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Changing Economic Perspectives on the Farm Problem By Bruce L. Gardner What is the Farm Problem? • • • Low incomes Instability of incomes Decline in farm numbers 3 Key Elements of the farm problem 1. Supply and demand factors 2. Factor markets 3. Model limitations The Supply-Demand Model for Agricultural Products • • • • Very inelastic demand Very inelastic supply Demand increases slowly over time Supply increases more rapidly • Implication: Farm product prices decline over time The Incorporation of Factor Markets and Dynamics Labour • Labour could earn higher real incomes elsewhere in the economy. • Low return on investment • Why should state of disequilibrium between sectors persist for decades and cause chronically low farm incomes? • Continuous technical innovation reduces demand for farm labour. Indicating declining wage rates and labour income. • Lack of labour mobility • Fixed Asset theory Fixed Asset Theory • Resources get trapped in agriculture • Investment in farm specific resources increases productivity and output, however these additional resources simultaneously create low earnings and/or capital losses. • “Treadmill” Effect • During periods of rising commodity prices expected returns from investment exceed acquisition costs so new investments are made. However, demand beings to decrease again resulting in lower incomes. Model Limitations • Functions are of aggregate commodities • Model assumes isolated markets • Inconclusive evidence to either confirm or reject theory of asset fixity.
