Academic journal article Agricultural and Resource Economics Review

The Role of Social Capital in the Industrialization of the Food System

Academic journal article Agricultural and Resource Economics Review

The Role of Social Capital in the Industrialization of the Food System

Article excerpt

Selfishness of preferences alone will not support the coordination necessary for the industrialization of the food system. Social capital relationships of mutual sympathy (caring) yield socio-emotional goods that are important in the more personal business world of evolving incomplete contracts and alliances involving input suppliers, processors, and labor. Relationships are also critical when consumers are buying image as well as physical products. Management and policy alternatives constitute investment in social capital that can affect opportunism, risk, loyalty, and trust.

Key Words. contracts, food system, industrialization, loyalty, opportunism, risk, social capital, socioemotional goods, trust

The industrialization process in agriculture, including consolidation and vertical coordination within the food system, strongly relies on relationships among the transacting parties. This emphasis on relationships calls for an enriched conceptual framework for economic analysis that goes well beyond neoclassical economics. It also goes beyond organizational economics, or the new institutional economics, which is based heavily on selfish preferences, incentives, information, and transaction costs, and is manifested in principal-agent relationships, transaction costs economics, property rights, and incomplete contracting.

The economics of relationships extends into the domain of trust and social capital (Fukuyama, 1995). Our premise is that this enrichment must be an inherent part of the analytical framework used to analyze the economic implications of the industrialization of agriculture. While assuming selfish preferences independent of others may simplify our models, the evidence supports the conclusion that relationships matter. Indeed, relationships matter to the extent that we seek to build and maintain them, sometimes at significant sacrifices of financial and material goods.

The reason relationships matter and produce nontraditional economic behavior is simple. Relationships of mutual sympathy yield highly valued socio-emotional goods. To continue to receive these valued goods, we invest in relationships. Moreover, the industrialization of agriculture is not likely to be completely understood without including in the analysis the production and consumption of socioemotional goods and investments in sympathetic relationships.

The Problem Setting

The industrialization of agriculture today is marked by new modes of coordination of people and activities. For much of its history, agriculture was organized by auction markets. The main signal to coordinate activity was price, and the parties to the transaction need not be known to each other. This was the context for Adam Smith's celebrated notion that parties did not have to care for each other to be guided by the invisible hand. The commodity spoke for itself and buyer beware.

Farmers produced and brought the commodity to a place where other sellers and buyers assembled, and prices adjusted to clear the market. If the market did not clear at a price that covered the cost of production, producers took this into account in production plans for the next period and hoped the same mistake would not be repeated. Unfortunately, the same mistake was often repeated because agriculture was marked by endless cycles of under- and over-supply, and boom and bust as a function of weather and the aggregate guesses of all producers. It is not just that the future is uncertain for a firm; the future does not exist until other firms and consumers act.

The auction market concept in agriculture is quickly being displaced as the exemplar for agriculture. Increasingly, contracts between farmers and processors specify price, cultural practices, and product characteristics. The parties to the transaction are known to each other. The processor is also changing and growing in size and number of functions. Transactions previously coordinated by market prices are now coordinated by orders to people who are employees or by provisions in contracts and not independent contractors. …

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