Schultz, Theodore W.

English

Research Papers in Economics

ARE  WE  SOLVING  OUR  FARM  PROBLEM?
Theodore W.  Schultz, Professor  of Economics
University of Chicago
Only  one  clean-cut  word would  have been  needed  to answer  the
question put to me in the title-an emphatic no. I then presumably could
have stopped.  That,  however,  would have been  too short to cover  the
subject  and not long enough  to have been  even interesting!
Since the title does  not distinguish clearly who "we" are,  and what
"our" stands  for, let me select my ground by substituting for it the fol-
lowing: Are the Federal  Farm Programs  Improving the Economic Op-
portunities of Farm People Who Earn Their Income from Farming?
In examining  this question I take it to be true:
1. That the real income of farm people on the average has declined
in recent years relative to the real income of comparable  people
in nonfarm  occupations.
2.  That farm programs  can and  should be  developed  to help  cor-
rect this adverse  situation.
My outline consists  of four parts.  The first  takes up the question:
What  are the  fundamentals  of the  U.S.  farm  problem  now upon  us?
The second part  reviews the economic  developments  affecting  the  de-
mand  and  supply  of  farm  products  that are  related  to  the low  farm
earnings. Next  is  a treatment  of the input  mix in agriculture  and why
it is so badly out of line with equilibrium.  The fourth and last part of
the outline examines  implications  of  the preceding  analysis  and  what
kinds of farm programs  are required  to help  solve this farm  problem.
FUNDAMENTALS  OF  THE  CURRENT  FARM  PROBLEM
What  are  the  fundamentals  of  this  U.S.  farm  problem  as  it  has
come  to  a head  in  the past  10  years?  One way  to cover  this ground
quickly is to state each of several propositions in the form of a question
which  can  be  answered  with  a categorical  "no"  or "yes."
1. Has the domestic demand for U.S. farm products been declining?
Surely the answer is no.
2.  Has the volume of exports  of U.S. farm  products been running
below par?  No. On the contrary,  they have been above  "normal."  We
have been and are dumping a part of our farm problem on other coun-
tries.  As the leading  country  of the Western trading world,  we  should
78not do this; it represents a kind of irresponsibility that we can ill afford
in our  international  relations.
3.  Has the accumulation of large stocks of some farm commodities
depressed the earnings of farm people? No. We, however,  do face a big
disposal problem.  As the U.S. government reduces its stocks, prices are
affected  adversely,  but the reverse  was  the case when the stocks  were
acquired.
4.  Has  the  U.S.  economy  had major  elements  of  instability that
depressed  farm  incomes?  The answer  is  again  no. The U.S.  economy
has performed well in terms of full employment, economic  growth, and
price  stability. The over-all  economic  stability  has  been  good.
5.  Have  the earnings  of  land and capital  and  of current  physical
inputs used in farming fallen below par? The relevant evidence  in agri-
culture  points  to  a negative  answer.  In  the main,  capital  invested  in
farm real estate, major capital improvements, and machinery, and funds
used to buy  fertilizer,  insecticides,  and  fuel  have been  earning  about
as much as have comparable  investments  and funds in other sectors of
the economy.
6.  Has  the  demand  for  farm  products  declined  relatively to  the
total demand of U.S. consumers for all products and services?  Yes. The
agricultural sector gains less, in terms of increases  in demand from rises
in real per family  income than does the nonfarm producing  sector.
7.  Has  the  price  of  capital  (inputs)  fallen  relative to  the  price
(wage)  of hired labor in both agriculture and the rest of the economy,
calling  for much substitution of capital for labor?  Yes.  Statistics  show
that wage rates in agriculture have actually  risen  relatively more  than
the  average  rise  in industry.  The  incentive  substitute,  therefore,  has
also been greater  in agriculture.
8.  Has  the  rise  in output  exceeded  the  increase  in  (traditional)
inputs  in both agriculture  and  in other major  parts  of the  economy?
Yes.  The result has been most impressive and it has contributed  much
to the general  rise  in  real  income.
9.  Has  the  farm  labor  force  been  declining?  Yes,  but  not  fast
enough.
As a consequence  of propositions  6,  7, and  8 above  and because
farm people have not been able to adjust to these changes fast enough,
the  earnings  of  many farmers  and  of  members  of their  families  who
earn  their  income  from  farming  have  failed  to  keep  abreast  of  the
earnings  of  comparable  people  who earn their  income  in other occu-
pations.
79ECONOMIC  DEVELOPMENTS  RESULTING  IN  LOW  FARM  EARNINGS
I now want to examine  briefly  the developments  that explain why
the earnings  of many farm people  have not stayed abreast  of earnings
of workers  generally.
1.  ON THE  SIDE  OF  DEMAND,  we find that increases  in income  per
family add relatively little to the demand for farm products  at the farm
gate in a rich economy such as ours. In the language of the economists,
the income elasticity of the demand for farm products  is much less than
unity. If it were 1.0  (unity),  a 10 percent increase in per family income
would  increase  the demand by  10  percent  (provided  other  things  re-
mained  equal).  Taking  all  farm  food  products  together,  the  income
elasticity  is  close to zero-somewhere  between  .15  and  .25.  If we  take
the midpoint, namely  .2, it implies that a 10 percent increase in income
per family  adds only  2 percent to the demand for farm food products.
Nonfood farm products  appear to face an even lower income elasticity.
The  major  implication  of  this  very  low  income  elasticity  of farm
products  is  simply that in a growing economy  in which relative supply
prices  remain  about constant,  the total demand for farm  products  in-
creases  less than does demand  as a whole.  Let me illustrate this for  a
three-sector  economy.  Suppose  we  begin  with three  sectors  of equal
size in terms of demand:
Distribution  in
Distribution  of  second period  after
demand  at the  Income  income  increases
Sectors  beginning  period  elasticity  50 percent  per family
A.  Agriculture  100  =  331/3%  .2  110 =  25%
B.  Major consumer
desirables  and
housing  100--  331/3%  1.0  150=  33%
C.  Travel,  vacation
facilities, enter-
tainment and re-
lated services  100  - 33 1/3%  1.8  190  =  42%
Total  300 =  100  %  1.0  450 =  100%
Note  that,  although  sector  A is  as  large  as  is  sector  C  in the first
period  in  this  illustration,  in  the second period  it  is  only a little over
one-half as large.  (I am ignoring  population  growth.)  If resources  re-
mained equally efficient  (in terms of inputs required  to produce  addi-
tional output), sector A would require only  10 percent more resources,
whereas sector C would need 90 percent more. If resources were to be-
come more  productive,  say  25  percent  more output  from the  bundle
of resources,  then sector A would be producing  125,  or 15 more than
80required by the increase in demand. Sector C, however, producing  only
125,  would fall  short by 65  of satisfying  the demand for the products
and services  of that sector.
2.  ON  THE  SIDE  OF  SUPPLY,  I want  to call attention to two  basic
developments.
a.  We have approximately constant relative supply prices of prod-
ucts. We  observe that in agriculture  when we  take the long view  and
compare supply prices during periods  of full employment,  for example,
for periods  as  far apart  as  1910,  1929,  and  1956,  the supply  prices
of well established farm products have changed very little, one relative
to the other.  We,  of course,  expect this to be the case  for major feed
grains-corn,  oats,  barley,  and  grain sorghum.  It is  also true generally
not only for farm products but for other products as well. Let us, how-
ever, restrict ourselves  to farm products.
The implication of this supply price proposition is that in agriculture
we  are, in substance,  producing only  one commodity.  This  is how  an
economist  would define  a  commodity  in  this  context.  Why  does  this
happen?  The explanation  is  that resources  can  be readily substituted
in  production.  This  fact  is  certainly  well  known  by  those  who  have
tried to reduce production  by acreage  allotments  and similar devices.
If agricultural  production,  over the longer  pull,  does behave  as  if we
were  producing  only one  commodity,  then  it follows  that the current
production disequilibrium in agriculture  is not restricted to the produc-
tion  of  a  specific  farm  product  but  is  general  to  all  of  agriculture.
Evidence strongly supports this characterization  of U.S. agriculture.
b.  The other basic development  on the supply side is that the ad-
ditional  output we  are  achieving  exceeds by  a wide margin the addi-
tional inputs of conventional labor and capital which we are employing.
Increases  in real income  are coming from two sources,  i. e.,  (1)  from
the growth in the labor force and the accumulation  of capital and  (2)
from improvements in the quality of these inputs that make them more
productive. These improvements in quality of both labor and of physical
inputs have been occurring widely throughout the economy. Agriculture
has made big strides in this  respect as has industry.
EQUILIBRIUM  MALADJUSTMENT  OF  INPUT  MIX
The relatively  slow  growth  of  the demand for farm  products  and
the marked improvements in the quality of inputs used in farming have
created a situation in agricultural production characterized by an input
mix that is badly out of line in terms of equilibrium.
1. In general,  the amount of physical  capital  and of current  phy-
sical inputs is not out of line with the allocation and value of these kinds
81of inputs elsewhere in the economy.  The substitution effects of the rise
in  wages  relative  to the price  of the  services  of physical  (capital)  in-
puts,  to which  we  referred  earlier,  have been  highly conducive  to the
use of more of the latter inputs.
2.  But many farmers and  members  of farm families  are providing
entrepreneurship  and labor under conditions  where  the value produc-
tivity of their effort is  far below what  comparable  human effort  earns
in other occupations.  Three  principal  developments  explain  why  this
has happened:  (a)  The substitution efects discussed  above  have run
adverse to human effort.  Much  physical  capital has been and  is  being
substituted for labor  at  numerous  points  in farming.  (b)  The quality
effects  of the marked  improvements  in the competence  and  ability  of
farm  people  as  productive  agents  in  farming  also  has  run adverse  in
that it has added to the effective  supply of human effort committed  to
farming.  (c)  The changes represented by (a)  and (b)  above have been
occurring very rapidly, so fast in fact that even the extraordinarily large
out movement  of farm  people  from farming  has not been  sufficient  to
correct the maladjustments  in the input mix.
3.  Another way of saying all this is that:  the factor market of human
effort  serving  U.S.  agriculture  is  badly clogged.  This  clogging  is  less
evident for hired farm  workers  and for part-time  farmers than it is for
farm  entrepreneurs  and members  of their families  who earn  all or vir-
tually all of their income at farming.
4.  The  degree to which  this factor market has failed to "clear  the
supply"  differs  considerably  depending  upon how near or how distant
the farm  labor  (farm  people)  are from major industrial-urban  areas.
The greater the effective distance of farming areas from such industrial-
urban  growth  points,  the more  acute  the  maladjustments  are.
5.  The farm "labor" market is also  under greater stress in farming
areas  that have a large natural increase in births  over deaths.
IMPLICATIONS  FOR  FARM  PROGRAMS
I shall now consider some of the major implications  of the preced-
ing analysis for  farm programs.  First,  let me touch on some negative
implications.
1.  Farm programs  to reduce the supply of this or that crop are of
no  avail. The maladjustment  in the input mix  is widespread  through-
out agriculture; it is  not restricted  to a few particular crops.  We  need
only recall that we are producing only one commodity in agriculture in
the longer run.
2.  Farm  programs  to  reduce cropland  are  also  of  no  avail.  Sub-
stitution is  again an important factor.  Such programs  have three  addi-
82tional  strikes  against  them  (and  should  be  declared  out!):  (a)  Farm
land  has become  one of the  less  important  inputs  used in  farming.  It
represents  only  between  15  and  20  percent of  all inputs.  (b)  If such
programs  were  effective,  they would  in  the  long  run  increase  the  re-
turns  to  the owners  of  farm  land.  Moreover,  as  I  have  argued,  the
earnings  of farm  land,  in  the  main,  are  not below  par.  (c)  If  these
programs were  effective,  they would further  reduce  the value produc-
tivity of human effort used in farming  (assuming they would not reduce
the  supply  of  farm  products,  but  would  make  land  per  unit  more
valuable).
3.  Farm  programs  to  transfer  public  funds  to  farm  families  to
supplement their income from farming, under existing political realities,
would  go mainly to the less poor farm people. Then, too,  such income
transfers  by themselves  would  not help correct  the maladjustments  in
the input mix. A case, however, can be made for selective income trans-
fers as transitional  measures in view of the very rapid changes  that are
occurring.
Second,  let me  close with  some  positive  policy  and  program  sug-
gestions  that are  implied  by this examination  of the present U.S. farm
problem.
1.  A great deal could be accomplished  if farm product prices were
allowed to clear their respective markets, and if no more than one-fifth,
or about one billion dollars a year of the present federal appropriation
for agriculture,  were used to help farm people who want to leave farm-
ing to transfer as  rapidly as  possible to other lines of productive  work.
2.  Part of this amount could be wisely used in providing free train-
ing to prepare mainly middle-aged farm people for specific occupations
outside  agriculture.
3.  Part of  it could be used effectively  in finding  the best possible
nonfarm  jobs  for such  farm  people.  As things  now stand,  the federal
employment  services  are  severely  restricted  by  existing  legislation  in
providing such assistance to farm people who are seeking nonfarm jobs.
A drastic  overhauling  of this legislation  is long overdue.
4.  A  large  part  of this  billion  dollars  could  be  employed  in  sub-
sidizing the actual transfer  of full-fledged farmers and their families to
industrial-urban  communities  along lines  of my proposal of two years
ago which I called Homesteads in Reverse.
5.  Part of this fund could be used to induce  such farm  families to
stay  at their  industrial-urban  jobs  and  locations  long  enough  to  be-
come sufficiently  accustomed to the community and to the new way of
life  to be  willing  to remain.
836.  Then, too, part of the fund could be put to good use by helping
farmers who decide to leave farming  to dispose  of their assets that are
specific  to farming  and  in the process  assist  the farmers  who  remain
in farming to take them over  and  use them effectively.
84

ARE WE SOLVING OUR FARM PROBLEM?

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