This article examines the way ‘social capital’ has been deployed by researchers and practitioners in the field of urban movements and community development. It reveals the powerful and in many ways effective role the concept is playing in framing the contemporary reconfigurations of local state‐society relations which impact especially on the trajectory of third or voluntary sector development. The article identifies the gaps and weaknesses the ‘social capital’ perspective responds to, thereby explaining why it looms so large within the urban development discourse. Its own blind spots and ambiguities, however, limit our understanding of contemporary urban change. By prioritizing specific forms of civic engagement (and neglecting others), the concept filters the contemporary reconfigurations in the relationship of civil society, state and market in a peculiar way, which is conducive to supporting the spread of market forces to areas so far beyond the reach of capital. By directing attention to the self‐activation potential of different communities, whether in the form of civic engagement of well‐to‐do volunteers or in the form of activation/reinsertion (into the low‐wage labour market) of the marginalized, this new discourse plays a crucial role not only in current efforts to unburden the local (welfare) state, but also in the expansion of market forces into new areas.