The changes last week at Minnesota Technology Inc. highlight an interesting paradox in public policy.
Historically, we have devoted substantial resources to technical and management assistance for farmers. But similar help for small businesses continues to get short shrift.
Are we spending too much money on agricultural research and extension or too little on small business extension? Or are the two sectors so different that our starkly uneven assistance is justified?
Agricultural economists argue that the system of agricultural education, research and extension, which began with the 1862 Morrill Act, made crucial contributions to agricultural productivity in our country.
That act transferred federal land to the states to set up “colleges for the benefit of agriculture and the mechanic arts.” In 1887, the Hatch Act established a joint federal-state system of agricultural experiment stations. The cooperative federal-state-local agricultural extension service came along a few years later.
In the 140 years since the Morrill Act, U.S. agricultural productivity — both per acre and per person — grew faster in this nation than anywhere else. Increases in productivity contributed to inexpensive food and a growing standard of living. It also freed up resources that went into industry.
Researchers in the Applied Economics Department at the University of Minnesota have found that effective extension systems offer a high payoff in increased output.
Countries with relatively good systems — Korea, Taiwan and Brazil, for example — experienced benefits comparable to the United States. Countries with nonexistent or ineffective efforts tend to have much slower growth in this key sector.
One may ask, however, why we should subsidize research and education in agriculture but not in much of industry. During the same years that public resources initially flowed to help farmers, the steel, chemical, petroleum, electrical equipment and automotive industries achieved similarly dramatic productivity increases without government help. How did this happen?
The industrial sectors that achieved rapid growth in productivity and total output — with little government help — tended to be ones in which technology allowed considerable economies of scale.
The steel, oil, automotive and other industries created large companies that had both the resources to conduct research and development and the market share to capture much of the benefit from any innovations.
This was not true for most of agriculture. Tropical plantation crops such as bananas and natural rubber were an exception, but the technology of most U.S. agriculture was such that efficiently sized farms still were very small compared to the total agricultural sector. No individual farm had resources or incentives to invest much in new technology.
A government-funded research and extension apparatus that developed new technology and brought it to farms helped farmers and society as a whole. Diffusion of technical knowledge in this case turned out to be what economists call a “public good.” It was an activity with benefits that spilled over to society as a whole and for which free markets had inadequate incentives to produce.
Historically, there probably were other sectors besides agriculture where some sort of extension effort might have resulted in big payoffs. Not all of the non-agricultural sectors were composed of large companies.
Nevertheless, publicly funded technical assistance to producers was largely limited to farming until late in the 20th century. At that time it became apparent that while small firms were a dynamic and important component in the U.S. economy, many such enterprises suffered from the same lack of access to technical information that farmers had experienced before the research and extension system.
It appeared there was a similar “public good” aspect to giving technical and management assistance to small firms, particularly manufacturers and those outside of large urban areas. An agency that helped such firms solve problems would benefit society as a whole and not just the firms directly receiving assistance.
Rudy Perpich, Minnesota’s mercurial governor, was sold on this argument and worked to establish the Greater Minnesota Corp. to deliver assistance to small firms, among other things. This initiative eventually became Minnesota Technology Inc., which has functioned for about 13 years.
Gov. Tim Pawlenty and conservative Republicans are not convinced that organizations such as Minnesota Technology are a wise use of public funds. Their view prevailed in the last Legislature, when state funding was sharply curtailed. Now the organization’s president and most of its directors have resigned. It may continue on a much-reduced scale with private-sector funding, but its future is uncertain.
I have no personal knowledge of any studies of the social return on past appropriations for Minnesota Technology or for similar agencies in other states. But the economic argument for public finding of such organizations remains clear.
We may not “live to regret” cuts in funding for the organization because people are not always aware of losing what might have been. Citizens of Burundi and Bolivia may not be aware of what they have lost because of ineffective agricultural extension in their countries, but the loss remains real nevertheless.
I fear we are making a serious mistake. I hope that public officials keep the need in mind going forward.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.