In most developed countries, the past decade has undoubtedly been the hardest time to build financial wealth since the Great Depression. Aspiring wealth builders have been hit with a cluster bomb of stagnating economic growth and wages, high unemployment, poor career advancement opportunities, soaring living costs, paltry fixed income investment returns, and increasingly volatile financial markets.
Unfortunately, my research has found that it will become even harder to build financial wealth in the next ten to fifteen years or so because the Global Financial Crisis is far from over despite the desperate efforts of institutions such as the media and government to convince the public otherwise. Rather than encouraging a sustainable economic recovery, central banks have created what I call a "Bubblecovery" or bubble-driven recovery by inflating a series of dangerous, but temporary growth-boosting bubbles around the entire world, from Canada to China to the U.S. stock market. The inevitable ending of this Bubblecovery will finish where the 2008 Crisis left off, causing living standards to plummet even further and depressing the value of common investments for a very long time.
Introducing The Concept of Social Capital
Everything that I have just discussed pertains to the difficulties of earning and accumulating capital that is primarily financial in nature, which is due to the fact that these problems stem from a financial crisis. To put it simply, the "Dollars and Cents" paradigm that the middle class relies so heavily upon for its existence is broken and will not be fixed anytime soon.
Thankfully, there is another form of wealth that exists outside of the broken financial paradigm and is therefore relatively insulated from the trends that affect financial markets and economies. This form of wealth is called social capital or capital that is derived from the value of social connections or networks. The concept of social capital takes the adage "it's not what you know, it's who you know" a step further by adding "and who knows you." Social capital includes everything from having a small network of professional contacts to being prominent in a specific industry or geographic region, all the way up to national and international fame. As with financial capital, people can be poor in social capital terms or they can be very wealthy, and everything in between.
Put into basic mathematical terms, an individual's social capital is measured by the number of people in their social network multiplied by the value of those people's social capital. Social capital can be derived from having a large network of people who each possess a small amount of social capital or from having a small network of people who each possess a very large amount of social capital. Obviously, the ideal situation is to have a large social network that includes many influential individuals who each possess a significant amount of social capital of their own.
Even though social capital exists outside of the conventional financial paradigm and is difficult to measure in financial terms, it has a very real economic value because it can be converted into financial capital if needed. For example, a job seeker may reach out to their professional network for assistance in finding a better-paying job, while a renowned public figure may monetize their fame by obtaining lucrative book deals and endorsements. The more social capital one has, the more potential financial capital they have.
Why Few People Are Aware Of Social Capital
Even though social capital has genuine economic value, there is very little mainstream awareness and understanding of it for a variety of reasons. One reason is the fact that social capital is a more abstract and intangible form of wealth than money in a bank account or a portfolio of stocks, which are easy to measure in numerical terms. In addition, social capital is a rarer form of wealth than financial capital. In the U.S. alone, for example, there are nearly 10 million millionaires, but nowhere near as many people who are comparably wealthy in social capital terms.
Members of the middle and working classes are conditioned to think of wealth primarily in financial or "Dollars and Cents" terms because they are typically employed by corporations or governments and earn a salary for their labor, but receive very little compensation in the form of social capital and personal brand development. Hiring institutions prefer employing legions of "worker bees" who are reliable, efficient, and cost-effective rather than "stars" who personally possess large amounts of social capital and name recognition and thus have a greater degree of bargaining power and independence. For this reason, one of the keys to escaping the middle class rat race is to become more like a star and less like a worker bee, and building a significant amount of social capital is one way to do this.
Unlike the middle and working classes, members of the upper class are more likely to be aware of and possess a wider array of capital types including financial capital, social capital, political capital, symbolic capital, and cultural capital. The upper class leverages these tangible and intangible forms of capital to generate even more capital with far less emphasis on "trading time for money" as salaried employees do. Like financial capital, social capital can be earned through hard work and ingenuity, though social capital has become easier to earn than financial capital in these tumultuous economic times.
Social Capital Has Many Benefits Over Financial Capital
While having a certain amount of financial capital is obviously necessary for living a comfortable life, there are numerous benefits that social capital has over its financial counterpart. Thankfully, it is possible to experience the best of both worlds because these forms of capital are not mutually exclusive and because they typically reinforce each other. Just how diversification is beneficial for investment portfolios, it is also beneficial to have a diversified mix of financial capital and social capital.
Here are just a few of the benefits that social capital has over financial capital:
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