Resource Structure of Agriculture. An Economic Analysis

253 Pages·1970·3.696 MB·English

by  Keith Cowling, David Metcalf and A. J. Rayner (Auth.)

RESOURCE STRUCTURE
OF AGRICULTURE:
AN ECONOMIC ANALYSIS
by
KEITH COWLING
University of Warwick
DAVID METCALF
London School of Economics
A. J. RAYNER
Manchester University
PERGAMON PRESS
Oxford 9 New York · Toronto
Sydney · Braunschweig
Pergamon Press Ltd., Headington Hill Hall, Oxford
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Vieweg & Sohn GmbH, Burgplatz 1, Braunschweig
Copyright © 1970 K. Cowling; D. Metcalf; A. J. Rayner
All Rights Reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording or otherwise,
without the prior permission of Pergamon Press Ltd.
First edition 1970
Library of Congress Catalog Card No. 70-114570
Printed in Great Britain by A. Wheaton & Co., Exeter
08 015585 5
TO BARBARA, HELEN AND PATSY
PREFACE
THIS book was conceived at Manchester in an environment which
proved to be a stimulating milieu for quantitative economic analysis of
the agricultural industry. All three authors were together there and
all three owe a very considerable debt of gratitude to Wat Thomas,
Professor of Agricultural Economics, for providing consistent encour-
agement to the attempts made to break new ground by applying new
tools to the considerable body of data which had accumulated on the
resource structure of the industry. In addition to his positive encourage-
ment for all our research he has also given valuable comments on
various papers and reports that have been produced whether as pre-
cursors for chapters in the book or as earlier drafts of the actual
chapters. The authors would also like to mention Leslie McClements,
John Mclnerney, David Colman and Tim Josling for valuable comments
on some of the chapters at various stages of their production.
Cowling started working on the agricultural labour market in 1964
and was subsequently joined in this activity by Metcalf. In 1966
Rayner started working on the demand for tractors in which Cowling
co-operated. Later in the same year Cowling and Metcalf started inde-
pendent investigations of different aspects of the demand for fertilizers
and they subsequently co-operated in a published paper. Since then the
authors have attempted to integrate these studies of the resource
structure of the industry and to tie these empirical investigations to a
theoretical structure which is developed in some detail so that a strong
base will be laid for the use of this book as a basic text in agricultural
economics.
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CHAPTER 1
INTRODUCTION
THIS book seeks to examine the resource structure of the agricultural
industry and to explain the changing structure over time. The empirical
analysis is focused essentially on the inter-relationships between the
agriculture sector and the industrial sectors on the input side. That is, we
are not directly concerned with resources generated in the agricultural
sector and we are not concerned with the flow of agricultural output
into the industrial sector. For industrial inputs, specifically, we are dealing
with markets dominated by oligopoly structures, as in the case of the
tractor, machinery and chemical industries. For the agricultural labour
market and the land market this is not the case although there will
usually be a greater degree of concentration in the non-agricultural
sectors. The factor markets serving agriculture that we will examine
will include both these groups and in addition we will examine the
provision of research and development, education and extension services
to the sector.
The analysis will be theoretical as well as empirical. There is a separate
theoretical chapter giving the main underpinnings for the later chapters
dealing with specific factor markets. This chapter is essentially based
on the orthodox profit maximizing theory of the firm, but the model is
adapted to situations of uncertainty and to situations where the instan-
taneous adjustment of resource structure to equilibrium is not assumed.
In addition, the chapters dealing with specific factor markets include
sections in which the underlying model of demand for inputs is adapted
to the particular situation for that factor market. In addition, the chapter
on labour includes estimates of the supply function for agricultural
labour since in this case it is a meaningful concept. Such estimates
would not be meaningful in the case of oligopolistic structures with
administered pricing. In this case it would be interesting to explore the
mechanism of price formation, although we have not attempted this.
1
2 Resource Structure of Agriculture
The empirical analysis is essentially based on market behaviour in
the post-war period supplemented where possible with material from
earlier periods. Largely because of the paucity of information, but also
because of the constraints on time, this historical material is essentially
descriptive and we have not usually attempted quantitative explanations
of market behaviour. The chapters on specific factor markets will often
include some econometric analysis and indeed there is a brief intro-
duction to the problems of estimating demand relationships included in
the theory chapter. However, we have tried to write up the material on
each factor market so as to allow for a coherent development of
analysis even if the problems of estimation and hypothesis testing are
ignored. Thus each chapter will involve a description of the market
and a discussion of the determinants of demand and then the chapter
will be ended with an evaluation of the econometric results which are
obtained as a result of the methods reported in the intervening sections.
In a similar vein, people with little theoretical background in micro-
economics should be able to work through the theory chapter and pick
out the relevant bits for understanding the models developed for each
factor market. Some parts of the book assume a knowledge of differ-
ential calculus but the book can be read by others by simply skipping
these sections as they generally only serve to give a rigorous backing to
the verbal reasoning that has gone before.
The structure and content of the book as a whole is the product of
the endeavours of all three authors—each has contributed something
to every chapter. However, particular chapters are the major responsi-
bility of particular authors. Cowling has co-ordinated the work, written
the preliminaries and has a major responsibility for Labour (Chapter 3)
and Research and Development, Extension and Education (Chapter 7).
Metcalf has major responsibility for Chemical Technology (Chapter 5),
Land and Buildings (Chapter 6) and Implications of Public Policy
(Chapter 9), and Rayner for Theory of Resource Demand (Chapter
2), Engineering Technology (Chapter 4) and Demand for Resources and
the Supply of Agricultural Products (Chapter 8). It might be said
straightaway that the most well developed areas of empirical analysis
are the labour market, the demand for tractors and the demand for
chemical fertilizer. Each of these markets has been subjected to careful
econometric analysis. To fill in the gaps remaining in the resource
Introduction 3
picture we have included an essentially descriptive treatment of other
markets involving interactions with the industrial sector of the economy.
Thus the chapter on Engineering Technology includes a description of
trends in the use of various machines together with a qualitative explan-
ation as well as a detailed examination of the demand for mechanical
power. Similarly the chapter on Chemical Technology includes some
analysis of the demand for pesticides as well as a detailed analysis of the
market for chemical fertilizers. The chapters on Land and Buildings
and Research and Development, Education and Extension give some
documentation of these important areas of resource use but do not
attempt any systematic quantitative analysis. An important market
has been omitted almost entirely—the market for animal feed. This
was quite deliberate in that we wanted to restrict our attention to the
interactions between the agricultural and industrial sectors. This is a
convenient cut-off in that we then avoid plunging into all the problems
of measuring directly agricultural supply relations and intra-agricultural
transactions. We have in fact included some extraneous material on the
demand for animal feed in developing our indirect estimates of agricul-
tural supply elasticities. It might be useful now to give a brief, chapter
by chapter, introduction to the contents of our book.
Chapter 2, Theory of Resource Demand, begins by describing the
characteristics of the environment in which decisions are taken in
agriculture and examining the motivations of farmers. After explaining
and illustrating the concept of an aggregate production function for
agriculture and explaining how industrial inputs are priced, a detailed
step-by-step analysis is made of the demand function for a current input.
The orthodox theory of the firm is developed first assuming a certain,
static environment and then these simplifying assumptions are relaxed
first to examine the problem of uncertainty surrounding both the price
structure faced by the farmer and the marginal productivities of the
different resources under different environmental conditions, and second
to examine the dynamic environment due to changing technology and
lags in adjustment to changes in the price structure. This part gives a
particularly detailed account of the process of quality change in inputs
into agriculture and indicates how this process can be quantified and
integrated into our theory of the firm. Subsequently the peculiar prob-
ems of durable inputs are examined and the optimal rules for invest-
4 Resource Structure of Agriculture
ment in such resources are examined. The chapter is completed by a
brief excursion into the problems of actually estimating the relationships
between demand for specific inputs and the relevant prices and other
variables which our theory suggests are the determinants of the quantity
demanded. In other words this section is concerned with the problems
we are faced with in empirical analysis when we are trying to get
estimates of the relevant demand elasticities.
Chapter 3 on Labour is orientated round three pieces of empirical
analysis, first an investigation of the aggregate supply and demand
relationships for agricultural labour giving separate results for the
post-war and inter-war periods, second an analysis of the determinants
of agricultural wages, describing the process of estimating an industry-
level "Philips curve" and documenting the results, and third a model
of regional labour supply giving results for a period in the nineteen-
sixties. These separate results are introduced in the context of the
historical record of large and continuing outmigration of people from
the agricultural sector.
Chapter 4 revolves round a detailed analysis of the market for farm
tractors in the post-war period. This is supplemented by a description
of trends in the use of particular types of machinery and the recent
developments are put into historical context by a description of the
early moves toward the mechanization of agricultural processes. This
chapter and the previous one on agricultural labour obviously show a
lot of inter-relationships and should be read in conjunction in order to
grasp the whole process of substitution of capital for labour in this
industry. The chapter on Engineering Technology is completed by a
brief description of the structure, conduct and performance of the
agricultural sector of the engineering industry.
The chapter on Chemical Technology (Chapter 5) follows a similar
format to the one on engineering, being focused on the demand for a
particular set of chemicals—those used as fertilizers by the agricultural
industry, being essentially nitrogen, phosphorus, and potassium com-
pounds. The chapter is rounded out by some documentation of the use
of pesticides which include a wide range of inorganic and organic
chemicals and where innovations are quite frequent. Because of this
latter fact a section of the chapter is devoted to an analysis of the process
of diffusion of innovations although the subject matter is relevant to the
Introduction
5
uptake of new engineering technology and new crop varieties as well. The
supply side of the chemical industry is described and government inter-
vention, which is of major importance for fertilizer demand, is discussed.
Chapter 6 on Land and Buildings looks at the competing demands for
land for urban and agricultural uses and examines the movement in
agricultural land prices over an extended period. Some documentation
is made of recent investment in farm buildings and variables are sug-
gested which may be relevant to an explanation of building investment.
Chapter 7, Research and Development, Extension and Education
reviews the limited information on these sectors contributing resources
to the agricultural industry. Most of the data refers to the public sector
with only very fragmentary evidence for the private. In addition
to aggregate expenditure figures, the chapter again discusses the innova-
tion and diffusion of new technology, this time with reference to new
crop varieties. A model of decision-making under uncertainty is also
discussed from the point of view of selecting among different crop
varieties with uncertain yields. The chapter is rounded out with a discus-
sion of the problems of attempting cost-benefit analyses of public
intellectual investment.
Chapter 8 brings together the studies of different inputs and examines
the resultant changing resource structure of agriculture over the post-
war period. There is some discussion of the interaction between the
demands for different resources followed by the derivation of an
aggregate supply elasticity for agriculture from the estimates of the
demand elasticities for the different inputs with respect to the product
price, i.e. agricultural output price. This section includes a theoretical
discussion of the problem of generating short-run and long-run
equilibrium supply elasticities from the short- and long-run demand
elasticities. The chapter is completed by some discussion of likely future
developments in resource structure and technology.
Chapter 9 focuses attention on the impact of public policy measures
on resource use. Direct and indirect public policy measures impinge
very significantly on the factor markets serving agriculture. The first
sections of the chapter attempt to evaluate the impact on these markets
of the agricultural policy instruments adopted by government in the
post-war period. This is followed by an analysis of the impact of various
measures of macro policy on specific factor markets.
CHAPTER 2
THEORY OF RESOURCE DEMAND
THE aim of this chapter is to put forward general hypotheses which can
explain why the aggregate demand for a resource varies over time. In
later chapters we turn these general hypotheses into specific hypotheses
which explain the demand, by farmers, for particular inputs over the
post-war period. That is, the general hypotheses indicate the type of
factors that are likely to have influenced the demand for any particular
input; we then attempt to measure and test for the influence of these
factors. The theory put forward is expressed in the form of a demand
function for an input: the demand for an input is assumed to depend on
the magnitude of various determining factors or variables. In addition,
we attach to the function a hypothesis about the qualitative influence of
each variable on demand—the direction in which we expect demand to
change given a change in each variable, whilst holding the magnitudes
of the other variables constant.
The aggregate demand by farmers for an input is simply the sum of
the demands by individual farm-firms. Hence, firm theory, which
explains the behaviour of the average firm, forms the basis for deriving
a demand function explaining aggregate behaviour. To develop the
appropriate theory, we first look at some relevant features of the
decision-making environment within agriculture. We go on to derive
demand functions explaining the aggregate demand for an input and
conclude with a note on the method used, in later chapters, to test and
measure demand functions. However, as a starting point, we define
some concepts which are used in the rest of the chapter.
I. Some Concepts and Definitions
The activity of production may be defined as the process of combining
and co-ordinating materials and factor services (inputs) in the creation
6