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

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.

In assessing the factor market conditions in the context of the farm problem Gardner looked at six areas: - Technical change in agric. and factor demand. - Factor supply and disequilibrium - Farm income and factor returns Farm wealth -Rate of return to investment - Wage rates 1.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?

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 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. FIGURE 6 2b.Disequilibrium 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 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.

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. 3.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.

4.Farm Wealth Data suggests that farmers are much wealthier than nonfarmers in terms of there physical assets, eg land. 5.Rate of Return to Investment in Agriculture The rate of return to investment in agriculture is lower than in non-farm industries. 6.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)