Social interaction can have permanent effects even if it is not itself permanent.Instead of being stored in physical capital, the effects of social interaction canbe stored in human capital: if, for example, social interaction leads to an increasein the stock of knowledge, its effect will persist even if the social interactionceases. Another possibility is for the effects of social interaction to be storeddirectly in another form of social capital. For example, even if the choir isdisbanded, the norm of trust that it has built up may persist. The choir is thesocial interaction; trust is the output, which is durable.Classifying social capitalSocial capital can be classified by distinguishing the forms of social interaction,the particular type of externality generated, and the mechanisms that induce itto be generated. I briefly set out this classification here, explaining it more fullylater in the chapter.The simplest form of social interaction scarcely deserves the name, since it involvesonly a one-way relationship. However, since it can have all the other characteristicsof social capital it is appropriate to include it. The most primitive formof one-way social interaction is observation: one agent watches another andlearns from observing (even if the motive for the observation is nosy curiosityrather than economic advancement). One-way interaction can also characterizehighly sophisticated forms of social interaction, notably hierarchies: the youthdefers to the kin group elder, while the elder ostentatiously ignores the youth.The other form of social interaction is reciprocal interaction, which characterizesboth networks and clubs. A network is a spontaneous free association ofagents; a club has an organizational form and a defined membership. For example,the grapevine through which a firm picks up gossip on other firms, therebydiscovering which are reputable, does not have the capacity to make collectivedecisions and it lacks a defined network membership; each firm is linkedonly to some other firms in a chain. Nevertheless, the grapevine generates anexternality by reducing opportunism. In contrast, hierarchies and clubs, beingorganizations, have the capacity for group decisions. This capacity is lackingin observation and networks. The two higher-order forms of social interaction,hierarchies and clubs, generally facilitate lower-order social interaction:a hierarchy facilitates observation, a club facilitates networking. Hierarchiesand clubs are equivalent to observation and networking in which the capacityfor group decision is added. It is useful to denote these four forms of socialinteraction as SIo, SIn, SIh, and SIc.Three types of externalities are generated by social interaction. Two of these –knowledge about the behavior of other agents and knowledge about the nonbehavioralenvironment – are knowledge externalities, but they are so differentthat it is worth keeping them distinct. Sharing knowledge about the behavior
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