Extension and Place: Reducing Transaction Costs for Better Communities

Cornelia Butler Flora
Senior Fellow, Endowed Chair in Agricultural Systems COAFES
University of Minnesota
North Central Regional Center for Rural Development
Iowa State University

Extension, even in our most targeted programming, seeks multiple goals. Work at the North Central Regional Center for Rural Development (NCRCRD) has summarized these goals around the major capitals of place: human, social, natural, and financial/built.

  1. Increased use of the skills, knowledge and ability of local people
  2. Strengthened relationships and communication
  3. Improved community initiative, responsibility, and adaptability
  4. Sustainable, healthy ecosystems with multiple community benefits
  5. Appropriately diverse and healthy economies.

For example, a nutrition program may increase human capital by increasing knowledge and health status, strengthen relationships and communication by working through neighborhood groups, improve community responsibility by supporting those groups to self-sufficiency, improve ecosystem health by working with the group in setting up community gardens (which again strengthens relationships and communication as Master Gardeners are involved). Financial capital is improved as better nutrition results in better health and less absenteeism, increasing productivity.

Extension works at the intersection of the three sectors that many see as making up society: market, state, and civil society.

The terms are drawn from Plato. It is important to note that these spheres are composed of institutional actors -- both formal and informal groups. A farm can be a market institution, as can be a cooperative or multi-national firm. Within each sphere there are many institutional actors, who at different times will collaborate, cooperate, or "do each other in", depending on relative power, desired future states and perceived mental-causal models of how to get to that desired future state. Consolidation, competition, and cooperation among market firms suggests a very dynamic sphere.

For most market-oriented institutions, the desired future state is generally higher market value and higher profits. These market-oriented goals are particularly prevalent in stock companies or institutions that have their own legal identity as corporations. The stockholders are separate from the management. That separation of management and ownership, particularly when these have a further degree of separation through a variety of mutual funds, management companies, or institutional portfolio managers (as compared to an individual owning stocks in a particular company), gives little information about the skill of management. Managers are judged by the quarterly or annual earnings of the company and market value of their stock.

Market institutions are relatively good at distributing goods and services to those who can afford them. They are not very good at protecting the environment or attending to human health and well being, unless it can be proven that these can contribute to market value or profitability.

When individuals relate to the market, they do so as customers. Market transactions are made for exchange value. That is, one firm buys something from another firm to aid them in producing something that can in turn be sold at a profit. Capital is invested to create more capital. When something is purchased for "use" value, that is to say something that will be used and is not expected to produce any exchange value, that is where the purchaser becomes the consumer. (However it is important to note that economists traditionally refer to the consumer in the agricultural value chain as anyone beyond the farm gate.)

Extension relates to the market through a variety of programs: farm management, crop and animal production, business retention and expansion, e-commerce training, pesticide application certification, and home based businesses are a few examples.

The state makes the market possible. Markets need fairly stable conditions in which to operate Markets need contracts that are enforceable through an effective administrative and judiciary system. They need a reliable money supply. They need to know that rules will be put into place by the legislative system that apply to all. And they need to know that the rules will be administered in a universalistic way -- the same rules are applied to everyone. Thus the state, defined as government from international levels down to the national, state, and local levels, is critical to the market because different parts of the state are influenced by different market and civil society interests. Individuals relate to the state as citizens.

Different state agencies within a given level and different levels of the state are often at odds. The state, like the market, is a dynamic, contested sector. In the state of Minnesota, Governor Jessie Ventura's conflict with the legislature suggests differences between the administrative and legislative branches of state government. Very often, local levels of government, particularly counties and small cities, feel imposed upon by the state or federal governments, particularly as they deal with unfunded mandates. Thus, within the sphere of the state, which sets the rules and conditions for the market and the safety net for its citizens, conflicts arise.

The state helps ensure that the market operates in ways that do not damage the greater society. What is defined as "damage" versus simple externalities and what is defined as right, moral, or correct behavior comes from civil society.

The market influences the state directly through economic institutions. The state lays down rates in the public interest. Economic institutions seek to convince government institutions to further the specific interest of the firm. ("What is good for General Motors is good for the country.") The market also influences the state in what it invests in for the public interest. Recent purchases of pork for the school lunch program are an example of market groups (the Pork Producers) influencing the administrative branch of the government (USDA).

Extension relates to the state by providing training to government officials, linking local people to information provided by University of Minnesota scientists, dealing with environmental regulations, among other programs.

But the state has the additional responsibility of providing for the public welfare. Civil society is formed of groups of people who come together around their goals and values. These groups can range from antique car clubs to political parties. Churches, environmental groups, and other voluntary associations are part of civil society. Individuals relate to civil society as a participant.

Extension relates to civil society by developing civil society institutions (4-H Clubs, Homemakers Clubs), teaching leadership, and building farmers' associations to do on-farm experimentation.

Civil society influences the market directly through forming consumer groups, which can engage in boycotts and information campaigns to influence processors (the "driver" in the U.S. food value chain) or retail grocery chains (the "driver" in European food value chains). It also influences the market indirectly by influencing the state, insisting that the state make it profitable for the market to do what is "moral" (or, more often, that the state make it unprofitable to do what is "immoral". Civil society groups are in constant tension as they struggle to impose different definitions of morality and what is in the public interest.

Civil society influences the state directly by bringing lawsuits (influencing the judicial branch of government, by forging legislation (influencing the legislative part of government), and by urging that particular laws be enforced (influencing the administrative part of government). Civil society institutions are part of the "special interests" that influence who is elected to office and what they do once they are elected. Civil society institutions can counter the influence of market institutions on the state.

Civil society generally exerts influence based on deeply held values or desired future conditions. Groups in civil society, both formal and informal, form around those shared future conditions and their mental/causal models of how the world works. Individuals relate to civil society when they become participants or members. Groups in civil society are also in hot dispute. Since this is where the definition of the "collective conscious" is negotiated, groups struggle to gain participants and to co-opt other groups. The dynamism of this sector influences both the market and the state.

Each of these spheres is not one-dimensional, yet there are tendencies for one to dominate the other. In the former Soviet Union, the state dominated the society to the point that the market was small and did not work very well and civil society was non-existent. With the fall of the Berlin Wall and the end of the Soviet Union, the belief was that free markets alone would transform the newly-reformed countries into nations similar to the capitalist democracies of Western Europe, North America, and the Pacific, including Japan, Australia and New Zealand. The state was very inefficient in distributing goods and services in the old centrally planned economies. The external advisors and the nationalist reformers forgot the need for a strong state to enforce contracts, not run the market, and the need for civil society, organized groups of citizens to be outraged by corruption and able to pressure the state to put more rules on the market. As a result, we currently have what some refer to as "mafia" capitalism in the former Soviet Union. Individuals are upset, but organized corrective action is still not in place. A lack of a civil society and a lack of a strong state have resulted in a market dominated purely by power, which includes control of the means of violence, a power reserved for and protected by the state in more stable democratic parts of the world. This makes Moscow a dangerous place to live today.

Having an imbalance in favor of the market is also problematic. When things are judged as moral because they are profitable and the state therefore acts only to increase profitability, the other important roles of the state - protecting those in society who cannot protect themselves and protecting the environment - fall by the wayside. Thus, civil society through organized groups becomes organized in order to help move toward those desired future states.

Extension has a comparative advantage at the local level in reducing the transaction costs of linking different institutional actors from the different sectors and at different levels (local, regional, state, national, and international). With roles in each sector, it works through partnerships to reach the outcome of improving community capitals.

Extension's Areas of Comparative Advantage: A, then B, C, and D

The biotechnology revolution has brought about a sea-change in science. Suddenly, we know more than ever before about the invisible world of the gene. Human kind is mapping it and cataloging it. Unlike previous knowledge creation, the changes in intellectual property rights since the 1980s make less and less of this knowledge readily available in the public sphere. Further, our proud claim to be based on "sound science" means increasing ambiguity, as the new knowledge gained about sub-microscopic relationships means that eminent scientists, following appropriate methods, arrive at different conclusions, particularly related to the impact of production technologies on human and environmental capital. In this situation, extension educators are more compelled than ever to offer choices, not answers. We can screen the choices because of our science knowledge base, but we can also help science begin to answer the questions that most concern not only the market and the state, but also civil society.

Transaction Costs

A major strength of cooperative extension is local presence. Part of that local presence is knowing the resources - groups and institutions - within a community and outside it, particularly those resources available within the university. One of the most important activities extension can perform is bringing those groups together in appropriate ways to reconfirm visions and to determine action. Thus, extension is key in reducing transaction costs by bringing together the appropriate assets, facilitating their ability to work together and then stepping aside once social capital has been built to the point that action can proceed.

A major product of extension in the 21st Century is reduced transaction costs - reduced transaction costs for individuals, such as farmers, in finding appropriate markets and deciding what are appropriate crops to grow in the absence of government support programs. (Previously, Extension spent a great deal of time explaining how best to take advantage of the ever-changing government programs, particularly in terms of the set-asides and base acres.)

Transaction costs include information seeking; that is to say, what resources are available and what it takes to engage resources. In the economic sense that means determining price. Transaction costs also include the costs of drafting, negotiating, and safeguarding an agreement. When there are high levels of social capital (i.e. mutual trust), which extension can help build, these costs are reduced in terms of time and effort.

There are also the costs of resolving disputes when agreements are not followed or when people misunderstand the contents of the agreement. The new trend of transaction costs economics helps us understand this in terms of businesses. Combining transaction costs economics with the understanding of social capital helps us understand what extension does.

Transactions, defined as what is necessary for action to take place, incur relationships and specific investments regarding particular outcomes. They also involve the uncertainty about other-party actions, which extension can help clarify. Uncertainty about the future or other-party actions leads to higher transaction costs. Given the rapid rate of change, the future is uncertain. We can never lay out all of the possible contingencies. Social capital grows through understanding other parties' actions better, and having a grip on the future and future conditions can help solve these problems.

Granovetter refers to the strength of weak ties. By knowing a large number of people and groups that are different from yourself and your groups, you can include them in actions, such as buying and selling, to get things done faster and to reduce transaction costs.

Extension provides access to expertise. When educators in the field have good relationships with on-campus sources of information, the traditional data sources, as well as other locality-specific sources of information, this cuts the transaction costs of seeking information and shortens the time between planning and action.

As extensionists move from specifically increasing human capital to building social capital and reducing transaction costs, they must stop doing some of the things they have done previously. Stopping traditional activities does not mean that those activities are inappropriate or are no longer useful. It is most appropriate for Extension to spin them off when they can be done by private sector groups. This occurs with the delivery of much agricultural information and with building coalitions for housing and getting curriculum into the schools.

The ability to set processes into motion must be mapped from the beginning in order to show extension's key role and to enumerate the transaction costs that can help move toward a desired collective future, making extension a vital ingredient to successful people and places. This presents a challenge in the current uncertainty that exists in the extension service. There is a push on generating money because extension must begin to pay its own costs. However, generating money is not the same as being profitable. The time spent in various activities by extension educators needs to be valued in terms of transaction costs that are cut. Spending too much time with the same old folks may not be building as much social capital as getting to know new groups. Working with the same three farmers may not be as important as working with a larger group of farmers to produce a quality ingredient for a specific food processor. Such activities can only be judged against the agreed-upon outcomes.

It is vital that extension educators work toward an activities/outcome model (not an input/output model), which can be a productive way of helping to reduce the transaction costs of others while moving toward an agreed-upon vision. By looking at situations where extension educators have done this, we can begin to develop our transaction cost model of extension evaluation. And by seeing where this has been done across sectors, we can better understand the unique role of extension in the field and linked to Land Grant Universities, particularly the University of Minnesota.