Tuesday, September 16, 2008

On gas prices and social capital

In 1995, political scientist Robert Putnam wrote an influential essay with the unusual title Bowling Alone: America's Declining Social Capital. In it, Putnam pointed out a seeming paradox in America in that the number of people participating in bowling had been increasing for many years but the number of people participating in bowling leagues was rapidly declining. People seemed to enjoy going to the bowling alley to play the game, but were becoming less interested in participating in organized leagues, where the bowling was itself perhaps secondary to the social interaction that accompanies an outing with one's friends and neighbours. Putnam went on to use the metaphor of bowling alone to explain how social interactivity, and the beneficial social capital that was built as a by-product, seemed to be on the wane in America, with ominous signs for the country's future.

Social capital is a term that is at least as old as Karl Marx's Das Kapital, although its meaning and significance has evolved over the years.  Social capital is in essence a beneficial economic outcome that emerges from a social connection. For example, if I go out to lunch with a friend, that's a social interaction. If during that lunch my friend provides me with information about an upcoming job opening at her workplace, and I manage to submit a resume and get the job before anyone else has a chance to apply, that's social capital: my friendship with her provided me with an economic advantage others who are not friends with her did not enjoy.  

Social capital does not need to always manifest itself in simple exchanges of insider information; there are many other examples. Social capital can be manifest in terms of trust: I may loan you something or extend you credit on the basis of a handshake and a verbal understanding you will pay me back or return a favour to me when you can - simply because I trust you (try that at the bank or the Wal-Mart). Organized crime gangs often have high levels of social capital: membership in the gang offers protection from other gangs, the chance to share in the spoils of other gang-members and a code of silence to protect one another from the authorities (unless one offends the gang, in which case the social capital is quickly replaced with a punishment).

The key point is that social capital is ephemeral; it is a beneficial by-product of being an active participant in your community, in social groups, in the lives of your friends and neighbours and so on. Not all social interactions lead to the creation of social capital, nor are they supposed to. As soon as someone learns that you sought to become friends with them simply in hopes of gaining some economic favour from them, you will quickly be dropped. As a result, most social interactions are not social capital; social capital is stored in a latent form within social relationships and networks, much in the way potential chemical energy is stored in a fire log. Only when a flame is applied and only under the right conditions will a log catch fire and release its energy in flames (although some logs will never burn because they will never achieve the right conditions). Similarly, social capital may reside in many of our social relationships, but only under certain conditions will it be called into action.

As an example, I am not the only one who marvels at how rapidly gasoline prices in urban centres fluctuate. Urban gasoline station operators act as semi-competitive cartels, defying most of the basic principles of economic theory taught in first year university economic courses. One thing that tends to get overlooked when people examine why gas prices fluctuate so wildly is the inherent geographic restrictions on gasoline purchases. If you drive a car to work, you will by necessity make most of your gasoline purchases at a station located somewhere along your route between home and workplace. Consequently, the gas stations vying for your purchase are not competing with all the gas stations in the city (let alone gas stations father beyond); they only compete with the small number that fall along your commute. You won't deliberately drive to a more distant gas station unless there is a significant savings in doing so; but no other gas station is likely to be so foolish as to cut its prices dramatically, since it, too, is competing with a small number of competitors for drivers within its own established transportation networks. In any event, there is a distance-decay factor at work; your car will only travel so far on a tank of gas, and you need to burn gas in order to travel to buy more. Every extra kilometer traveled to purchase gas causes the savings you might realize to decay. So, urban gas stations are endlessly engaged in cat-and-mouse games with their customers, constantly trying to fleece a couple extra cents per litre out of them. 

Gas prices in small, remote towns tend not to behave that way, at least not in my own experience. Instead, they tend to fluctuate far less often, with price changes occurring on a weekly basis rather than a daily or hourly one.  For example, several times a year I drive 250km out of Ottawa along highways 7 and 41 to do research in a rural, somewhat remote township called Addington Highlands (see www.addington.uottawa.ca). In Addington, there are only about 2,500 people spread out in a series of small villages along 60km  of highway, with only a few gas stations to serve them. The price of gas there is sometimes a bit lower than in Ottawa, sometimes a bit higher. On average, I would estimate the price is about 2-3 cents per litre more than at the two stations found near my house in Ottawa, but in Ottawa the price fluctuates rapidly over a much greater range.

Basic economic theory would suggest gas prices should be considerably lower in Ottawa, where there are more gas stations within 5km of my house than there are within all of Addington Highlands, but they are not. Why not? I would suggest it is at least in part due to social capital. In Addington, the gas stations are owned and operated by local residents. The operator is not selling gas to nameless customers; his or her customers are often friends and neighbours. The station operator's current profit on a tank of gas for a Honda Accord is probably less than $2. Any attempt to gouge customers through unpredictable changes in gas prices would net windfall profits of at best a dime or two per tankful - hardly worth the cost to the station operator's relationship with his or her fellow residents. The higher average price of a few cents per litre as compared with the Ottawa gas station simply reflects the added wholesale costs of transporting fuel to remote areas. It changes only when the operator has to purchase a new bulk shipment of fuel from the wholesaler. 

In Ottawa, the gas station owner typically does not know his or her customers (the station is typically a self-serve operation staffed with a teenaged employee earning minimum wage). So the Ottawa station operator has no social capital to worry about, and therefore has no social disincentive to prevent him or her from gouging customers. 

While I somewhat cavalierly attribute the behaviour of rural gas station operators to social capital, I would caution others to avoid leaping into making too many explanations of human behaviour using the concept. Too often in reading social science research I find that authors who seek to use social capital in explaining some sort of human phenomenon fail to make a clear distinction between social interaction and social capital (I am not the first to observe this; John Harriss and Ben Fine have written excellent if somewhat dense books on how the concept social capital is used in academia). The resulting fuzziness too often implies that most human relationships and behaviours can be explained in mercenary financial terms. I disagree with such an implication. While it may seem that our society has moved in such a direction (particularly urban gas station operators) I still cling to belief that most of what we do is done for reasons that are better explained by evolutionary principles (i.e. the evolution of humans as a species of inherently social and cooperative (if somewhat quarrelsome) primates) rather than economic theory (even if I do subscribe to the fact that social capital really does exist).

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