens-tein, SS 1999, Swiss Federal Institute of Technology Zurich).

This means that the natural communities, in which men originally lived, are the starting point for our analysis. Unfortunately, these days we have lost this communitarian view. Society dis-integrates into atomised individuals. Hence we need two things: First, a new social science which takes account of people′s conntectedness and relatedness. Therefore we need new in-tellectual tools which must capture the person in his/her embeddedness and connectedness in his/her community. In part I we will try this by developing the concept of social capital. In part II we will give empirical evidence that this broadening of view is of relevance for eco-nomic development and personal well-being. Finally, in part III we will start thinking about how we can change the European polity in order that we will have more social capital in the future. Social capital is a good worthwhile to pursue for its own sake. But it is also of eminent importance to prevent social breakdown on the one hand and on the other hand can it become a crucial competitive advantage in a globalising world economy.

Part I: Cooperation, Social Capital and Social Integration

The major goal of society is to foster mutually beneficial cooperation among its members. Society should integrate. But presently we see more a disintegration, fragmentation and at-omisation of our social fabric. Only the individual counts. What gets lost are the necessary connections between people; the connectedness and embeddedness. Persons are embedded in communities. In the following we will try to capture with the concept of ′social capital′ the major aspects of cooperation and connectedness. On the one hand we will focus on the moral feelings coming from within the person. Norms of justice, trust, civic engagement and toler-ance facilitate mutually beneficial cooperation. On the other hand can social structure help to enforce cooperation among people who don′t always behave morally. Moral norms are seen as having evolved evolutionary. For man being dependant on other human beings it seems plausible that an innate moral sense and a genetical predisposition for moral learning will have developed to help humans to live together in fruitful collaboration. By including moral and political motivations and constraints in our analysis we will go a crucial step further than normal libertarians do. They normally restrict their view on rationally maximising individu-als, property rights and free markets. We are convinced that it is essential to broaden the view and to go beyond the present day ′shrink liberalism′. Social connecteddness and embedded-ness of persons is crucial for a well integrated society. Working together is easier in a com-munity blessed with a substantial stock of social capital.

We will start this part with the analysis of the problem of cooperation. How does cooperation evolve? Social capital is the crucial cooperation resource. It has a double character. Social capital is a moral resource on the one side, and captures social and political structures which foster cooperation on the other. What are the sources of morality? We will start by looking at the evolutionary and biological base of morality - moral sense theory. Then we will discuss the limits of the evolutionary approach and present some of the most prominent rationalist moral thinkers - Aristotle, Kant, Habermas and Rawls.

Voluntary cooperation based on innate moral rules might not always be successful. But since human beings are different from other animals in the way that they have culture and reason, they can modify their genetically controlled behaviour. This opens the realm of constructivist political intervention. But how should political institutions be organised? The best way for political intervention is when the polity is based on federalist principles. Thus with a view to European institutions we will discuss the philosophy and principles of federalism. Having un-derstood the various moral and institutional sources of social capital we will show the origins of the concept ′social capital′ in social science literature from Karl Marx onwards. Subse-quently we will also discuss production, distribution and depreciation of social capital. To close part I we will show the major elements of social integration and the crucial role social capital plays as precondition to capitalism and democracy.

1. Social Dilemmas and the Problem of Cooperation

The problem of how cooperation among actors can emerge lays at the centre of this study. It is the old problem of the origins of social order and how social cohesion can be sustained. The question of where the cooperative norms, underlying social capital, come from is a ques-tion that is in some way coextensive with the field of sociology. But also economics has with game theory a highly developed theory of the origins of cooperative norms. Cooperation oc-curs when actors adjust their behaviour to the actual or anticipated preferences of others, through a process of coordination so that all sides end up better off than they would otherwise be. Therefore cooperation must be distinguished from harmony of goals and mutuality of in-terests. Cooperation implies adjustment of goals. But on the other hand cooperation is some-thing different from competition and conflict (zero-sum game) where one wins at the expense of another.

Sometimes the pursuit of self-interest guided by the invisible hand leads to the spontaneous emergence of cooperative systems. These are the benefits of a working market system. Adam Smith asserted in his ′The Wealth of Nations′ (1776) that the invisible hand of self-interest ′frequently′ leads men to promote the interests of others.

"Every individual is continually exerting himself to find out the most advanta-geous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.

[Each individual is] led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effec-tually than when he really intends to promote it." (Smith, 1776/1961, I, 475, 477, 478).

His famous canonical example is the one of the Butcher-Brewer-Baker.

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