2.4 Agrarian Institutions; The Nature of the Farm Flashcards Preview

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Flashcards in 2.4 Agrarian Institutions; The Nature of the Farm Deck (11):
1

Please explain what forms of Agrarian Institutions exist and give reasons for their complexity.

There are peasant farms, family farms, family-managed farms, partnerships, limited companies, jointstock companies, production cooperatives, agricultural commons, socialist collective and state farms, household plots, farms in Chinese household responsibility system, plantations, indoor feeding of hogs and poultry, etc.

But we look at the “family farm” to learn about what shapes the farm as an institution. Institutions are sets of rules put into practice by forms of organisation. An agrarian Institution have some sets of rules to organize the production. That is embedded in a network of other organisations together based on complex rules of interaction because A variety of organisational solutions needed for:

(1) responding to activities with different economies of scale and
(2) governing transactions cost
(3) Path dependency

For example a dairy farm. It depends on many others institutions such as those who determine the quality of the milk (limits of content such as protein, sugar, etc.), the rules of the cooperative to share incomes and obligations of the farmer and so on.

Remember: Institutions are sets of rules put into practice by forms of organisation (= structures and of modes of governance)

2

Why is the “Family Farm” a suitable example for explaining the system of such Institutions? What role do transaction costs and economies of scale play? What role does the principal- agent problem play?

• We look at the family farm to learn about what shapes the farm as an institution. In processes of factor re-allocation, family farms respond to equal opportunity or mobility costs but they respond in a different way than members of other branches do.
• Low agency costs of family labor: advantage compared to non-family operations
•Decentralized governance: actors = farmers take their own decisions - autonomous action!
• And also individualised governance: actors = farmers are responsible for their decisions

Transaction Costs of Labor
• In farming, hired labor causes higher transaction costs than family labor
• ‘The family farm can be regarded as an organizational solution to the difficulty of monitoring and supervising workers, who, for technological reasons, cannot be gathered in a single location' (Pollak 1985: 592)
• Explains superiority of family governance in agriculture – but not always!
The 'Principal-agent Problem'
• Low agency costs of family labor: advantage compared to non-family operations
• Aereboe (1923: 534): larger ‘social distance’ between manager and worker in large farms
• Compensation system difficult, problems of measurability due to nature of farming (Pollak)
• Decentralized governance: actors = farmers take their own decisions - autonomous action!
• And also individualized governance: actors = farmers are responsible for their decisions

3

What are reasons the for the persistence of family farms? When do non-family operations prevailing agriculture?

Advantages

• Family farms have important advantages regarding coordination: e.g., information flow, motivation, trust, responsibility, accountability, knowledge transfer, continuity
• Pollak (1985: 585): 'the advantage of family governance can be grouped into four categories: incentives, monitoring, altruism, and loyalty.‘
• For example incentives: family members have claims on family resources; e.g. social security for inactive members (informal and formal)

• Form of economic organization of farming mostly based on household and family
• Transaction costs of agricultural production to be borne by the farm are transaction costs to be borne by the family/household
• In farming, hired labor causes higher transaction costs than family labor
• Obviously the family/household can do this better than a segregated farm firm

Similarly, Allen and Lueck (1998): farm families’ “self-motivated effort” is superior because:

• Farming activities are seasonal in nature, flexible adjustment of family labor capacity
• Timeliness of work due to biological processes
• Work is sequenced in between random events
• Scope for specialization is therefore limited
• Activities difficult to observe – agency problem

When non-family farms prevail...:
Larger farms can prevail, because the the average cost tends to remain relatively constant over time, even though the lowest production costs may be attainable on medium-sized farms. This creates a strong incentive to expand. TC have a fixed cost element, so that the cost per unit are declining to a certain extent if farms increase in size.

4

What are Integrative Institutions and how are they characterized by March and Olsen (1989) and Bogason (2003)?

*** Grafik ***
The integrative system involves such things as status, identity, love, hate, benevolence and legitimacy. Its a social institution which defines roles ins such a way that you do things because of what you are and because what I am, that is, because of some status or respect.

• Integrative institutions allow actors
deciding on transactions, not only to
profit from beneficial effects, but they also hold them liable for adverse effects.
• Similarly, they not only make them internalise the transaction costs, but also protect them against transaction cost resulting from activities of others.
• Decision makers enjoy all benefits and bear all costs of their own decisions, and decisions made by other actors will cause them neither gains nor nuisances.

Segregative institutions: just the opposite!

5

What are Segregative Institutions and how are they characterized by March and Olsen (1989) and Bogason (2003)?

Exact opposite of integrative institutions.

They show a higher degree of separation between employers and employees, capital owners and management, family and profession, household and firm, work time and free time, production units and living quarters etc.
• Different impact on integrating and segregating institutions on transaction costs of decision making, which influences effectiveness or attenuation of property rights. Characteristics:
- decision makers may not be able to collect all components of benefit of his or her factor allocation activities
- decision makers may be successful to burden other actors with some cost components resulting from his or
her factor re-allocation activities without incurring prohibitive costs.
• In segregating systems such decisions are taken in a separated way, and are based only on a part of the total TC.

6

Do we find more Integrative or Segregative economic institutions in agriculture? Give reasons, especially in regard to structural changes.

• Farmers in integrating institutional systems internalise more and externalise less transaction costs.

• Deviating attributes of structural change may be due to deviating institutional performance of integrating and
segregating economic institutions, the first prevailing in agriculture and the other outside of agriculture.

• Compared with the segregating institutions, the integrating agrarian family farm is able to coordinate decision-making without structural change at lower transaction costs but can only coordinate decision-making with structural change at higher transaction costs.

7

Please refer to the “Family Farm” as an institutional success one the one hand and as institutional barrier on the other hand.

Success:
Allen and Lueck (1998): farm families’ “self-motivated effort” is superior because:
- Farming activities are seasonal in nature, flexible adjustment of family labor capacity
- Timeliness of work due to biological processes
- Work is sequenced in between random events
- Scope for specialization is therefore limited
- Activities difficult to observe – agency problem

Barrier:
‘When agricultural tasks can be monitored easily in terms of inputs or outputs, family farms are often overshadowed by other forms of agricultural organization.

- For some crops and tasks hired labor can be concentrated into work gangs and supervised directly, so plantation agriculture is possible.
- For other crops and tasks (e.g. harvesting) output can be measured directly and work paid for on a piece-rate basis’ (Pollak 1985: 592)

8

What are the advantages of Family Farms (in small farms) being Integrative institutions?

• Agricultural production is closely interconnected with ecological and biological processes.
• Farming causes nature-related transactions: diverse, heterogeneous, can not be standardized.
• Small units have lower coordination cost than large units.
• Economies of scale are exploited at a firm size which can be operated by a family or extended family or small group
(no large factory). They over-compensate for higher transaction costs.
• Thus, the already existing integrative institution “family” can be used for coordinating the economic decisions: no
separate institution required.
• Family farm is an institutional extension of the pre-existing (INTEGRATIVE) social institutions “family” and
”household” . This explains why transaction costs are lower in small family units than in large ones .
• No separate organisation, no segregation!
• Outsourcing activities with large economies of scale, e.g. inc oops (farmers=patrons)

Advantages of Family Farms as Integrative Institutions:

• Family farms as important advantages regarding the quality of coordination.
• Agricultural activities are difficult to be organised in standardised processes.
• Hired labor usually causes higher transaction costs in agriculture than in industry. Family labor in small farms has a comparative advantage due to low agency costs.
Exemptions: large plantations, poultry production
• The farm family owns several production factors, (labour, land, human, physical and natural capital). It also provides the management of these assets.
• Intertwinedactivitiesforfamily,householdandjob.
• Economic decisions for the private household and the firm are taken in close interdependence.
• Agricultural production and “household production” or “shadow economy” can be easily harmonised.
• Work time and free time are not subject to collectively agreed and formally fixed schedules.
• Proximity of farm and housing facilitates mutual penetration of private and professional concerns.

9

Please discuss adjustment and income problems of agriculture in processes of structural change and how they are related to institutional reasons?

Theory of Agricultural Adjustment
• „Obstacles to mobility“ affecting the adjustment capacity are considered as the key towards a proper explanation of „the agrarian problem“.
• Core element in agricultural economics theory that has shaped the shared mental models of agricultural economists.
• It belongs to the most important applications of “mainstream economic thought” in agricultural economics which “had special reference to the evolution of ideas about the role of agriculture in the economy” (Throsby, 1986: 18f.).

Income Problems:
- The institutional deficit of the family farm system is that it does not offer a solution to deal with the problems of poly- polistic supply labour.
- The price of labour (wage) does not change in a perceptible way if a farmer gives up his family farm.
- Operators of family farms and their family members as owners of labour have no agent for collective action and
cannot try to optimise prices and quantities by the means of joint strategies.
- Only an agent who is in charge of collective action can act as a supplier of a large quantity of labour effectively and is able to defend a lower threshold of wages.

Deficits of the Adjustment Theory
- As it tries to explain a dynamic process by a static approach, the process of change itself is not understood as an institutional challenge to economising transaction cost.
- The operation of markets is measured against the ideal of a perfect co-ordination mechanism („Nirvana Approach“).
- Comparing actual & perfect institutional performance implies ubiquity of market failure.
- Adjustment problems and over-capacities are normal - no indicator of inefficient decisions.

The following opportunities for externalising transaction costs are not available to farmers:
- burdens of adjustment are usually shifted to those whose interest would not be successfully enforced during wage negotiations.
- externalising TC of re-allocation may not only burden other groups but also members of one’s own group e.g. after having successfully increased wages workers may have to pay a price for that, an increase in unemployment.

• Insufficient factor mobility -resulting in low opportunity costs for agricultural production factors- is considered the key for the solution of the agricultural income problem.

10

Please explain the statement “institutional cumulation of transaction costs due to Integrating institutions”.

siehe M&M

11

What is the political relevance of the transaction cost cumulation?

siehe M&M