Changing Economic
Perspectives on the Farm
Problem
By Bruce L. Gardner
What is the Farm Problem?
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Low incomes
Instability of incomes
Decline in farm numbers
3 Key Elements of the farm problem
1. Supply and demand factors
2. Factor markets
3. Model limitations
The Supply-Demand Model for
Agricultural Products
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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.