Whuffie, Social Capital, the Firm and the Enterprise

Source: Flickr

Theres a great debate/discussion going on about Whuffie & Social Capital and how it applies to the social media & online networks/communities on blogs & twitter.

It all started with a post by Brian Solis, a very well reputed leader in the PR world & social media, titled Social Capital: The Currency of the Social Economy. He deeply derives on the book called The Whuffie Factor by Tara "missrogue" Hunt.

Venessa Miemis kicked off an animated conversation on twitter around the difference of Social Capital (as suggested by socio-politico-economists) & Reputation economy (as suggested by Whuffie). She topped it off with an excellent post titled: Social Capital is not the same as Whuffie that I highly recommend everyone to read before proceeding further. Worth every minute you spend reading & digesting it.

In the language of game theory, social capital is the excess propensity to play cooperative solutions in prisoner's dilemma games. Venessa deliberates in detail about the concept of Social Capital, so I will not write redundant stuff. Instead lets consider what's Whuffie.

The term Whuffie comes from Cory Doctorow's sci-fi novel Down and Out in the Magical Kingdom, which is set in a post-scarcity economy. As per the novel, Whuffie is an ephemeral, reputation based token for trading.

"Whuffie recaptured the true essence of money: in the old days, if you were broke but respected, you wouldn't starve; contrariwise, if you were rich and hated, no sum could buy you security and peace. By measuring the thing that money really represented — your personal capital with your friends and neighbors — you more accurately gauged your success"

Whuffie represents the reputation economy, an individual's personal capital; not the social capital that is inherent in the networks, built with trust, that eases cooperation among the individuals.

Source: Emergent by Design

Venessa's map above depicts very clearly the key concepts of Social Capital - relationships, trust, norms, ethics, morality, reciprocity. This is much more than mere reputation alone.

Ok, I think we have flogged the dead horse enough to drive home the point - Whuffie is reputation, not social capital. Now lets proceed further & see how it is relevant to Social CRM, especially to the firm & the enterprise. I will not pose to be an expert in economics, political science or sociology. I am merely a student trying to think through this all.

First lets consider the firm & the enterprise. The Firm, by some definitions, exists to maximize utility. And since the concept of utility is a bit philosophical, as in it is not always observable and thus cannot be measured people resort to using proxies. Hence, in common understanding, or lets say in a pragmatic manner, the firm exists to maximize wealth, revenue or profit.

As per the seminal work of Coase [1937. The nature of the firm. Economica 4 (November): 386-405.], the firm exists separate from a market because of the transaction costs.

"Coase noted that there are a number of transaction costs to using the market; the cost of obtaining a good or service via the market is actually more than just the price of the good. Other costs, including search and information costs, bargaining costs, keeping trade secrets, and policing and enforcement costs, can all potentially add to the cost of procuring something with a market. This suggests that firms will arise when they can arrange to produce what they need internally and somehow avoid these costs."

Coase does not consider non-contractual relationships, as between friends or family members. Thus he inherently leaves out the Social Capital out of the equation. Also, considering the reducing costs of transactions, thanks to the advances & reach of the digital & internet technologies, the existence of the firm, as defined by Coase, is beginning to be challenged.

On the other hand in the art & science of enterprise design Giachetti [Design of Enterprise Systems, Theory, Architecture, and Methods, CRC Press, Boca Raton, FL, 2010.] defines enterprise as below:

"The term enterprise refers to a complex, socio-technical system that comprises interdependent resources of people, information, and technology that must interact with each other and their environment in support of a common mission."

The enterprise as you can see, consists of a network & its environment, that must collaborate to maximize utility.

Ok, so how does the enterprise now calculate Social Capital? Paldam [Social Capital: One or Many? - Issues in New Political Economy, 2001] tries to meld three different concepts of Social Capital to come with different methods & measures.

Source: Google Books

He argues that

"There is far more theory and speculation than measurement: Social capital is a new field, suffering from a great lack of good, reliable data. Both time series and cross-country evidence are missing. In the meantime much speculation is going on."

After a lengthy discussion on the various concepts, Paldam concludes that "the two most promising avenues to measurement are Putnam’s Instrument and generalized trust on the one side and network/trust payoffs on the other side". To know more about the two methods, you need to go through the 22 page article. ;)

Further Reading:

1. Discussion on Social Capital by B. Delworth Gardner [PDF]
2. Social Capital: One or Many? [PDF]
3. The nature of the firm [PDF]