Social Capital in the creation of Human Capital and Economic Growth: A Productive Consumption Approach

Social capital is a broad term containing the social networks and norms that generate shared understandings, trust and reciprocity, which underpin cooperation and collective action for mutual benefits, and creates the base for economic prosperity. This study deals with the formation of social capital through development of human capital that is created from productive consumption. This paper attempts to formalize incorporation of social capital (SK). This paper sets up a one-sector growth model, where the engine of growth is capital accumulation. The production function for final output is of the AK – type, which uses aggregate capital as single input. Aggregate capital is represented by a Cobb-Douglas index comprising three types capital. Human capital accumulation results from productive consumption and an increase in social capital is driven by the existence of human capital. The optimal growth rate of consumption is derived and it is shown that both human capital and social capital accumulation affect the equilibrium growth rate. Finally, paper presents some empirical evidence on social capital and economic growth.