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 Supply and demand factors Factor markets 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.