The development of agriculture

From the History of the World podcast comes these two podcasts on the development and spread of farming.

The Marshalls (Alfred and Mary) on farming

In the past I have discussed the theory of the farm explaining why farming is one of the few areas left in the economy still dominated by family businesses. The standard argument as to why this is so is given by Allen and Lueck (1998, 2002).

The is key to understanding why so is that the incentives generated within agriculture favour family farms. The two basic issues are opportunities for hired workers to shirk due to random production shocks from nature and the limits on the gains from specialisation and the timing problems caused by seasonality. The trade-off between effect work incentives and gains from specialisation help determine the costs and benefits of different farm organisational types.

The abstract from Allen and Lueck reads:

Using a model based on a trade-off between moral hazard incentives and gains from specialization, this paper explains why farming has generally not converted from small, family-based firms into large, factory-style corporate firms. Nature is both seasonal and random, and the interplay of these qualities generates moral hazard, limits the gains from specialization, and causes timing problems between stages of production. By identifying conditions in which these forces vary, we derive test able predictions about the choice of organization and the extent of farm integration. To test these predictions we study the historical development of several agricultural industries and analyze data from a sample of over 1,000 farms in British Columbia and Louisiana. In general, seasonality and randomness so limit the benefits of specialization that family farms are optimal, but when farmers are successful in mitigating the effects of seasonality and random shocks to output, farm organizations gravitate toward factory processes and corporate ownership.

Allen and Luecks's paper is relatively recent, 1998, so this all looks modern using new ideas to so with contracting to explain family farms. But is it so? A week or so ago I was reading Alfred and Mary Marshall's “The Economics of Industry” published 1879 when I came across the following on pages 57-58:

§ 11. The largest industry is that of agriculture; but there is scarcely any other industry which is able to make so little use of the advantages of division of labour and of production on a large scale. For agricultural labourers cannot be grouped together in large masses ; they must be scattered over the country. And each season of the year has its special work: a man cannot spend his life in reaping. So that the work of agriculture cannot be broken up into a vast number of parts each of which is performed by a band of labourers who devote their lives to acquiring a special skill in this class of work.

Agriculture, however, seems to be following in the steps of manufacture. Field steam-engines are becoming common, and new machines to be worked by them or by horse power are appearing in rapid succession. The fields demand every day a smaller number of dull labourers and a greater number of intelligent mechanics.

This change is exercising an important influence in the competition between small and large farms. The small farmer cannot always afford to have a field steam-engine; he cannot afford to have a great number of machines for occasional use. Thus every year puts him at a greater disadvantage relatively to the large farmer. This disadvantage is diminished but not removed by the rapid growth of a subsidiary industry, which undertakes steam ploughing threshing, &c. for farmers, The growth of this industry is the most important step towards obtaining the advantages of division of labour that has ever been made by agriculture.

In comparison with a small farmer a large farmer gains something in economy of buildings, and in economy of materials. He is able to have a better rotation of crops; he can send a great many labourers into a field in which there is anything to be done quickly. He can, as a rule, borrow capital from the banks more easily than a small farmer can. Lastly, the large farmer is likely to have more knowledge and greater skill and enterprise than the small farmer, He probably received· a better education at starting; and he can afford to leave to subordinates much work that the small farmer does himself, so that he has more time and opportunity for increasing his knowledge, And as farms change hands from time to time, the ablest farmers are likely to find their way to the largest farms. Thus the economy of skill is carried further under a system of large, than under one of small, farms. On the other hand the large farmer loses in the matter of superintendence. The small farmer works hard himself: he watches for every trifling gain and every small saving: and those who work under him have little opportunity of being idle or dishonest.

Its often said that in the late 1800s-early 1900s the answer to any student's question about economics was "It's all in Marshall". Well it appears it is!

Refs.:

• Allen, Douglas W. and Dean Lueck (1998). "The Nature of the Farm", Journal of Law and Economics, 41: 343-86.
• Allen, Douglas W. and Dean Lueck (2002). The Nature of the Farm: Contracts, Risk, and Organization in Agriculture, Cambridge Mass.: The MIT Press.

The fall and fall of Soviet agriculture or why small is sometimes beautiful

In chapter 4 of his recent book “Was Communism Doomed?: Human Nature, Psychology and the Communist Economy" psychologist Simon Kemp outlines the mostly sorry tale of Soviet agriculture. He sums the Soviet experience up by saying,

Overall, Soviet agriculture was not a great success story.

The question raised by this is, Why?

Kemp gives his answer is chapter 8 of his book on “Psychological Ownership”. Kemp notes that agriculture does not require a large organisation. Kemp writes,

Economies of scale are not always important in agriculture. When Stalin initiated the brutal collectivisation of Soviet agriculture, he appears to have done so with the genuine belief that in the long run the larger units would prove more productive. As we have seen, this increase in productivity did not happen [see chapter 4 of Kemp's book]. In part, this is because agriculture does not always benefit from concentrated large-scale production.

Owner-operator (family) farms are still in most countries, including New Zealand, the standard organisation for agricultural production. Why this is so is a question relevant for why collective farms failed. After all collective farms were designed more along large scale industry lines than small scale family lines.

The short economic answer to this question is, I would argue, given by Allen and Lueck (1998). They argue that farms operate in unique circumstances defined by nature, in particular seasonality. This is the main feature that distinguishes farm organisation from industrial organisation. For farmers a season is a distinct period of the year during which a given activity is optimally undertaken.

This is key to understanding the why the incentives generated within agriculture favour family farms. The two basic issues are opportunities for hired workers to shirk due to random production shocks from nature and the limits on the gains from specialisation and the timing problems caused by seasonality. The trade-off between effect work incentives and gains from specialisation help determine the costs and benefits of different farm organisational types.

The family farm model provides the best work incentives since the owner is the sole recipient of the benefits, but this model misses some benefits due to specialisation. This follows from the fact that the farmer must engage in numerous different tasks during each stage of production, and in addition, numerous production stages throughout the year.

On the other hand, large factory-style corporate farms gain from a specialised labour force and lower cost of capital, but suffer from bad worker incentives since hired workers, not being one of the owners, have an increased incentive to shirk.

To some degree all firms are governed by the trade-off between gains from specialisation and work incentives. For the case of farming it is the unique, large impact of nature that biases it towards family operations.

An obvious, but key, feature of agriculture is that it involves a living, growing product. In the case of livestock, for example, you have breeding, husbandry, feeding and slaughter. Such a cycle is largely governed by nature. In principle there is no reason that a different farmer could not own each stage. But timing difficulties between stages result in high costs of engaging in market transactions. Such timing issues are particularly severe in farming because the inventories of the intermediate goods cannot be held given the living nature of the product.

There are a number of factors, such as the number of crop cycles, the length of the production stages and the number of tasks within a stage, which also influence wage labour incentives. When cycles are few, stages are short, random shocks are large and the tasks are few, there is little to gain from specialisation and labour is especially costly to monitor. Thus family farms.

If these issues can be overcome, that is, if farmers can mitigate seasonality and random shocks to output, farm organisation starts to look much like that in the rest of the economy. Under such conditions farm organisation will gravitate towards factory process and develop the large-scale corporate forms of other sectors of the economy. So larger more industrial looking farms may work.

But right now, small it seems really is beautiful.

Ref.:

• Allen, Douglas W. and Dean Lueck (1998). "The Nature of the Farm", Journal of Law and Economics, 41: 343-86.

Stories from the stone age First Farmers pt.2

Neolithic Revolution the Caucasian Resurrection.

Stories from the stone age First Farmers pt.1

Out of the Stone age and into the Neolithic one of human's most incredible accomplishments 6000 yrs before the pyramids. The story of Near Eastern "The First Farmers".

Are NZ First really as xenophobic and economically illiterate as this makes them sound?

An article at Voxy.co.nz tells us that English concedes NZ farms better off in NZ ownership - NZ First. The article states,

The government has finally admitted its folly over foreign ownership of New Zealand’s farms, says New Zealand First.

"When questioned in Parliament yesterday, Finance Minister Bill English first parroted the government line that Landcorp buying Crafar farms is not an obvious advantage to Landcorp or the New Zealand economy," says Spokesperson for Primary Industries Richard Prosser.

"However, Mr English then confirmed what farmers know but the government would not admit, until yesterday. He compared foreign corporate ownership of NZ farms to a fashion trend that came and went, but then revealed his own view that the ‘New Zealand owner-operator model - those who live it and love it - tend to be the only ones who can make money out of NZ farmland’.

First, a little knowledge of economics would suggest that the fact that the owner-operator model, normally a family-owned model, tend to be the ones to make money out of framing should not surprise anyone.

In New Zealand, and most other places, it is obvious that family-based firms still dominate in agriculture. Which is odd if you compare agriculture with, say, manufacturing, investor-owned firms predominate in manufacturing, So why not farming?

The short answer given by Allen and Lueck (1998) and Allen and Lueck (2002) is "nature". They argue that farms operate in unique circumstances defined by nature, in particular seasonality. This is the main feature that distinguishes farm organisation from industrial organisation. For farmers a season is a distinct period of the year during which a given activity is optimally undertaken.

This is key to understanding the why the incentives generated within agriculture favour family farms. The two basic issues are opportunities for hired workers to shirk due to random production shocks from nature and the limits on the gains from specialisation and the timing problems caused by seasonality. The trade-off between effect work incentives and gains from specialisation help determine the costs and benefits of different farm organisational types.

The family farm model provides the best work incentives since the owner is the sole recipient of the benefits, but this model misses some benefits due to specialisation. This follows from the fact that the farmer must engage in numerous different tasks during each stage of production, and in addition, numerous production stages throughout the year.

On the other hand, large factory-style corporate farms gain from a specialised labour force and lower cost of capital, but suffer from bad worker incentives since hired workers, not being one of the owners, have an increased incentive to shirk.

To some degree all firms are governed by the trade-off between gains from specialisation and work incentives. For the case of farming it is the unique, large impact of nature that biases it towards family operations.

An obvious, but key, feature of agriculture is that it involves a living, growing product. In the case of livestock, for example, you have breeding, husbandry, feeding and slaughter. Such a cycle is largely governed by nature. In principle there is no reason that a different farmer could not own each stage. But timing difficulties between stages result in high costs of engaging in market transactions. Such timing issues are particularly severe in farming because the inventories of the intermediate goods cannot be held given the living nature of the product.

There are a number of factors, such as the number of crop cycles, the length of the production stages and the number of tasks within a stage, which also influence wage labour incentives. When cycles are few, stages are short, random shocks are large and the tasks are few, there is little to gain from specialisation and labour is especially costly to monitor. Thus family farms.

If these issues can be overcome, that is, if farmers can mitigate seasonality and random shocks to output, farm organisation starts to look much like that in the rest of the economy. Under such conditions farm organisation will gravitate towards factory process and develop the large-scale corporate forms of other sectors of the economy. But thus far this hasn't happened.

Given the nature of farming, corporate ownership, be it local or foreign, isn't yet the most efficient form of ownership and thus it hasn't penetrated agriculture to the degree it has in other sectors of the economy.

So farms being in family ownership is simply a result of the economics of farming. It is the fact that the owner-operator model is the most efficient that is important here, not the nationality of the owner.

The economics of farming will give the result that most farms are in New Zealand hands, since family-owned business are most likely New Zealand owned business. There is no need for any xenophobic ownership restrictions to keep farms in New Zealand hands, the market will achieve this.

Also putting restrictions on ownership can prevent foreign investment in the situations where it is needed.

The Voxy article continues,

"Ownership of New Zealand property, be it residential or farmland, needs to be restricted to New Zealand citizens and permanent residents only, the end," says Mr Prosser.

Such restrictions are not need since as noted above when local ownership is efficient you get it, and there are times when you want foreign ownership. The point is that New Zealand gains the most when you get assets into the hands of those you value them most, who will use them most efficiently, and the restrictions on ownership can prevent this.

References:

• Allen, Douglas W. and Dean Lueck (1998). "The Nature of the Farm", Journal of Law and Economics, 41: 343-86.
• Allen, Douglas W. and Dean Lueck (2002). The Nature of the Farm: Contracts, Risk, and Organization in Agriculture, Cambridge Mass.: The MIT Press.

The family owned farm

Over at Homepaddock Ele Ludemann is discussing the ownership of farms and the profitability of farms:

These are usually larger family owned businesses. They have economies of scale that smaller ones lack and don’t have problems of governance and management which often dog corporate farms.

However, while profitability is essential for the long-term health of any business, money isn’t all that matters.

From my observation family owned and run farms are more likely to take a longer term view and seek to balance economic, environmental and social factors in their businesses.

This obviously is an important (and interesting) topic for a farming country like New Zealand. As noted by Ele an odd fact about farming is that family-based firms still dominate the industry. This is unusual given that most other industries are dominated by investor owned firms, so why isn't farming?

The short answer given by Allen and Lueck (1998) and Allen and Lueck (2002) is "nature". They argue that farms operate in unique circumstances defined by nature, in particular seasonality. This is the main feature that distinguishes farm organisation from industrial organisation.

For farmers a season is a distinct period of the year during which a given activity is optimally undertaken. This is key to understanding the why the incentives generated within agriculture favour family farms. The two basic issues are opportunities for hired workers to shirk due to random production shocks from nature and the limits on the gains from specialisation and the timing problems caused by seasonality. The trade-off between effect work incentives and gains from specialisation help determine the costs and benefits of different farm organisational types.

The family farm model provides the best work incentives since the owner is the sole recipient of the benefits, but this model misses some benefits due to specialisation. This follows from the fact that the farmer must engage in numerous different tasks during each stage of production, and in addition, numerous production stages throughout the year.

On the other hand, large factory-style corporate farms gain from a specialised labour force and lower cost of capital, but suffer from bad worker incentives since hired workers, not being one of the owners, have an increased incentive to shirk.

To some degree all firms are governed by the trade-off between gains from specialisation and work incentives. For the case of farming it is the unique, large impact of nature that biases it towards family operations.

An obvious, but key, feature of agriculture is that it involves a living, growing product. In the case of livestock, for example, you have breeding, husbandry, feeding and slaughter. Such a cycle is largely governed by nature. In principle there is no reason that a different farmer could not own each stage. But timing difficulties between stages result in high costs of engaging in market transactions. Such timing issues are particularly severe in farming because the inventories of the intermediate goods cannot be held given the living nature of the product.

There are a number of factors, such as the number of crop cycles, the length of the production stages and the number of tasks within a stage, which also influence wage labour incentives. When cycles are few, stages are short, random shocks are large and the tasks are few, there is little to gain from specialisation and labour is especially costly to monitor. Thus family farms.

If these issues can be overcome, that is, if farmers can mitigate seasonality and random shocks to output, farm organisation starts to look much like that in the rest of the economy. Under such conditions farm organisation will gravitate towards factory process and develop the large-scale corporate forms of other sectors of the economy.

Another issue that family ownership of farms raises for theory of the firm types is, Are farms firms? An answer of Yes may seem obvious, but a little thought could suggest otherwise.

In Spulber (2009) Daniel Spulber defines a firm

"[ ... ] to be a transaction institution whose objectives differ from those of its owners. This separation is the key difference between the firm and direct exchange between consumers". (Spulber 2009: 63).

Note that under this definition organisations such as family owned farms - along with other types of family owned businesses, clubs, basic partnerships, worker cooperatives, non-for-profit organisations and public enterprises - are not firms. The basic reason being that the objectives of these types of organisations cannot be separated from those of their owners.

References:

• Allen, Douglas W. and Dean Lueck (1998). "The Nature of the Farm", Journal of Law and Economics, 41: 343-86.
• Allen, Douglas W. and Dean Lueck (2002). The Nature of the Farm: Contracts, Risk, and Organization in Agriculture, Cambridge Mass.: The MIT Press.
• Spulber, Daniel F. (2009). "The Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations", Cambridge: Cambridge University Press.

Just for fun: the theory of the farm

An interesting question, at least for New Zealand, is Why are family-based firms still dominate in agriculture? The short answer given by Allen and Lueck (1998) and Allen and Lueck (2002) is "nature". They argue that farms operate in unique circumstances defined by nature, in particular seasonality. This is the main feature that distinguishes farm organisation from industrial organisation. For farmers a season is a distinct period of the year during which a given activity is optimally undertaken.

This is key to understanding the why the incentives generated within agriculture favour family farms. The two basic issues are opportunities for hired workers to shirk due to random production shocks from nature and the limits on the gains from specialisation and the timing problems caused by seasonality. The trade-off between effect work incentives and gains from specialisation help determine the costs and benefits of different farm organisational types.

The family farm model provides the best work incentives since the owner is the sole recipient of the benefits, but this model misses some benefits due to specialisation. This follows from the fact that the farmer must engage in numerous different tasks during each stage of production, and in addition, numerous production stages throughout the year.

On the other hand, large factory-style corporate farms gain from a specialised labour force and lower cost of capital, but suffer from bad worker incentives since hired workers, not being one of the owners, have an increased incentive to shirk.

To some degree all firms are governed by the trade-off between gains from specialisation and work incentives. For the case of farming it is the unique, large impact of nature that biases it towards family operations.

An obvious, but key, feature of agriculture is that it involves a living, growing product. In the case of livestock, for example, you have breeding, husbandry, feeding and slaughter. Such a cycle is largely governed by nature. In principle there is no reason that a different farmer could not own each stage. But timing difficulties between stages result in high costs of engaging in market transactions. Such timing issues are particularly severe in farming because the inventories of the intermediate goods cannot be held given the living nature of the product.

There are a number of factors, such as the number of crop cycles, the length of the production stages and the number of tasks within a stage, which also influence wage labour incentives. When cycles are few, stages are short, random shocks are large and the tasks are few, there is little to gain from specialisation and labour is especially costly to monitor. Thus family farms.

If these issues can be overcome, that is, if farmers can mitigate seasonality and random shocks to output, farm organisation starts to look much like that in the rest of the economy. Under such conditions farm organisation will gravitate towards factory process and develop the large-scale corporate forms of other sectors of the economy.

References:

• Allen, Douglas W. and Dean Lueck (1998). "The Nature of the Farm", Journal of Law and Economics, 41: 343-86.
• Allen, Douglas W. and Dean Lueck (2002). The Nature of the Farm: Contracts, Risk, and Organization in Agriculture, Cambridge Mass.: The MIT Press.