Social Networking in the Age of Diversity

The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.

In 2005, Robert Putnam, Harvard Professor, presented, “E Pluribus Unum: Diversity and Community in the Twenty-First Century.” The study behind the paper took five years and involved 30,000 interviews in 41 communities around the U.S., yet, for reasons which will become clear in a moment, it was little noted in the popular press. One essential goal of the study was to better understand the notion of “social capital,” which he defined as "the collective value of all social networks and the inclinations that arise from these networks to do things for each other.” We have a peculiar interest in the economic value of social capital.
 

The difficult conclusion of the study was that the more diverse a community the lower its social capital. There were numerous factual and statistically relevant elements to the measure of social capital that included voter turnout, volunteerism, contributions to charity, carpooling and the stated level of trust in neighbors. The degree of ethnic homogeneity was measured using the Herfindahl index. This analysis is familiar to M&A attorneys attempting to prove lack of industry concentration to overcome an adverse Hart-Scott-Rodino decision. There was a strong correlation between a high Herfindahl index (increasing ethnic homogeneity) and the measure, “trust neighbors a lot.” In short, as neighborhoods become more diverse, residents' trust in each other and their social capital declines.
 

As Putnam put it, “Inhabitants of diverse communities tend to withdraw from collective life, to distrust their neighbors, regardless of the color of their skin, to withdraw even from close friends, to expect the worst from their community and its leaders, to volunteer less, give less to charity and work on community projects less often, to register to vote less, to agitate for social reform more but have less faith that they can actually make a difference, and to huddle unhappily in front of the television.”¹
 

Clearly, this is not the conclusion we want to hear. In fact, it has been the policy in the U.S. for over 40 years to promote ethnic diversity and integration through various policies, including integrated schooling.  But if Putnam’s conclusions are true, why would governments promote policies that may undermine social capital? 
 

The reason is that despite Putnam’s conclusion that diversity can degrade social capital, we also have the gut sense that long-term ethnic diversity is a powerful force for economic growth. As immigrants arrive and they begin to assimilate the resultant mixture of cultural attributes is often stronger than what existed before. Over time, the Italians and Irish stopped competing with each other in New York and began to intermarry. Fourth generation San Franciscan children benefit from the robust competition in math and science from Russian and Asian immigrants. Another study by Scott Page uncovered the fact that, “ethnic and cultural diversity among groups of highly skilled workers helps catalyze creative thinking and problem solving.”² Indeed, the positive impact of immigration in Silicon Valley is well documented.  In fact, Putnam’s study affirms this outcome showing Silicon Valley and other centers of entrepreneurial growth such as Seattle, San Diego and Boulder, as outliers that exhibit an unusually high level of “trust in neighbors” despite a very low rating for homogeneity. 
 

When we overlay these conclusions on the explosive popularity of social networking websites there are some interesting implications. One huge benefit of social networking technologies is that it makes it extremely easy to find people who are “just like me.” The “like me” context can be highly variable, including alumni from the same college, former employees from the same company, or revolutionaries in Tunisia. So the attraction to social networking venues may simply be finding a virtual refuge from our increasingly diverse social reality. In effect, we can create our own homogeneous virtual communities that escape the geographic bounds of our physical world. To use Putnam’s phrase, instead of “hunkering down in front of the TV” we are hunkered down with our Facebook friends.
 

There is a critical difference, however. The social gaming experience on Zynga’s Cityville is vastly different from watching the daytime soap operas that Zynga will eventually supplant. The interaction is important as is the transparency. The gamers on Cityville are friends and they are real not avatars or actors. The same is true for your contacts on LinkedIn. These are interactions which encompass a high level of trust, the key factor in building social capital.
 

The economics of social capital is obvious. The “externalities” are significant as increased trust in community promotes increased trust in individuals. This will reduce transactional friction and increase trade volumes. Higher levels of trust will also enhance capital formation and risk taking. All of these effects will contribute to economic growth.
 

This has us wondering whether there is a feedback loop from these positive online social networks to real world social networks. Here we are thinking about more than the occasional flash mob or overthrown dictatorship. Does a comfortable, trusting couple hours with your friends on Facebook change your perspective when you head out of the house to the local park or shopping mall? If you have strong social capital in your online community, will it add to the social capital where you live? Will social networking speed up assimilation with all the attendant economic benefits or slow it down because the social discomfort that motivates assimilation has been assuaged by the online experience?
 

Finally, will countries that permit and promote robust social networking capture a long-term economic advantage?

¹“E Pluribus Unum: Diversity and Community in the Twenty-First Century - The 2006 Johan Skytte Prize”. Scandinavian Political Studies, Vol. 30 – No.2 2007 page 150.
²The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools, and Societies. Page, Scott. 2007. Princeton, NJ: Princeton University Press.