agriculture's three economies in a changing resource environment

8/8/2019 Agriculture's Three Economies in a Changing Resource Environment

1/12

Agricultural & Applied Economics Association

Agriculture's Three Economies in a Changing Resource EnvironmentAuthor(s): Harold F. BreimyerSource: American Journal of Agricultural Economics, Vol. 60, No. 1 (Feb., 1978), pp. 37-47Published by: Blackwell Publishing on behalf of the Agricultural & Applied EconomicsAssociationStable URL: http://www.jstor.org/stable/1240159

Accessed: 21/06/2010 04:56

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at

http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless

you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you

may use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at

http://www.jstor.org/action/showPublisher?publisherCode=black.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed

page of such transmission.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of

content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms

of scholarship. For more information about JSTOR, please contact [email protected].

Blackwell Publishing andAgricultural & Applied Economics Association are collaborating with JSTOR to

digitize, preserve and extend access toAmerican Journal of Agricultural Economics.

http://www.jstor.org
http://www.jstor.org/stable/1240159?origin=JSTOR-pdfhttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/action/showPublisher?publisherCode=blackhttp://www.jstor.org/action/showPublisher?publisherCode=blackhttp://www.jstor.org/page/info/about/policies/terms.jsphttp://www.jstor.org/stable/1240159?origin=JSTOR-pdf


2/12

Agriculture'sh r e e Economiesi n a Changing Resource EnvironmentHaroldF. BreimyerFormanyyearsabundant ndrelatively nexpensive ndustrial awmaterials ontributedto a resourceenvironmentavoring ndustrialization f U.S. agriculture.Theirgradualdepletionandrisingpricesnow createa counterpressure.Thepaceof industrializationhas slowed, withdifferentmanifestationsn the three economies of agriculture-crops,livestock, and marketing.The economics of extractive ndustries,a subjectlongneglected,willhenceforthbe anintegralpartof the economicsofagriculture.Citedhereare conceptualformulations he authorpublished n a precursorarticle of 1962,formulations hatgo back to the "emptyeconomic boxes" and the writingsof JoanRobinson.Key words: Impactof resourcedepletion, ndustrializationf agriculture,awmaterials.

A half century ago three giants of economicscontended in the language of "empty eco-nomic boxes" about the meaningof increas-ing, constant, and decreasing returns (Clap-ham, Pigou, Robertson).' They thereby setin motion new channels in the evolution ofeconomicthought.As often happenswithpre-cursors, they doubtless did so without pre-science.As also is not rare, the essence of theirargumentremains with us yet. It applies tomodem agriculture, orthe configuration f itsreturnsfunctionhas muchto do with produc-tivity andother attributesof agricultureunderchanging-tightening-conditions of access tothe industrial resources on which today'stechnology relies.To give more clues in advance to how thelogic of this paperwill be developed, the threekinds of returnshelpto explainthe differencesbetween the land-basedand the industrialas-pects of modemagriculture.Those differenceswere the subject of my "Three Economies"article publishedin 1962. At that time indus-trializationwas proceedingapaceandincreas-ingly giving its imprint o agriculture.The es-sence of the 1962 article will be reviewedbriefly. Since then, as also will be recounted

here, a slow reversal has begun. Indus-trialization has begun to ebb. Althoughchanges are still scarcely perceptible and oc-casionally denied, they are significant and,some would say, ominous.Moreover, insofar as industrial features ofagriculture have faded, the cause lies not inindustrial processes as such and definitely notin institutional structure, but in a consid-eration that has largely been neglected ortaken for granted; namely, the economics ofthe extractive sector of the economy. An ag-riculture that relies on petroleum, phosphaterock, and dozens of metals is implicitly subjectto the situation in that sector. Growing scar-city and rising cost of those materials consti-tute a changing resource environment for ag-riculture.A neglected sector is not often theorizedabout. The three economists referred to abovedid not explain extractive economics verywell, nor have many of their successors. A fewnotes on the distinctive features of the eco-nomics of extraction, and lessons to be drawnfor our day, will conclude this article.Increasing ReturnsOf the three categories of returns about whichClapham, Pigou, and Robertson contended,the center of attraction was increasing returns.Until two or three generations previous totheir time, Western economies were domi-

Harold . Breimyers a professorntheDepartmentf Agricul-turalEconomicst theUniversityf Missouri-Columbia.Gratitudes acknowledgedor hevaluableommentseceivedfromJamesD. Shaffer ndananonymouseviewer.SIn eality,RobertsonermedClaphamndPigou iantsandhimself mereDavid.


3/12

38 February 1978 Amer. J. Agr. Econ.natedby agriculture.Earlyeconomic thoughthad anagricultural ias. Thepatternof returnsin agriculturewas not in question. It was de-creasingor, bettersaid, eventuallydecreasing.Still, in our day, the subtle inferences to bedrawnfrom factor combinationsthat eventu-ally are less yieldingoccupy the minds of sa-vants.Increasing returns are of another genre.Imaginativehinkerswere fascinatedby them.Theyalso wereperplexed.Returns hatdo not(eventually) decrease pose such annoyingquestionsas, "where, if ever, can equilibriumbe established?" They also offer a hopefulnote to which economists of the "dismal sci-ence" school were unaccustomed.EmergentTheoryWorthbrief commentare the directionssub-sequently taken by economic theory. One isnow known as industrialorganization.Sraffaand Robinsonin Englandand Chamberlinnthe United States took note of human in-genuity in devisinginstitutionalarrangementsthat would make returns curves turn down(and cost curves up), thereby improvingfa-vored firms' chances to make a protectedprofit. Theirs was the fertile exploration ntoimperfect competition. In agriculturaleco-nomics in the United States today theforemost exponent is WillardMueller.The other direction came to be known aseconomic development. The gradual emer-gence of this school is a story of itself. The"essentialoptimismof increasingreturnsgaveit impetus. Progress was slowed initially bypicayunedisputesover details such as the na-ture and significanceof capital goods-theirlumpinessand the meaningof lengthof time.2Robertson clarifieda bit by introducingtheidea that, "given time, methods of techniqueand of organisationare capable of improve-ment" (p. 146). (Page references are to themost convenient source of the three articles,StiglerandBoulding.)A few years laterAllynYoung sprungthe whole subject loose fromthe shackles of individual-firmhinking.In anarticle significantly itled "Economic Returnsand Economic Progress" he observed that"the mechanismof increasingreturns[arises

from]the progressivedivision and specialisa-tion of industries .... What s required s thatindustrial operations be seen as an inter-related whole. . . . In this circumstance lies thepossibility of economic progress" (p. 539).Two RobinsonianModelsThe ultimate connection between increasingreturnsanddevelopmentwas set forth aterbyJoan Robinson in a perceptive 1962 article.She began by outliningtwo models, one en-tirely undevelopedand the other fully devel-oped. The first s primitiveandgrim.Mankindsubsists on whatever means are nativelyavailable.Human nstitutionssuch as marketsareinapplicable. fanexchange priceis useditis conventional.The opposite model, the ultimatein devel-opment, is exclusively capitalusing. Claphamhad initiallysuggestedthat increasingreturnswere the "economies of an organised indus-try" (p. 123)andRobinsonnowpositeda fullyorganizedeconomy. In it all factorsof produc-tion are internally producedto humanspec-ification. Paradoxically, n such an economy,viewed without time as a constraint, returnswould not be increasingbut constant.Thus isrefuted, at least conceptually, Clapham'sclaim that "constant returns . . . must alwaysremain a mathematicalpoint, their box anempty one" (p. 125). Constancyof returns ssufficientfor unbridledhope.The Robinsonianindustrial model can becharacterizedalso in terms of mobility anddivisibility of resources. In her model of atotally industrialeconomy, all resources areperfectly mobile and divisible. Mishan hadmade mobility-divisibility referencepoint inhis welfare economics. I later borrowedthecoinage in interpretingstructural trends inmarketing armproducts (1976). As a simpleillustration,both thelocationof the processingof those productsand the competitivenessoflocal tradingare influencedincisively by themobility of materialsand by their divisibil-ity-the ease of their differentiation.Manifestly,Robinson's industrialeconomyof mobile and divisibleresourcesin which ev-erything ncludinghumanskills can be tooledto man's instructions a halcyonprospect.It isthe ultimate in development; it is the goal,however remote and elusive, to which mea-sures in economic developmentare directed.2 Amazing to our era, Clapham wrote, "Economics . . . is notconcerned with geological time .. " (p. 121).


4/12

Breimyer Agriculture's Three Economies 39We all want to control our destiny for richerreward.Two Models for Three Economies ofAgricultureFor my 1962 "Three Economies" study, Idrew on Robinson's models, paraphrasingthem in terms that the first describes the"primitivestate, markedby the simplesteco-nomic pursuits."It is "an economy governedentirely by fixed, predeterminedfactors ofproduction."In the industrialmodel, by con-trast, all factors of productionare internallyproduced. It is "a totally self-containedandself-sustained economy in which no factorsarefixed,butall are variable"(1962,p. 681). Iwould now add, all factors are perfectlymobile and divisible.Against the backdrop of two models, Isketched the three economies of agriculture.These are, respectively, "the production ofprimaryproductsfromsoil, the conversion offeedstuffs into livestock products, and themarketingof products from farm to retail"(1962, p. 679).The models were useful for my study be-cause they provideda referencepoint for ex-aminingthe trend that hadbeen so pervasivein agriculture hroughout he century but es-pecially since World War II, that of movingever fartheraway from primitive agrarian o-ward an industrial orm. This was the trendknown as industrializationof agriculture.Itwas moving forward fast in 1962.Industrialization impinged on the threeeconomies of agriculturedifferently.By 1962marketinghad been almost fully transformed;it was then the most industrial of the three.The livestock andpoultrysector was interme-diate. However, it had moved fast towardmanagerial, f not locational,detachment romfeedstuffs and it thereby became much moreindustrial hanwhen it was a subordinatepartof feed crop productionon individualfarms.Only crop farming till showed significant ea-tures of a primitive economy and remainedpartly in thralldom o forces of nature.Moreover,the most industrialized conomywas also the fastest growing. Marketinghadbeen expandingfaster, in terms of batteryofservices performed,thanproductionof eitherlivestock or crops. And between the lattertwo, livestock and poultry had been edgingahead of crops.

On the other hand, in 1962the least indus-trialof the threeeconomies was industrializingthe most rapidly,as thoughit were racingtocatchup. Cropproductionwas in the throesofa technological revolution that was bringingmanymore ndustrialmaterialsandtechniquesto it. "Productionon U.S. farms has beenshiftingat fast pace to an industrial,capital-using, character"(1962, p. 685).There followed in myarticleanenumerationof inferencesto be drawnfromindustrializingall three economies and especially primaryproduction.Amongthese were a reducedrolefor land;moreinelastic farm-leveldemandforcrop products as those products becamefartherdetached from final consumption;thegreaterpotentialcontrolabilityof farmoutput,a control exercised by terms of access to in-dustrialinputs; the better case that could bemade than before for basing commoditysup-port prices on cost of production; and thegrowingimperiousnessof the marketingsys-tem over both primary(crop) and livestockproduction.Time and Place Restraints;New Setting forThreeEconomiesEvents since 1962 illustrateonce again howquickly can trends reverse and predictionsprove faulty. They remindthat contemporaryeconomic analyses are implicitly tentative,being confined within the boundaries of thedatathat give rise to them. This theme, oftencaptioned as risk in extrapolation, is ac-counted for in terms ranging romthe ceterisparibus caveat (some constants do not staythat way) to the cross product term in asquaredequation (a dog multiplied en timescould not supportits weight). A more schol-arlyreference s to laws of compositionwhich,according o the logicianShermanRoy Krupp,"determinethe rangewithinwhich a particu-larbasicrelationwill hold" (p. 47). Therangeis distinctlylimited.Theevents were the sudden ncreases in thepriceof anumberof nonfarm nputsto agricul-ture that are crucial to its industrialization.They dated mainly in the 1970s. In the leadwere tripledor quadrupled osts of petroleumand other fossil fuels. Variousderivedprod-ucts also became more expensive. Equallyimportant, though, was a resulting shift inpsychology. A new sensitivityto the resource


5/12

40 February 1978 Amer. J. Agr. Econ.base for agriculture ameinto view. Instancesof fear for future food supplies bordered onpanic; and they were matched, as usual, bysome iconoclasm. Both have largely dissi-pated,beingreplacedby a near-consensus hatindustrial nputs, thoughnot criticallyscarce,will not be as cheaplyavailable n the futureasin the past. Theirprices may continue to in-crease relativeto farmproductprices, insteadof laggingas in earlierdecades.(Between 1960and 1976both the consumerprice index and wholesale price index fellshort of doubling,but the wholesale price offuels and power nearly tripled. Farmers'prices paid for tractors and "other self-propelledmachinery" ncreased140%ust be-tween 1965(firstyear of data) and 1976.)The developments, moreover, were unex-pected, heightening their drama. In 1962scarcely a murmurwarned of any braking ocontinued industrialization."There is as yetno signof let-up n [trends]underway.Primaryproduction continues to become more capi-tal-using. Livestock enterprisesstill threatento leave their traditional home. Marketinggains ever more size and dominance" (Brei-myer, 1962,p. 690).Evidenceof ChangedTrendsinthe ThreeEconomiesBeforeevidence of post-1962 rendsis consid-ered, a reminders in order. Seldom nhistoricevolution does a trend so about-facethat thestatus quo ante is restored. More often, notonly is the picturemixedbutchangesaresmalland subtle ratherthan graphic.So it is with observations for the periodsince 1962. But there areenoughpositive indi-cators to suggest that a shift from steadilydecreasingrelativepricesof nonfarm nputstocurrentandprospective ncreaseshaspalpableeffects.Perhapsmost meaningfuls the alteredpub-lic attitudetowardfood productivity,and to-ward foodpolicy, that follows from awarenessthatindustrial esourceswillnot henceforthbeso plentiful. Smallercrops in the 1970s anddisappearanceof reserve stocks of grain un-questionablygave the farmand food economya rareconspicuousness.As of late 1977a newsurplus of wheat seemed to be buildingup.Whether t will dispel publicattentiveness re-mains to be seen. But an entrywill have beenwrittenin history's logbook:citizens become

alertwhenthey believe their food supplyto bethreatened.Gross ProductivityManifestly, a partly industrialagriculture ssensitiveto productivity nthe entireeconomyin a waythatthe olderagrarian griculturewasnot. On a commonsense as well as theoreticalbasis highercost energyhas macro effects re-tardinggrowth.RascheandTatomallege thatrecognitionof the effect of energy cost hascome slowly becauseof the "usualpracticeofestimating he functionalrelationshipbetween[aggregate]outputand only labor and capitalresources," which "implicitly assumes thatchanges in the stock and flow of energy re-sources arecapturedby the movementsin thecapitalstock and need not be explicitly takeninto account." They take energy explicitlyinto account as they enter it "as an integralpart of the productionfunction." Whentheydo so, estimates of the potentialoutputof theeconomy are reduced several percentagepoints (June 1977,p. 14 and ff.).Relative Growth Rates of Agriculture'sEconomiesWhen we look at agriculturealone, we natu-rally find that although productivity slowedsomewhat in the 1970s,it is virtually mpossi-ble to isolate energy-cost from climatic andother influences.Even so, a featureof trendssince 1962has been a differentpatternof rela-tionship between the three economies thanprevailed before. The change could holdmeaning.Recapitulating:n 1962the most industrialeconomy, marketing,had been growing thefastest and the least industrial,primarypro-duction,the slowest. Recounted hen was thatin 1948 he farmer'sshare of the retail valueofall food had been 51%, but by 1961 it wasdown to 38%(Breimyer, 1962,p. 688).In the mid-1970s he farmer'sshare climbedto above 40%.In 1976 t was 40%.Marketinghadnot continued ts gainrelativeto the othertwo economies; if anything, it had slipped abit.More clearly to be seen, however, was aslowdown in the livestock economy. Overmany previous decades livestock and poultryproductionhad prospered. It outpaced cropproductionin volume and in contribution ofarm cash receipts. Bolstered by strong de-


6/12

Breimyer Agriculture's Three Economies 41mand, in the later 1950s livestock and poultrysold were 55% of all cash receipts-56% ifgovernment payments be excluded.During the 1970s feed grain-livestock rela-tionships somersaulted. World demand foravailable feed supplies became strong, anddevaluation of the dollar encouraged exports.Price ratios in feeding were squeezed. Thevolume index for livestock and poultry pro-duction in the United States in 1976 stood atonly 117%of the 1960base year. Crop produc-tion was 127% of the 1960 base. Even moreimpressive are data for the 1970s on live-stock's share of farmers' cash receipts. Atmid-decade livestock and poultry accountedfor only 48% of all receipts---49% when gov-ernment payments are omitted. Inferencesmust be drawn cautiously; relationships couldreverse again. But there is at least a hint thatprimary products of agriculture have recov-ered some of the status they lost during pros-perous and expansive postwar years.Organizational Separation of Feedand LivestockOne earlier trend reported in 1962 seemsdefinitely not to have stopped. It is the trendtoward separating livestock and poultry enter-prises from feed crop production.Corn farmers in the Midwest are not goingback to raising hogs or feeding cattle. Theydefinitely are not buying laying hens or broilerchicks. New large-scale hog units pop upmonthly.Several factors account for corn farmers'disinterest. Among them is several years ofgood profits earned from grain alone, whichspared them financial pressure to intensify.Also, some cattle and hog feeding is financedin part by tax shelter capital funds, and as sosubsidized is a strong competitor to farmerfeeding.Even so, the situation could be over-read.Although large cattle feedlots continue to dis-place farmers' smaller ones, a number of themare custom operations-hotels for the animalsof farmers and ranchers among the variousowners.Also, a slight counterpressure originatesfrom new extension programs. The Coopera-tive Extension Service, embarrassed by itsselective counselling of larger farmers, has in-augurated a special educational program forsmall farmers. Farmers on limited acreage arecommonly advised to add livestock.

Disconnection Between Farmersand ConsumersIndustrialization of agriculture tends toconfine crop farming to producing primaryproductsthat are sold in raw form. It widensthe difference n both formand valuebetweenthose productsand the foods that reach con-sumers. This feature of industrializationwasdescribed n 1962.It is doubtful hatany majorchange has occurredsince then. The market-ing economy, organizedfor imperfectratherthan perfect competition, has continued toemphasize merchandisingrather than least-cost deliveryof basic product.Growingpopu-larityof restaurantand other groupfood ser-vice is of the same genre, althoughtoo muchsignificanceought not be attached to it. In-stitutionalized ood service as an alternatetohome preparations no longerjust homecraftbut can be regarded,with only slight over-statement, as miniature ndustry.A few signs of opposite trends also can befound, though they may be little more thanstraws in the wind. Notable in the 1970shasbeen a halt to so much pre-preparationoffoods sold at retail,once widely heralded.Re-surgence of farmers' produce markets andeven of pick-your-own fruit and vegetablefarms,togetherwith scatteredinterest in sim-ple consumers' food cooperatives, are sym-bolic of agrarianrather than industrialfooddelivery. Quantitiesin such direct marketingare trivial but the portents may not be.ProductionControlPoliciesIn 1962 t waspointedout thatthe then-currentpractice of relyingon acreage controls to re-strict the volume of farmproductionwas ananachronism. f nonfarmmaterialsconstituted62%of all inputs to agricultureand land wasless than 15%,the estimates for that year, itseemed scarcelyappropriateo use landaloneas the factor of control. Not mentioned wasthe furtherpointthat landcontrolsfunnelpro-gram benefits almost exclusively to the landfactor.Manyeconomistshave calledattentionto this consequence of land retirement. SeeGaffney, for example.In the mid-1970s,when tighter supplies ofnonfarm nputsandbadweathersharedblamefor interruptedproductiontrends, productionwas not restricted.Onthe contrary,maximumoutput was officially encouraged. Consistentwithpreviousphilosophy, t was to be attained


7/12

42 February 1978 Amer. J. Agr. Econ.by plantingmore acres--" fence row to fencerow" (a literaryfigure, as many fences hadbeen removed).Yet in an ironictwist, in otherquartersdur-ing the 1970s,the nonfarm nputof petroleumand other fossil fuel energycame to be recog-nized as an instrumentof control. At the timeof the oil importembargoandallocations,withfurther tightness threatened, the oil supplywas seen as an instrument o hold farmpro-duction up.If need for moreproductionbecame at thattimea rationale oraskingto protectfossil fuelsuppliesto farming, he counterpartwould beto turnniggardlyat timeof farmsurplus.If theinflow of oil from abroad should be slowedwhen farm products are in oversupply,chances are that petitionsfor 100%allocationfor farmingwould not be heeded.So long as oil enters the United States asfast as supertankerscan deliver it, the pros-pects are that "productioncontrol" will beconfinedto setting aside land. Such a policywas built into the 1977farm law and appliedimmediately to wheat. It bids to prove nomore effective than before.A less contrivedway to regulatefarmpro-duction is to establish quantity marketingquotas. They allow the agrarianresource ofland and the industrialone of nonfarm nputsto be balancedmore rationally,and more ef-fectively, than is possible when only acreageof landis controlled.Except forsome types oftobacco and a few specialty crops, quotashave not been employed. Nor are they likelyto be soon.In looking at productioncontrol, however,we could easily overaggregate.Energy policycould intrude ocally, apartfrom the nationalscene. An instance s energyforhigh-intensiveforms of irrigation.Signsare that discrete de-cisions will be made about allocatingenergyand they will not be wholly concessionarytoagricultural nterests. Some pump irrigationfueledby naturalgas maybe the firstcasualty.Focus on LandIf nonfarminputs will not be so generouslyavailable n the future,farm nputswill climbanotch or two on the prestige scale. They willalso attract more policy attention. Consistentwith developmentsof the time, a new appreci-ation of the crucialroleof farmland eemedtoappear in the 1970s. Unlike productioncon-trol, its context is long run.

Halting teps began n the 1970s owardpro-tecting land for farming.Differentialassess-ment schemes wereone. Iftheypromised ittlelastingbenefit, their announced ntentwas noless noteworthy.In 1976Secretaryof Agricul-ture Earl Butz called for the first time for afarmland-preservation ngredient in USDApolicies. His successor, Robert Bergland,echoed the theme.Elasticity of Farm-level DemandIn 1962 t could be said with some confidencethat farm-leveldemandfor primaryproducts,such as grainsand cotton, had become highlyinelastic.If agricultures now less industrialized,or ifat least some of the thrust toward indus-trializationhas eased, is that demandnow lessinelastic?Neitherstatisticalstudiesnorlogicaldeduc-tion can providean answer. Statisticalanaly-sis will not do so because the time series forthe new periodis too shortfor reliableresults.Logically,we coulrd xpect that if the market-ingeconomyhas revertedeven slightly owardselling primaryproductsinstead of merchan-dising brand-namedprocessed ones, farm-level demandwould show just a little less in-elasticity than before. We can doubt this hashappened.The snag in reachinga judgmentis the na-ture of export demand, which has grownstrongersince 1962. Accordingto traditionaltheory, world demandfor a nation'sproductsis elastic because the worldis so big and eachnation'sexports so small.The worldis indeedbig, but demand s fractionatedand separatedinto national clusters, each of which has itsown behavioral syndrome. Also, for someproductsthe United States is not a small ex-porter.No resolutionof the demand-elasticityissue seems possible. Intoday's tradingworld,the concept of aggregateelasticity of demandseems to be inappropriate.The Economicsof ValueDeterminationEconomics is concerned not only with thephysical wealth of nations but also with thedeterminationof value. Perhaps the latterranksfirstin importance.My 1962articleim-plicitly if not explicitly sketched a functionalrelationshipbetween the value (price)of non-farm nputsand of farmresources,principally


8/12

Breimyer Agriculture's Three Economies 43land. Heavier use in farmingof cheapnonfarminputs, I wrote, would lead to a "gradualsub-ordination" of land values in agriculture(p.691).By parallel logic, the idea of basing com-modity price supportson cost of productiontook on some credibility."To the extent farmoutput now rests on variable nonfarmcapitalinputs, cost of productionmay at last achieverespectable status. At the least it is not asinapplicableas it once was" (p. 697).It is questionablewhether land prices everwere subordinated, gradually or otherwise;andin any case, they didnot continueso. Onecomplication is the mixed relationship be-tween an input such as commercialfertilizerand land: it is partly complementary,partlysubstitutive(Breimyer,1977,p. 22). Events ofthe mid-1970s nevertheless suggest that theperceived scarcity and higher price of inputssuch as fertilizer, pesticides, and herbicidescontributedto skyrocketingland prices. Al-thoughinflation-sped, ax-subsidizedspecula-tive demandalso was involved, the highercur-rent and prospective prices for industrial n-puts to agriculturehelped to send land pricesupward.The national ndex of farmlandpricesmore thandoubledbetween 1972and 1977andsome regionsreportedsubstantially aster es-calation.With regardto nonfarminputs and cost ofproduction, n the 1973 arm awthe cost crite-rionwas acknowledged,andin 1977 t attained"respectable status." Although the recogni-tion may have come a little late, it is stillgermane. But as another instance of irony, itwould have been a bit easier to base produc-tion costs on nonfarm nputsin the late 1950sand early 1960s. The price of land was lessvolatile then.Buildinga productioncost into a farmpricesupportlaw is relatively easy so long as onlythe cost of purchasednonfarm nputsneed becovered---nuisanceproblems of specificationnotwithstanding.To try to protect any sub-stantialpartof landpricesis anothermatter.Ifland prices should continue to propel them-selves upward,it will be increasinglydifficultto exclude them fromcost data for price sup-port. Farmers' protests of inequity, not en-tirely baseless, will then override economists'objectionsbasedon the contrasting conomicsof land and nonfarm nputs.PureRicardianscould remind,though, thatmarginal andyields no rent and thatto fail toinclude any rent in support prices discrimi-

nates against farmers of that land. Testimonythe Missouri Farmers Association offered theU.S. Senate in connection with 1977 farmlegislation was more introspective than that ofsome economists (Carpenter, p. 2).Industrialization and Rental Return to LandThe primitive (agrarian) and industrial modelsfor an economy have opposite welfare implica-tions including those of income distribution.As set forth by Robinson and myself, the in-dustrial model, though requiring highly sophis-ticated management, allows production to besubservient to consumer demand. Income-distribution, in Robinson's words, is free of"persistent differences between factors ofproduction" (p. 6). As all products are tai-lored to consumer specification, returns areconstant and there can be no consumer orproducer surplus: no rent. Would there bequasi-rent? Possibly but if so it would be shortterm and limited to consumability of capitalgoods. As I noted, the fact that the industrialmodel is not fully achieved does not vitiate itssignificance (1962, p. 681).It must be admitted that although the indus-trial model in pure form yields no differentialreturns to factors, partial monopoly and guildrules can replicate rent-like returns. Also,Galbraith asserts that in the contemporary in-dustrial world consumer sovereignty is re-placed to high degree by producer sovereign-ty. As with most models, coexistent realitydoes not conform at all closely; and an indis-criminate welfare-judgment transfer from themodel to the "real world" is not warranted.It is the primitive economy, not the indus-trial, that by its very nature yields differentialreturns. Higher return to super-marginal thanmarginal land, the unearned income known asrent, has always been disruptive. When ag-riculture is organized as composite entre-preneurial ("family farm") units, the distribu-tional effect is minimized because rent be-comes an indistinguishable supplement to in-come from the operator's labor and man-agement. But contrariwise, the greater therent, the stronger the pressure to change theorganizational structure and stratify the rolesfor landholders and operators.The trend toward industrialization of ag-riculture once bade to even out rents just abit--although creating separate issues of whowill hold the industrial (finance) capital of ag-


9/12

44 February 1978 Amer. J. Agr. Econ.riculture and who will provide the technicalmanagement. If industrialization now lags toany appreciable degree, both current rent andits capitalization into capital gains will be ofpersistent significance. Contests will ensue toget and keep the right to receive both, and willbecome entwined in income and estate taxrules. In other words, we will see a repetitionof episodes such as those of the mid-1970s. In1972-76 real estate value in agriculture aloneincreased $233 billion, appreciably more thanthe $152 billion net income from farming oper-ations including net rent paid to non-operatorlandlords (Breimyer, 1977, pp. 47-48). Andthe long-established income and estate taxes,as partial redistributors of income, ran intoalmost violent opposition for the upsettingreason that the capital-value inflation that gaverise to tax liability also created cash flow prob-lems. Tax shelters were sought, and an ag-gressive Ag-Land Fund proposal of Continen-tal Illinois National Bank was widely pub-licized (Matthews and Rhodes).Whether the future brings an industrially-based high productivity in primary agriculture,dampening values in land and land rents, orwhether the opposite occurs, will have a greatdeal to do with both income distribution andstructural organization in agriculture.The Economics of Raw MaterialsWe turn now to a new topic, the economics ofextractive industries.Joan Robinson considered only two models,the primitive and industrial. The latter in turnderived from the exciting revelation that therecan be constant returns in the economy oreven increasing ones, as described in theempty boxes trilogy. Thereupon optimismreigned as principles of economic develop-ment were formulated and espoused.An industrialeconomy is a fabrication econ-omy. It brings together and "works up"cruder materials. The industrial model itselfcontains no concern for the terms of availabil-ity of those materials. Implicitly they are re-garded as costless except for the mechanics ofextraction, itself incorporated in the industrialprocess. That is to say, in Robinson's indus-trial model there is no room for a reservationprice on the crude oil or coal or metallic ore,no calculus of the anticipated price effect ofprogressive exhaustion of a stock material.Nor, in fact, is there any occasion for rent tothe better oil fields and mines.

It is not coincidencethatthe beneficenceofindustrializationwas given both scholarlyandpoliticalexpressionduringa period nWesternhistorywhen rawmaterialswere plentifulandthe expectation was that new discoverieswould be more yielding than the previousones.The emptyboxes authors,nevertheless,didnot entirelyoverlook the extractiveeconomy.None of them, however, took note of the arti-cle on the subject published by the U.S. ag-ricultural conomist L. C. Grayin 1914.Grayrecognized the "indistinguishableelements"in rent from"exhausted" and "inexhausted"properties,namely, "returnfor the coal usedup and the return for the site value of thatcoal" (p. 468). He also pondereddistinctionsbetween royalty (depreciationfund) and rent(p. 484).Claphamnoted mineralextractionas a spe-cial case, perceptivelyand presciently. "Na-ture's responseto the miner s notoriouslyre-luctant," he wrote. Furthermore, "A timemust come in the history of the planet, as atime comes in the history of every pit, whenequal successive 'doses' of resources willyield smallphysical returns"(p. 121). But inkeepingwith the sanguinityof his generationClaphampettifoggedin terms that there werenew lodes of coal in the Transvaaland theworldwas "fast becominga single market orcoal .... So far as our economist knows thework is not yet begun," he concluded (pp.121-22).Wecan read ntoClapham's vasiveness theassumptionthat stock resourceswere neitherto be given a reservationvalue nor allowedany sortof privatemonopoly.The returnsboxinto which coal miningwas to be placedwoulddepend solely on productivityin extraction.As Claphamwas optimisticabout productiv-ity, he seemed to swallowhardandput coal inthe increasingreturnscategory.So it provedto be. So it was for a longtimewith coal, and with oil and metals too. Therewere, in fact, increasingreturns n the extrac-tion process. Cheapironwas used to drill forcheapoil whichin turnpoweredexcavationofmore ore; and both iron and oil relieved thehumanbackin miningcoal. Itwas a nice sym-biotic relationship.During this comfortable interlude, feweconomists reconsideredthe extractive phe-nomena. Hotellingtook up the issue in 1931.Depressionandwardistracted;andonly in the1960sand 1970s,underinstitutionalsponsorssuch as Resources for the Future, was the


10/12

Breimyer Agriculture's Three Economies 45subject opened up widely. In his Fellows ad-dress of 1977, Kelso recapitulated strains ofthought about the extractive economy and re-monstrated his profession for its lagging inter-est. He chose the contemporary language ofspaceship earth as a closed system: "All of us

?. must incorporate in our analytical struc-ture the conception of the closed spaceshipearth, improvement in the well-being staterather than maximization of the throughput ofthe system. . . ." (p. 27).Raw Materials and an Industrial AgricultureThe economics of extractive industries is rele-vant to our topic because, insofar as the trendtoward industrialization 'of agriculture hasslowed, the cause lies, as was stated above,not in inadequate technological processes butin higher cost of mineral raw materials, fossilfuel energy above all.For the bulk of the nonfarm inputs that havecontributed so much to the productivity of allthree economies of agriculture are derivedfrom extracted materials-the fossil fuels,mineral rock (phosphate and potash primar-ily), and metal ores. During the glory daysof drawing on those resources they wereavailable at a price that was almost perfectlyelastic (i.e., the quantity agriculture chose touse had little perceptible effect on the supplyprice), and in real terms was constant or de-clining. Even the quotas on delivery of oiladministered by the U.S. Department of theInterior and the Texas Railroad Commissionwere scarcely restrictive; and depletion allow-ances were intended to keep the crude flowingand prices comparatively low.Now that those palmy conditions no longerhold and are even less likely to prevail in thefuture, what is the meaning for agriculture andparticularly for the industrial part that has re-lied so heavily on abundance and cheapness inbasic materials?It is a new problem. Obviously, as mineraldeposits become less accessible, by no stretchof the imagination is the returns box the in-creasingone nor is it even constant. It is de-creasing. Moreover, in all likelihood depositsin some sources will be much less accessiblethan in others. The extractive model then dis-plays much in common with the primitivemodel associated with agrarian agriculture. Itparticularly reintroduces the factor return ofrent. At whatever high cost source a mineralprice is established, all other sources willenjoy a superior return, which is rent.

Sharplydifferent, however, from the primi-tive model of agricultures the element of res-ervationprice. Once progressivedepletionofa resource is recognized, its price can have areservationcomponent. Superficially,attach-inga reservationpriceresemblesmonopoly.Isit truemonopoly?If so, it is monopolywithoutnecessarilyhavingmonopolists!Hereinwe getthe unique feature of economics of extrac-tive industries.Any holder of a stock resource, howeversmall and powerless, who believes that thedepletion process will resultin a priceuptrendexceeding the rate of interest on money willfind it advantageous,if his liquiditysituationpermits, to hold instead of selling. This is atemporal-reservation function. Agriculturaleconomists will recognize the parallelwith acorn farmer'sguessingwhether the price out-look favors his holdingor selling. The crucialdifferenceis that more corn will be producednext year. No replacementoil will be forth-coming.Separately romthat, if the holderor coali-tion of holders is large enough to exert mo-nopoly power and thereby make a futurepricerise morecertain,the attraction o rationcurrentoutputbecomes greater.Thus, wherereservationpricing s appropriate, he tempta-tion to formorganizedoligopolyor monopolyis enhanced. (The implicit present-versus fu-ture-monopoly calculations of OPEC headsareinteresting o simulate.Few if any data areavailableas clues.)Withoutoverstatement, he returns o a firmin anextractive ndustrycanpotentiallybe thesum of a nonmonopolizedreservationprice, amonopoly booster to it, and a bonus for anyfavorablenessof location and accessibility.The most dramatic current illustration isOPECpetroleum.Reportedly,forsome SaudiArabian oil, easily extracted and delivered,the reservation,monopoly,andrentalcompo-nents add to 80% or more of the cartelizeddelivery price. As of 1977it was U.S. policyto compromisethe price consequenceby tier-ing the price of domestically produced oil.Thereby oil would be made available at theaverage of two marginalcosts, the simplestcase of average-rather hanmarginal-costing.So it is that the economics of a steadilydepletingraw materialresource base has be-come an element in the economics of modernagriculture. t becomes thatvia the intermedi-ate stage of economics of the industrialprocess. If the economics of the extractivesector has been neglected in the past, cir-


11/12

46 February 1978 Amer. J. Agr. Econ.cumstances will force more attention in thefuture.And as both practices and policy in agricul-ture respond to extant forces, irrespective ofwhether they are given intellectual expression,we can expect counteracting activities to maketheir appearance. Decision choices are ines-capable between trying to protect agriculture'saccess to remaining supplies of nonfarm inputsof extractive origin and the opposite course ofdeveloping anew, in imaginative variants, thenative (primary) resources of agriculture. In-deed, whenever a farmer plows under legumesor dries corn with sunlight or delivers freshvegetables to a nearby village market, hecounteracts by agrarian means the conse-quences of an oil supply that is not only run-ning out but being reserved by its holders.ResumeIn the foregoing pages a two-stage messagehas been presented. The first is a reconsid-eration of trends toward progressive indus-trialization of U.S. agriculture, a reconsid-eration prompted by a sudden increase duringthe 1970s in the relative price of nonfarm in-puts. In 1962, when the meaning of indus-trialization was examined, agriculture was inthe postwar industrialization surge. Effectsdiffered among agriculture's three economies,as primary crop production, still the least in-dustrial, was overshadowed by the livestockenterprises and by the third economy of mar-keting.In the decade and a half since 1962, highercosts of nonfarm inputs have slowed the paceof industrialization. Some consequences haveappeared. Marketing has not outrun the othertwo economies as it did before, and the live-stock and poultry economy has felt some re-straint. More clearly to be seen are anawakened public interest in farm and food af-fairs, a resurgence of the primary crop econ-omy to prominence, and a newly expressedregard for farmland as an essential and irre-placeable resource. Whether the larger cropharvests of 1977 and reappearance of sizablestocks of grain will defuse some of the recenttrends remains to be seen. A major reversalseems unlikely, for the reason that the highercost of nonfarm inputs in the 1970s is ascrib-able to changes in the supply and price of rawmaterials that will persist.The second stage of analysis is directed to

the economics of extractive industries, a sub-ject neglected for so many years when abun-dant raw materials were taken for granted.Models for primitive agrarian and industrialeconomies, useful for tracing the indus-trialization of agriculture and themselves de-rived from three classic articles on "emptyeconomic boxes," are inapplicable to the ex-tractive sector. The analysis sketched here isnot definitive yet echoes ideas as old as thoseof Gray of 1914, and recognizes in the pricingof extractive products an implicit temporal-reservation price to which is added anymonopolization element plus the rent somesuppliers get by virtue of their advantaged lo-cation.The principal inference to be drawn is thatthe economics of agriculture will henceforthcomprise not only the economics of its uniqueresource of the land together with that ofsuperimposed industrial processes, but alsothe economics of access to mineral raw mate-rials that are constituents of industrial tech-nology. The practice and politics of agriculturewill divide two ways, between sheltering ag-riculture from the deleterious effects of morecostly raw materials, and fostering the protec-tion and development of those native re-sources of agriculture that sustained human-kind before the first phosphate was mined oroil pumped, and that have never been super-seded.[Received June 1977; revision accepted Sep-tember 1977.]ReferencesBreimyer, Harold F. Economics of the Product Marketsof Agriculture.Ames: Iowa State UniversityPress,

1976.-. Farm Policy: 13 Essays. Ames: Iowa State Uni-versity Press, 1977.. "The ThreeEconomiesof Agriculture."Amer.J.Agr. Econ. 44 (1962):679-99.Carpenter,L. C. "Statement on]the Food andAgricul-tureActof 1977,SenateBill275,Presented o SenateCommitteeon Agricultureand Forestry, February23, 1977."Mimeographed,MissouriFarmersAssoci-ation, Columbia,Mo.Clapham,J. H. "Of EmptyEconomicBoxes." Econ. J.32 (1922):305-14.Gaffney,Mason."The Benefitsof FarmPrograms: nci-

dence, Shifting,andDissipation."J. Farm Econ. 47(1965):1252-63.Gray,L. C. "Rent Underthe Assumptionof Exhaustibil-ity." Quart. J. Econ. 28 (1914):466-89.


12/12

agriculture's three economies in a changing resource environment

Documents