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Presentation 1B

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The Changing Economic Perspectives on the Farm
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 it’s the key contributions
to the problem:
- Supply-demand elements based on commodity markets
- the incorporation of factors markets into the model
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
• 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
In assessing the factor market conditions in the context of the farm problem
Gardner looked at six areas:
Farm wealth
- Technical change in agric. and factor demand.
-Rate of return to investment
- Factor supply and disequilibrium
- Wage rates
- 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?
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 Gardner’s 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.
Why can’t farm workers change their
behaviour so as to increase earnings to
match earnings in nonfarm sectors?
• 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
- 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
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.
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
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)
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