Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

Abstract: We develop a two-sector model to analyze which kind of social

organization generates social capital. The hypothesis is that social capital must

be added as an important production factor when considering decentralization

of production. Thus, market centralization processes in a capitalist society eventually

may fragmentize and thus destroy social capital if the positive externality

of local production and social capital is not taken into account. To our knowledge,

no such attempt to model social capital has yet been undertaken and this

gap or ‘missing link’ in economic debates has to be developed to grasp a more

holistic understanding of the big differences in the wealth of nations or regions.

The model shows that if the policy maker decides to centralize the economy,

then the economy moves from an potentially stable equilibrium to an unstable

one that may under certain condition even fluctuate forever.

Keywords: Social capital; market centralization; two-sector model; economic growth growth

JEL-codes: A12; C71; D23; D60; D70; Z13

25 pages, December 10, 2004

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