A few months ago, Mumbai Mirror reported how several of the biggest real estate developers in the city traced their roots to Bhinmal, a small town in Rajasthan. Almost all the new public buildings in this town have been funded by those who struck gold in the Mumbai real estate market. One of the locals perceptively told Chaitanya Marpakwar: “See, if one person moves to a new place and makes money there, others follow. But it is important to note that all these builders had business acumen and foresight. They made the right investments at the right time. Later, they helped people from their native place to set up a business in Mumbai. It was like a chain."

I remembered this newspaper story when I came across a new paper by two economists on what they have evocatively described as dinner table capitalism. Hans K. Hvide and Paul Oyer went through reams of data on entrepreneurs in Finland to show that many of them went into industries in which their fathers worked. And those who set up new enterprises in areas where their fathers worked did better than their entrepreneurial peers who ventured into other lines of business. Four years after the new enterprises were set up, the ones in the former group were more likely to survive and have more employees.

Why did this happen? The two economists believe that the entrepreneurs who went into industries where there was family experience were more likely to succeed because of the specific industry knowledge they were exposed to at home during their childhood—or at the dinner table. It is possible that the successful entrepreneurs benefited from their fathers’ business networks rather than the knowledge passed on at the dinner table. Hvide and Oyer also looked at the data on sons whose fathers had died before they became entrepreneurs, and hence could not have linked them to existing business networks. Their success rates were pretty much the same as those whose fathers were alive when the entrepreneurs ventured into their own businesses. So it was the dinner table knowledge rather than access to old networks that mattered.

The story of the real estate developers who moved to Mumbai from Bhinmal and the recent research on dinner table capitalism in Finland are at one level very different episodes. The former deals with the power of social networks while the latter is all about the knowledge that children tacitly absorb at home. However, a subtle thread binds the two—of how the context matters even in a modern capitalist economy where exchange is usually backed by commercial contracts rather than social networks.

Economist Kaivan Munshi has done some of the most fascinating work on how community networks operate in the Indian labour market. He has shown how these networks become important when market institutions are weak. They provide capital, connections and jobs to other members of the community. Members of a community are keen to protect their reputations—and this goads them to do their jobs diligently or not default on informal loans that have been given without collateral.

As Munshi wrote in a paper published in 2014: “Anyone who has spent time in a developing country knows the importance of social connections, which can help individuals land jobs, and provide them with credit and other forms of support. At first glance, it might appear that such connections distort the economy by giving select individuals an unfair advantage. However, modern economics provides another perspective on this phenomenon, arguing that when markets function imperfectly, networks of socially connected individuals can enhance economic efficiency.... Unlike information networks, which can be organised around casual acquaintances or even anonymous online communities, networks that solve commitment problems must be based on strong social ties to support the sanctions that are needed to maintain cooperative behaviour."

India is a great example of an economy where community networks dominate specific activities—from trade to skills. In fact, a landmark report by a committee headed by R.K. Hazari in 1966 actually categorized large Indian business in terms of its social background. So there were mentions of Marwari, Punjabi, Parsi, Gujarati and south ndian groups. The public sector that was set up in the previous decade was the only exception. It was truly national. The Hazari committee report provides great unintended insights into the intersection of caste and capitalism in India.

Much has changed over the past 50 years. The power of community links has clearly dissipated in large business groups, though it continues to remain strong in other parts of the Indian economy because of weak market institutions. The research of the importance of social networks or of dinner table capitalism leads me to one final question, and an uncomfortable one at that. The very essence of networks is that their power grows exponentially. So how do newcomers break in?

Think about the recent attempts to foster Dalit capitalism. A community that has been denied opportunity will find it very difficult to plug into existing business networks, and creating new ones can be an uphill task. The strengthening of market institutions—so that contract replaces contact—is one solution, though perhaps not the only one.

(Further reading: Community Networks And The Process Of Development, by Kaivan Munshi, Journal of Economic Perspectives, Fall 2014

Dinner Table Human Capital And Entrepreneurship, by Hans K. Hvide and Paul Oyer, Working Paper 24198, National Bureau of Economic Research.)

Niranjan Rajadhyaksha is executive editor of Mint.

Comments are welcome at cafeeconomics@livemint.com. Read Niranjan’s previous Mint columns at www.livemint.com/cafeeconomics

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