The Changing Economic Perspectives on the Farm Problem

1
The Changing Economic Perspectives on the Farm
Problem BRUCE L. GARDNER

• The Farm Problem
• Tweeten (1971) low absolute net income to pay
  living expenses. A problem of variabiliy of
  farm prices and incomes.
• Schultz (1945) the low earnings of most farm
  people and the great instability of income from
  farming.

• Gardner looks at the farm problem model and its
  the key contributions to the problem
• - Supply-demand elements based on commodity
  markets
• - the incorporation of factors markets into the
  model

2

• The key features of the supply-demand model
• S D for agricultural products are very
  inelastic.
• D increases slowly over time while S increases
  more rapidly.
• Technological progress needs to be just large
  enough to generate a small increase in supply
  compared to demand to avoid large price falls.
• International trade is also a factor the needs
  consideration. Slow growth of domestic demand
  for agric products may be offset by increased
  export demand thus inelastic demand becomes
  irrelevant in an open economy.
• In Sum
• The inelasticity of commodity S D is a possible
  cause of commodity price instability but there is
  no evidence of unstable prices causing low farm
  incomes.
• The General Equilibrium model suggests that low
  farm incomes compared to non-farm incomes should
  not be a matter of commodity prices but of factor
  conditions.

3

• In assessing the factor market conditions in the
  context of the farm problem Gardner looked at six
  areas

• Farm wealth
• Rate of return to investment
• Wage rates

• Technical change in agric. and factor demand.
• Factor supply and disequilibrium
• Farm income and factor returns

• Technical change is agriculture and Factor Demand
• Total factor productivity is measured as the
  ratio of agric. output divided by an aggregate
  input index.
• Gardner asks the question can factor prices
  explain the changes in factor use, given that
  wage rates have risen relative to the prices of
  purchased farm inputs?

4

• 2a. Factor Supply
• The quantity of labour is explained by the farm
  wage rate, the non-farm opportunity wage rate and
  socio-economic variables.
• The supply side of factor inputs is less relevant
  in the farm problem as the quantities of
  non-human resources in agriculture have been not
  been declining over time. Labour is the only
  input with a significant downward trend.
• So far Gardners analysis has described falling
  labour demand and increasing supply of labour,
  resulting in declining wage rates. However, this
  does not fit well in the context of the General
  Equilibrium model, and so Gardner extends his
  investigations.

2b. Disequilibrium Why cant farm workers change
their behaviour so as to increase earnings to
match earnings in nonfarm sectors?
FIGURE 6
5

• The neoclassical approach interprets
  factor-market disequilibrium as a short run
  occurrence caused by adjustment costs in labour
  movement.
• - Adjustment costs would cause a short-run wage
  differential as labour D falls. When spread over
  the long-run the earnings differential will
  become negligible.
• - Long-run differences are due to variables such
  as age and skill differences.

• An extension of the neoclassical view emphasises
  the irreversibility of agricultural investment
  and fixed assets.
• - This is criticised by Johnson Pasour (1981)
  on the basis that allocation of new resources
  help achieve efficiency.
• - Gardner looks at investment in human capital.
  The disposal value is the cost to shift job move
  house and the wage rate that could be earned in
  alternative employment where the workers
  farm-specific skills may be less valuable.

6

• Other factors
• Regional disparities.
• The human capital of farm and nonfarm workers
  differ.
• Mobility between farm and nonfarm sectors.
• Immigration has influenced wages.
• Most farm workers also work in nonfarm
  employment, thus giving them flexibility should
  economic conditions require it.
• Farm Income and Factor Returns
• There are many difficulties in comparing the
  incomes of farm and nonfarm workers.
• historically farm family sizes are larger than
  nonfarm families, though this disparity is no
  longer significant.
• The cost of living is generally lower in rural
  areas than urban.
• Some of farm income, such as in-kind sources, are
  untaxed and therefore not included in an income
  measure. Self-employed income, which many farmers
  are, tends to be underestimated. Thus farm
  incomes are likely to be larger than recorded.

7

• Farm Wealth
• Data suggests that farmers are much wealthier
  than nonfarmers in terms of there physical
  assets, eg land.
• Rate of Return to Investment in Agriculture
• The rate of return to investment in agriculture
  is lower than in non-farm industries.
• Wage Rates
• The rate of change in the amount of labour used
  over time can be sufficient to have a relatively
  constant wage ratio between farm and nonfarm
  employment

Neither theory nor empirical evidence supports
the hypothesis that commercial farms are
chronically predestined to earn low returns in
farming in the absence of government
intervention - Tweeten (1989)