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Agricultural & Applied Economics Association

Agriculture's Three Economies in a Changing Resource Environment

Author(s): Harold F. Breimyer
Source: American Journal of Agricultural Economics, Vol. 60, No. 1 (Feb., 1978), pp. 37-47
Published by: Blackwell Publishing on behalf of the Agricultural & Applied Economics
Stable URL: http://www.jstor.org/stable/1240159
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Agriculture'sThree Economies
in a Changing Resource Environment
Harold F. Breimyer
For manyyearsabundantandrelativelyinexpensiveindustrialrawmaterialscontributed
to a resourceenvironmentfavoringindustrializationof U.S. agriculture.Theirgradual
depletionand risingprices now create a counterpressure.The pace of industrialization
has slowed, with differentmanifestationsin the three economies of agriculture-crops,
livestock, and marketing.The economics of extractive industries,a subject long
neglected,will henceforthbe an integralpartof the economicsof agriculture.Citedhere
are conceptualformulationsthe author publishedin a precursorarticle of 1962,
formulationsthat go back to the "empty economic boxes" and the writingsof Joan

Key words: Impactof resourcedepletion,industrialization

of agriculture,raw materials.

A half century ago three giants of economics here, a slow reversal has begun. Indus-
contended in the language of "empty eco- trialization has begun to ebb. Although
nomic boxes" about the meaning of increas- changes are still scarcely perceptible and oc-
ing, constant, and decreasing returns (Clap- casionally denied, they are significant and,
ham, Pigou, Robertson).' They thereby set some would say, ominous.
in motion new channels in the evolution of Moreover, insofar as industrial features of
economic thought. As often happenswith pre- agriculture have faded, the cause lies not in
cursors, they doubtless did so without pre- industrial processes as such and definitely not
science. in institutional structure, but in a consid-
As also is not rare, the essence of their eration that has largely been neglected or
argument remains with us yet. It applies to taken for granted; namely, the economics of
modem agriculture,for the configurationof its the extractive sector of the economy. An ag-
returnsfunction has much to do with produc- riculture that relies on petroleum, phosphate
tivity and other attributesof agricultureunder rock, and dozens of metals is implicitly subject
changing-tightening-conditions of access to to the situation in that sector. Growing scar-
the industrial resources on which today's city and rising cost of those materials consti-
technology relies. tute a changing resource environment for ag-
To give more clues in advance to how the riculture.
logic of this paperwill be developed, the three A neglected sector is not often theorized
kinds of returnshelp to explainthe differences about. The three economists referred to above
between the land-basedand the industrialas- did not explain extractive economics very
pects of modem agriculture.Those differences well, nor have many of their successors. A few
were the subject of my "Three Economies" notes on the distinctive features of the eco-
article published in 1962. At that time indus- nomics of extraction, and lessons to be drawn
trializationwas proceedingapace and increas- for our day, will conclude this article.
ingly giving its imprintto agriculture.The es-
sence of the 1962 article will be reviewed
briefly. Since then, as also will be recounted Increasing Returns

HaroldF. Breimyer is a professorin theDepartment

of Agricul- Of the three categories of returns about which
turalEconomics at the University of Missouri-Columbia. Clapham, Pigou, and Robertson contended,
Gratitudeis acknowledged forthevaluablecommentsreceived the center of attraction was increasing returns.
fromJamesD. Shafferandan anonymous reviewer.
SInreality,Robertson termedClapham andPigougiantsand Until two or three generations previous to
himselfa mereDavid. their time, Western economies were domi-
38 February 1978 Amer. J. Agr. Econ.

nated by agriculture.Early economic thought from] the progressive division and specialisa-
had an agriculturalbias. The patternof returns tion of industries .... Whatis requiredis that
in agriculturewas not in question. It was de- industrial operations be seen as an inter-
creasingor, bettersaid, eventuallydecreasing. related whole. . . . In this circumstance lies the
Still, in our day, the subtle inferences to be possibility of economic progress" (p. 539).
drawn from factor combinationsthat eventu-
ally are less yielding occupy the minds of sa-
vants. Two RobinsonianModels
Increasing returns are of another genre.
Imaginativethinkerswere fascinatedby them. The ultimate connection between increasing
They also were perplexed.Returnsthat do not returnsand developmentwas set forthlaterby
(eventually) decrease pose such annoying Joan Robinson in a perceptive 1962 article.
questions as, "where, if ever, can equilibrium She began by outlining two models, one en-
be established?" They also offer a hopeful tirely undeveloped and the other fully devel-
note to which economists of the "dismal sci- oped. The firstis primitiveand grim. Mankind
ence" school were unaccustomed. subsists on whatever means are natively
available. Humaninstitutionssuch as markets
are inapplicable.If an exchange price is used it
EmergentTheory is conventional.
The opposite model, the ultimate in devel-
Worth brief comment are the directions sub- opment, is exclusively capitalusing. Clapham
sequently taken by economic theory. One is had initially suggested that increasingreturns
now known as industrialorganization.Sraffa were the "economies of an organised indus-
and Robinson in England and Chamberlinin try" (p. 123)and Robinsonnow posited a fully
the United States took note of human in- organizedeconomy. In it all factors of produc-
genuity in devising institutionalarrangements tion are internally produced to human spec-
that would make returns curves turn down ification. Paradoxically,in such an economy,
(and cost curves up), thereby improvingfa- viewed without time as a constraint, returns
vored firms' chances to make a protected would not be increasingbut constant. Thus is
profit. Theirs was the fertile explorationinto refuted, at least conceptually, Clapham's
imperfect competition. In agricultural eco- claim that "constant returns . . . must always
nomics in the United States today the remain a mathematical point, their box an
foremost exponent is WillardMueller. empty one" (p. 125). Constancy of returnsis
The other direction came to be known as sufficient for unbridledhope.
economic development. The gradual emer- The Robinsonian industrial model can be
gence of this school is a story of itself. The characterized also in terms of mobility and
"essentialoptimism of increasingreturnsgave divisibility of resources. In her model of a
it impetus. Progress was slowed initially by totally industrialeconomy, all resources are
picayune disputes over details such as the na- perfectly mobile and divisible. Mishan had
ture and significance of capital goods-their made mobility-divisibilitya reference point in
lumpinessand the meaningof length of time.2 his welfare economics. I later borrowed the
Robertson clarified a bit by introducingthe coinage in interpreting structural trends in
idea that, "given time, methods of technique marketingfarm products (1976). As a simple
and of organisationare capable of improve- illustration,both the location of the processing
ment" (p. 146). (Page references are to the of those products and the competitiveness of
most convenient source of the three articles, local tradingare influenced incisively by the
Stiglerand Boulding.) A few years later Allyn mobility of materials and by their divisibil-
Young sprung the whole subject loose from ity-the ease of their differentiation.
the shackles of individual-firmthinking.In an Manifestly, Robinson's industrialeconomy
article significantlytitled "Economic Returns of mobile and divisible resources in which ev-
and Economic Progress" he observed that erythingincludinghuman skills can be tooled
"the mechanismof increasingreturns [arises to man's instructionis a halcyon prospect. It is
the ultimate in development; it is the goal,
Amazing to our era, Clapham wrote, "Economics . . . is not
however remote and elusive, to which mea-
concerned with geological time .. " (p. 121). sures in economic development are directed.
Breimyer Agriculture's Three Economies 39

We all want to control our destiny for richer On the other hand, in 1962 the least indus-
reward. trialof the three economies was industrializing
the most rapidly, as though it were racing to
Two Models for Three Economies of catch up. Cropproductionwas in the throes of
Agriculture a technological revolution that was bringing
many moreindustrialmaterialsand techniques
For my 1962 "Three Economies" study, I to it. "Production on U.S. farms has been
drew on Robinson's models, paraphrasing shifting at fast pace to an industrial,capital-
them in terms that the first describes the using, character" (1962, p. 685).
"primitivestate, markedby the simplest eco- Therefollowed in my articlean enumeration
nomic pursuits." It is "an economy governed of inferences to be drawnfrom industrializing
entirely by fixed, predetermined factors of all three economies and especially primary
production." In the industrialmodel, by con- production.Among these were a reducedrole
trast, all factors of production are internally for land; more inelastic farm-leveldemandfor
produced. It is "a totally self-contained and crop products as those products became
self-sustained economy in which no factors fartherdetached from final consumption;the
are fixed, but all are variable"(1962, p. 681). I greaterpotentialcontrolabilityof farmoutput,
would now add, all factors are perfectly a control exercised by terms of access to in-
mobile and divisible. dustrial inputs; the better case that could be
Against the backdrop of two models, I made than before for basing commodity sup-
sketched the three economies of agriculture. port prices on cost of production; and the
These are, respectively, "the production of growing imperiousness of the marketingsys-
primaryproductsfrom soil, the conversion of tem over both primary (crop) and livestock
feedstuffs into livestock products, and the production.
marketing of products from farm to retail"
(1962, p. 679).
The models were useful for my study be- Time and Place Restraints; New Setting for
cause they provided a reference point for ex- Three Economies
aminingthe trend that had been so pervasive
in agriculturethroughoutthe century but es- Events since 1962 illustrate once again how
pecially since World War II, that of moving quickly can trends reverse and predictions
ever fartheraway from primitiveagrarianto- prove faulty. They remindthat contemporary
ward an industrialform. This was the trend economic analyses are implicitly tentative,
known as industrializationof agriculture. It being confined within the boundaries of the
was moving forwardfast in 1962. data that give rise to them. This theme, often
Industrialization impinged on the three captioned as risk in extrapolation, is ac-
economies of agriculturedifferently. By 1962 counted for in terms rangingfrom the ceteris
marketinghad been almost fully transformed; paribus caveat (some constants do not stay
it was then the most industrialof the three. that way) to the cross product term in a
The livestock and poultrysector was interme- squared equation (a dog multipliedten times
diate. However, it had moved fast toward could not supportits weight). A more schol-
managerial,if not locational, detachmentfrom arly referenceis to laws of compositionwhich,
feedstuffs and it thereby became much more accordingto the logician ShermanRoy Krupp,
industrialthan when it was a subordinatepart "determinethe range within which a particu-
of feed crop production on individualfarms. lar basic relationwill hold" (p. 47). The range
Only crop farmingstill showed significantfea- is distinctly limited.
tures of a primitive economy and remained The events were the suddenincreases in the
partly in thralldomto forces of nature. price of a numberof nonfarminputsto agricul-
Moreover, the most industrializedeconomy ture that are crucial to its industrialization.
was also the fastest growing. Marketinghad They dated mainly in the 1970s. In the lead
been expandingfaster, in terms of battery of were tripledor quadrupledcosts of petroleum
services performed,than productionof either and other fossil fuels. Various derived prod-
livestock or crops. And between the latter ucts also became more expensive. Equally
two, livestock and poultry had been edging important, though, was a resulting shift in
ahead of crops. psychology. A new sensitivity to the resource
40 February 1978 Amer. J. Agr. Econ.

base for agriculturecame into view. Instances alert when they believe their food supplyto be
of fear for future food supplies bordered on threatened.
panic; and they were matched, as usual, by
some iconoclasm. Both have largely dissi- Gross Productivity
pated, beingreplacedby a near-consensusthat
industrialinputs, though not critically scarce, Manifestly, a partly industrial agricultureis
will not be as cheaply availablein the futureas sensitive to productivityin the entireeconomy
in the past. Their prices may continue to in- in a way thatthe older agrarianagriculturewas
crease relative to farmproductprices, instead not. On a common sense as well as theoretical
of laggingas in earlier decades. basis higher cost energy has macro effects re-
(Between 1960and 1976both the consumer tardinggrowth. Rasche and Tatom allege that
price index and wholesale price index fell recognition of the effect of energy cost has
short of doubling, but the wholesale price of come slowly because of the "usual practiceof
fuels and power nearly tripled. Farmers' estimatingthe functionalrelationshipbetween
prices paid for tractors and "other self- [aggregate]output and only labor and capital
propelledmachinery"increased 140%just be- resources," which "implicitly assumes that
tween 1965 (first year of data) and 1976.) changes in the stock and flow of energy re-
The developments, moreover, were unex- sources are capturedby the movementsin the
pected, heightening their drama. In 1962 capital stock and need not be explicitly taken
scarcely a murmurwarned of any brakingto into account." They take energy explicitly
continued industrialization."There is as yet into account as they enter it "as an integral
no sign of let-upin [trends]underway.Primary part of the productionfunction." When they
production continues to become more capi- do so, estimates of the potentialoutputof the
tal-using. Livestock enterprises still threaten economy are reduced several percentage
to leave their traditional home. Marketing points (June 1977, p. 14 and ff.).
gains ever more size and dominance" (Brei-
myer, 1962, p. 690). Relative Growth Rates of Agriculture's

Evidenceof ChangedTrends in When we look at agriculturealone, we natu-

the Three Economies rally find that although productivity slowed
somewhat in the 1970s, it is virtuallyimpossi-
Before evidence of post-1962trendsis consid- ble to isolate energy-cost from climatic and
ered, a reminderis in order. Seldomin historic other influences. Even so, a feature of trends
evolution does a trend so about-face that the since 1962has been a differentpatternof rela-
status quo ante is restored. More often, not tionship between the three economies than
only is the picturemixed but changesare small prevailed before. The change could hold
and subtle ratherthan graphic. meaning.
So it is with observations for the period Recapitulating:in 1962 the most industrial
since 1962.But there are enoughpositive indi- economy, marketing, had been growing the
cators to suggest that a shift from steadily fastest and the least industrial, primarypro-
decreasingrelativeprices of nonfarminputsto duction, the slowest. Recountedthen was that
currentand prospectiveincreases has palpable in 1948the farmer'sshareof the retailvalue of
effects. all food had been 51%, but by 1961 it was
Perhapsmost meaningfulis the alteredpub- down to 38% (Breimyer, 1962, p. 688).
lic attitude toward food productivity, and to- In the mid-1970sthe farmer'sshare climbed
wardfood policy, that follows fromawareness to above 40%. In 1976it was 40%. Marketing
that industrialresourceswill not henceforthbe had not continuedits gain relativeto the other
so plentiful. Smaller crops in the 1970s and two economies; if anything, it had slipped a
disappearanceof reserve stocks of grain un- bit.
questionablygave the farmand food economy More clearly to be seen, however, was a
a rare conspicuousness. As of late 1977a new slowdown in the livestock economy. Over
surplus of wheat seemed to be building up. many previous decades livestock and poultry
Whetherit will dispel public attentiveness re- production had prospered. It outpaced crop
mains to be seen. But an entry will have been production in volume and in contributionto
written in history's logbook: citizens become farm cash receipts. Bolstered by strong de-
Breimyer Agriculture's Three Economies 41

mand, in the later 1950s livestock and poultry Disconnection Between Farmers
sold were 55% of all cash receipts-56% if and Consumers
government payments be excluded.
During the 1970s feed grain-livestock rela- Industrialization of agriculture tends to
tionships somersaulted. World demand for confine crop farming to producing primary
available feed supplies became strong, and products that are sold in raw form. It widens
devaluation of the dollar encouraged exports. the differencein both form and value between
Price ratios in feeding were squeezed. The those products and the foods that reach con-
volume index for livestock and poultry pro- sumers. This feature of industrializationwas
duction in the United States in 1976 stood at describedin 1962.It is doubtfulthat any major
only 117% of the 1960 base year. Crop produc- change has occurred since then. The market-
tion was 127% of the 1960 base. Even more ing economy, organized for imperfect rather
impressive are data for the 1970s on live- than perfect competition, has continued to
stock's share of farmers' cash receipts. At emphasize merchandisingrather than least-
mid-decade livestock and poultry accounted cost delivery of basic product.Growingpopu-
for only 48% of all receipts---49% when gov- larity of restaurantand other group food ser-
ernment payments are omitted. Inferences vice is of the same genre, althoughtoo much
must be drawn cautiously; relationships could significance ought not be attached to it. In-
reverse again. But there is at least a hint that stitutionalizedfood service as an alternateto
primary products of agriculture have recov- home preparationis no longerjust homecraft
ered some of the status they lost during pros- but can be regarded, with only slight over-
perous and expansive postwar years. statement, as miniatureindustry.
A few signs of opposite trends also can be
Organizational Separation of Feed found, though they may be little more than
and Livestock straws in the wind. Notable in the 1970s has
been a halt to so much pre-preparationof
One earlier trend reported in 1962 seems foods sold at retail, once widely heralded.Re-
definitely not to have stopped. It is the trend surgence of farmers' produce markets and
toward separating livestock and poultry enter- even of pick-your-own fruit and vegetable
prises from feed crop production. farms, together with scattered interest in sim-
Corn farmers in the Midwest are not going ple consumers' food cooperatives, are sym-
back to raising hogs or feeding cattle. They bolic of agrarianrather than industrial food
definitely are not buying laying hens or broiler delivery. Quantities in such direct marketing
chicks. New large-scale hog units pop up are trivial but the portents may not be.
Several factors account for corn farmers' Production Control Policies
disinterest. Among them is several years of
good profits earned from grain alone, which In 1962it was pointedout that the then-current
spared them financial pressure to intensify. practice of relying on acreage controls to re-
Also, some cattle and hog feeding is financed strict the volume of farm production was an
in part by tax shelter capital funds, and as so anachronism.If nonfarmmaterialsconstituted
subsidized is a strong competitor to farmer 62% of all inputs to agricultureand land was
feeding. less than 15%,the estimates for that year, it
Even so, the situation could be over-read. seemed scarcely appropriateto use land alone
Although large cattle feedlots continue to dis- as the factor of control. Not mentioned was
place farmers' smaller ones, a number of them the furtherpoint that land controls funnelpro-
are custom operations-hotels for the animals gram benefits almost exclusively to the land
of farmers and ranchers among the various factor. Manyeconomists have called attention
owners. to this consequence of land retirement. See
Also, a slight counterpressure originates Gaffney, for example.
from new extension programs. The Coopera- In the mid-1970s, when tighter supplies of
tive Extension Service, embarrassed by its nonfarminputs and bad weathersharedblame
selective counselling of larger farmers, has in- for interruptedproductiontrends, production
augurated a special educational program for was not restricted.On the contrary,maximum
small farmers. Farmers on limited acreage are output was officially encouraged. Consistent
commonly advised to add livestock. with previousphilosophy,it was to be attained
42 February 1978 Amer. J. Agr. Econ.

by plantingmore acres--" fence row to fence Haltingsteps beganin the 1970stowardpro-

row" (a literary figure, as many fences had tecting land for farming. Differentialassess-
been removed). ment schemes were one. If they promisedlittle
Yet in an ironic twist, in other quartersdur- lasting benefit, their announcedintent was no
ing the 1970s, the nonfarminput of petroleum less noteworthy. In 1976Secretaryof Agricul-
and other fossil fuel energy came to be recog- ture Earl Butz called for the first time for a
nized as an instrumentof control. At the time farmland-preservationingredient in USDA
of the oil importembargoand allocations,with policies. His successor, Robert Bergland,
further tightness threatened, the oil supply echoed the theme.
was seen as an instrumentto hold farm pro-
duction up. Elasticity of Farm-level Demand
If need for more productionbecame at that
time a rationalefor askingto protect fossil fuel In 1962it could be said with some confidence
supplies to farming,the counterpartwould be that farm-leveldemandfor primaryproducts,
to turnniggardlyat time of farmsurplus.If the such as grains and cotton, had become highly
inflow of oil from abroad should be slowed inelastic.
when farm products are in oversupply, If agricultureis now less industrialized,or if
chances are that petitions for 100%allocation at least some of the thrust toward indus-
for farmingwould not be heeded. trializationhas eased, is that demandnow less
So long as oil enters the United States as inelastic?
fast as supertankerscan deliver it, the pros- Neither statistical studies nor logical deduc-
pects are that "production control" will be tion can provide an answer. Statisticalanaly-
confined to setting aside land. Such a policy sis will not do so because the time series for
was built into the 1977 farm law and applied the new periodis too short for reliableresults.
immediately to wheat. It bids to prove no Logically, we coulrdexpect that if the market-
more effective than before. ing economy has revertedeven slightlytoward
A less contrived way to regulate farm pro- selling primaryproducts instead of merchan-
duction is to establish quantity marketing dising brand-named processed ones, farm-
quotas. They allow the agrarianresource of level demandwould show just a little less in-
land and the industrialone of nonfarminputs elasticity than before. We can doubt this has
to be balanced more rationally, and more ef- happened.
fectively, than is possible when only acreage The snag in reaching a judgment is the na-
of land is controlled. Except for some types of ture of export demand, which has grown
tobacco and a few specialty crops, quotas stronger since 1962. According to traditional
have not been employed. Nor are they likely theory, world demandfor a nation's products
to be soon. is elastic because the world is so big and each
In looking at productioncontrol, however, nation's exports so small. The world is indeed
we could easily overaggregate.Energy policy big, but demandis fractionatedand separated
could intrudelocally, apart from the national into national clusters, each of which has its
scene. An instanceis energyfor high-intensive own behavioral syndrome. Also, for some
forms of irrigation.Signs are that discrete de- products the United States is not a small ex-
cisions will be made about allocating energy porter. No resolutionof the demand-elasticity
and they will not be wholly concessionary to issue seems possible. In today's tradingworld,
agriculturalinterests. Some pump irrigation the concept of aggregateelasticity of demand
fueled by naturalgas may be the firstcasualty. seems to be inappropriate.

Focus on Land
The Economicsof Value Determination
If nonfarm inputs will not be so generously
availablein the future,farminputswill climb a Economics is concerned not only with the
notch or two on the prestige scale. They will physical wealth of nations but also with the
also attract more policy attention. Consistent determination of value. Perhaps the latter
with developmentsof the time, a new appreci- ranks first in importance.My 1962article im-
ation of the crucialrole of farmlandseemed to plicitly if not explicitly sketched a functional
appear in the 1970s. Unlike production con- relationshipbetween the value (price) of non-
trol, its context is long run. farminputs and of farmresources, principally
Breimyer Agriculture's Three Economies 43

land. Heavieruse in farmingof cheap nonfarm nates against farmers of that land. Testimony
inputs, I wrote, would lead to a "gradualsub- the Missouri Farmers Association offered the
ordination" of land values in agriculture(p. U.S. Senate in connection with 1977 farm
691). legislation was more introspective than that of
By parallel logic, the idea of basing com- some economists (Carpenter, p. 2).
modity price supports on cost of production
took on some credibility. "To the extent farm
output now rests on variablenonfarmcapital Industrialization and Rental Return to Land
inputs, cost of productionmay at last achieve
respectable status. At the least it is not as The primitive (agrarian) and industrial models
inapplicableas it once was" (p. 697). for an economy have opposite welfare implica-
It is questionablewhether land prices ever tions including those of income distribution.
were subordinated, gradually or otherwise; As set forth by Robinson and myself, the in-
and in any case, they did not continue so. One dustrial model, though requiring highly sophis-
complication is the mixed relationship be- ticated management, allows production to be
tween an input such as commercial fertilizer subservient to consumer demand. Income-
and land: it is partly complementary,partly distribution, in Robinson's words, is free of
substitutive(Breimyer, 1977,p. 22). Events of "persistent differences between factors of
the mid-1970s nevertheless suggest that the production" (p. 6). As all products are tai-
perceived scarcity and higher price of inputs lored to consumer specification, returns are
such as fertilizer, pesticides, and herbicides constant and there can be no consumer or
contributed to skyrocketing land prices. Al- producer surplus: no rent. Would there be
though inflation-sped,tax-subsidizedspecula- quasi-rent? Possibly but if so it would be short
tive demandalso was involved, the highercur- term and limited to consumability of capital
rent and prospective prices for industrialin- goods. As I noted, the fact that the industrial
puts to agriculturehelped to send land prices model is not fully achieved does not vitiate its
upward.The nationalindex of farmlandprices significance (1962, p. 681).
more than doubledbetween 1972and 1977and It must be admitted that although the indus-
some regions reported substantiallyfaster es- trial model in pure form yields no differential
calation. returns to factors, partial monopoly and guild
With regard to nonfarm inputs and cost of rules can replicate rent-like returns. Also,
production,in the 1973farmlaw the cost crite- Galbraith asserts that in the contemporary in-
rion was acknowledged,and in 1977it attained dustrial world consumer sovereignty is re-
"respectable status." Although the recogni- placed to high degree by producer sovereign-
tion may have come a little late, it is still ty. As with most models, coexistent reality
germane. But as another instance of irony, it does not conform at all closely; and an indis-
would have been a bit easier to base produc- criminate welfare-judgment transfer from the
tion costs on nonfarminputs in the late 1950s model to the "real world" is not warranted.
and early 1960s. The price of land was less It is the primitive economy, not the indus-
volatile then. trial, that by its very nature yields differential
Buildinga productioncost into a farmprice returns. Higher return to super-marginal than
support law is relatively easy so long as only marginal land, the unearned income known as
the cost of purchasednonfarminputs need be rent, has always been disruptive. When ag-
covered---nuisanceproblems of specification riculture is organized as composite entre-
notwithstanding.To try to protect any sub- preneurial ("family farm") units, the distribu-
stantialpartof landprices is anothermatter.If tional effect is minimized because rent be-
land prices should continue to propel them- comes an indistinguishable supplement to in-
selves upward, it will be increasinglydifficult come from the operator's labor and man-
to exclude them from cost data for price sup- agement. But contrariwise, the greater the
port. Farmers' protests of inequity, not en- rent, the stronger the pressure to change the
tirely baseless, will then overrideeconomists' organizational structure and stratify the roles
objectionsbased on the contrastingeconomics for landholders and operators.
of land and nonfarminputs. The trend toward industrialization of ag-
Pure Ricardianscould remind, though, that riculture once bade to even out rents just a
marginalland yields no rent and that to fail to bit--although creating separate issues of who
include any rent in support prices discrimi- will hold the industrial (finance) capital of ag-
44 February 1978 Amer. J. Agr. Econ.

riculture and who will provide the technical It is not coincidence that the beneficence of
management. If industrialization now lags to industrializationwas given both scholarly and
any appreciable degree, both current rent and politicalexpression duringa periodin Western
its capitalization into capital gains will be of history when raw materialswere plentifuland
persistent significance. Contests will ensue to the expectation was that new discoveries
get and keep the right to receive both, and will would be more yielding than the previous
become entwined in income and estate tax ones.
rules. In other words, we will see a repetition The empty boxes authors, nevertheless, did
of episodes such as those of the mid-1970s. In not entirely overlook the extractive economy.
1972-76 real estate value in agriculture alone None of them, however, took note of the arti-
increased $233 billion, appreciably more than cle on the subject published by the U.S. ag-
the $152 billion net income from farming oper- riculturaleconomist L. C. Gray in 1914. Gray
ations including net rent paid to non-operator recognized the "indistinguishableelements"
landlords (Breimyer, 1977, pp. 47-48). And in rent from "exhausted" and "inexhausted"
the long-established income and estate taxes, properties, namely, "returnfor the coal used
as partial redistributors of income, ran into up and the return for the site value of that
almost violent opposition for the upsetting coal" (p. 468). He also pondered distinctions
reason that the capital-value inflation that gave between royalty (depreciationfund) and rent
rise to tax liability also created cash flow prob- (p. 484).
lems. Tax shelters were sought, and an ag- Claphamnoted mineralextractionas a spe-
gressive Ag-Land Fund proposal of Continen- cial case, perceptively and presciently. "Na-
tal Illinois National Bank was widely pub- ture's response to the mineris notoriouslyre-
licized (Matthews and Rhodes). luctant," he wrote. Furthermore, "A time
Whether the future brings an industrially- must come in the history of the planet, as a
based high productivity in primary agriculture, time comes in the history of every pit, when
dampening values in land and land rents, or equal successive 'doses' of resources will
whether the opposite occurs, will have a great yield small physical returns" (p. 121). But in
deal to do with both income distribution and keeping with the sanguinityof his generation
structural organization in agriculture. Claphampettifogged in terms that there were
new lodes of coal in the Transvaal and the
world was "fast becoming a single marketfor
The Economics of Raw Materials coal .... So far as our economist knows the
work is not yet begun," he concluded (pp.
We turn now to a new topic, the economics of 121-22).
extractive industries. We can readinto Clapham'sevasiveness the
Joan Robinson considered only two models, assumptionthat stock resources were neither
the primitive and industrial. The latter in turn to be given a reservation value nor allowed
derived from the exciting revelation that there any sort of private monopoly. The returnsbox
can be constant returns in the economy or into which coal miningwas to be placed would
even increasing ones, as described in the depend solely on productivity in extraction.
empty boxes trilogy. Thereupon optimism As Claphamwas optimistic about productiv-
reigned as principles of economic develop- ity, he seemed to swallow hardand put coal in
ment were formulated and espoused. the increasing returns category.
An industrial economy is a fabrication econ- So it proved to be. So it was for a long time
omy. It brings together and "works up" with coal, and with oil and metals too. There
cruder materials. The industrial model itself were, in fact, increasingreturnsin the extrac-
contains no concern for the terms of availabil- tion process. Cheap iron was used to drill for
ity of those materials. Implicitly they are re- cheap oil which in turnpowered excavation of
garded as costless except for the mechanics of more ore; and both iron and oil relieved the
extraction, itself incorporated in the industrial humanback in miningcoal. It was a nice sym-
process. That is to say, in Robinson's indus- biotic relationship.
trial model there is no room for a reservation During this comfortable interlude, few
price on the crude oil or coal or metallic ore, economists reconsidered the extractive phe-
no calculus of the anticipated price effect of nomena. Hotelling took up the issue in 1931.
progressive exhaustion of a stock material. Depressionand war distracted;and only in the
Nor, in fact, is there any occasion for rent to 1960s and 1970s, under institutionalsponsors
the better oil fields and mines. such as Resources for the Future, was the
Breimyer Agriculture's Three Economies 45

subject opened up widely. In his Fellows ad- Sharplydifferent,however, from the primi-
dress of 1977, Kelso recapitulated strains of tive model of agricultureis the element of res-
thought about the extractive economy and re- ervation price. Once progressive depletion of
monstrated his profession for its lagging inter- a resource is recognized, its price can have a
est. He chose the contemporary language of reservation component. Superficially,attach-
spaceship earth as a closed system: "All of us ing a reservationprice resemblesmonopoly. Is
must incorporate in our analytical struc- it true monopoly?If so, it is monopolywithout
?. the conception of the closed spaceship
ture necessarily havingmonopolists!Hereinwe get
earth, improvement in the well-being state the unique feature of economics of extrac-
rather than maximization of the throughput of tive industries.
the system. . . ." (p. 27). Any holder of a stock resource, however
small and powerless, who believes that the
Raw Materials and an Industrial Agriculture depletionprocess will result in a price uptrend
exceeding the rate of interest on money will
The economics of extractive industries is rele- find it advantageous, if his liquidity situation
vant to our topic because, insofar as the trend permits, to hold instead of selling. This is a
toward industrialization 'of agriculture has temporal-reservation function. Agricultural
slowed, the cause lies, as was stated above, economists will recognize the parallel with a
not in inadequate technological processes but corn farmer'sguessing whether the price out-
in higher cost of mineral raw materials, fossil look favors his holding or selling. The crucial
fuel energy above all. difference is that more corn will be produced
For the bulk of the nonfarm inputs that have next year. No replacement oil will be forth-
contributed so much to the productivity of all coming.
three economies of agriculture are derived Separatelyfrom that, if the holder or coali-
from extracted materials-the fossil fuels, tion of holders is large enough to exert mo-
mineral rock (phosphate and potash primar- nopoly power and thereby make a future
ily), and metal ores. During the glory days price rise more certain, the attractionto ration
of drawing on those resources they were currentoutput becomes greater. Thus, where
available at a price that was almost perfectly reservationpricingis appropriate,the tempta-
elastic (i.e., the quantity agriculture chose to tion to form organizedoligopoly or monopoly
use had little perceptible effect on the supply is enhanced. (The implicit present- versus fu-
price), and in real terms was constant or de- ture-monopoly calculations of OPEC heads
clining. Even the quotas on delivery of oil are interestingto simulate. Few if any data are
administered by the U.S. Department of the available as clues.)
Interior and the Texas Railroad Commission Withoutoverstatement,the returnsto a firm
were scarcely restrictive; and depletion allow- in an extractiveindustrycan potentiallybe the
ances were intended to keep the crude flowing sum of a nonmonopolizedreservationprice, a
and prices comparatively low. monopoly booster to it, and a bonus for any
Now that those palmy conditions no longer favorableness of location and accessibility.
hold and are even less likely to prevail in the The most dramatic current illustration is
future, what is the meaning for agriculture and OPECpetroleum.Reportedly,for some Saudi
particularly for the industrial part that has re- Arabian oil, easily extracted and delivered,
lied so heavily on abundance and cheapness in the reservation,monopoly, and rental compo-
basic materials? nents add to 80% or more of the cartelized
It is a new problem. Obviously, as mineral delivery price. As of 1977 it was U.S. policy
deposits become less accessible, by no stretch to compromisethe price consequence by tier-
of the imagination is the returns box the in- ing the price of domestically produced oil.
creasing one nor is it even constant. It is de- Thereby oil would be made available at the
creasing. Moreover, in all likelihood deposits average of two marginalcosts, the simplest
in some sources will be much less accessible case of average-ratherthan marginal-costing.
than in others. The extractive model then dis- So it is that the economics of a steadily
plays much in common with the primitive depleting raw materialresource base has be-
model associated with agrarian agriculture. It come an element in the economics of modern
particularly reintroduces the factor return of agriculture.It becomes that via the intermedi-
rent. At whatever high cost source a mineral ate stage of economics of the industrial
price is established, all other sources will process. If the economics of the extractive
enjoy a superior return, which is rent. sector has been neglected in the past, cir-
46 February 1978 Amer. J. Agr. Econ.

cumstances will force more attention in the the economics of extractive industries, a sub-
future. ject neglected for so many years when abun-
And as both practices and policy in agricul- dant raw materials were taken for granted.
ture respond to extant forces, irrespective of Models for primitive agrarian and industrial
whether they are given intellectual expression, economies, useful for tracing the indus-
we can expect counteracting activities to make trialization of agriculture and themselves de-
their appearance. Decision choices are ines- rived from three classic articles on "empty
capable between trying to protect agriculture's economic boxes," are inapplicable to the ex-
access to remaining supplies of nonfarm inputs tractive sector. The analysis sketched here is
of extractive origin and the opposite course of not definitive yet echoes ideas as old as those
developing anew, in imaginative variants, the of Gray of 1914, and recognizes in the pricing
native (primary) resources of agriculture. In- of extractive products an implicit temporal-
deed, whenever a farmer plows under legumes reservation price to which is added any
or dries corn with sunlight or delivers fresh monopolization element plus the rent some
vegetables to a nearby village market, he suppliers get by virtue of their advantaged lo-
counteracts by agrarian means the conse- cation.
quences of an oil supply that is not only run- The principal inference to be drawn is that
ning out but being reserved by its holders. the economics of agriculture will henceforth
comprise not only the economics of its unique
resource of the land together with that of
Resume superimposed industrial processes, but also
the economics of access to mineral raw mate-
In the foregoing pages a two-stage message rials that are constituents of industrial tech-
has been presented. The first is a reconsid- nology. The practice and politics of agriculture
eration of trends toward progressive indus- will divide two ways, between sheltering ag-
trialization of U.S. agriculture, a reconsid- riculture from the deleterious effects of more
eration prompted by a sudden increase during costly raw materials, and fostering the protec-
the 1970s in the relative price of nonfarm in- tion and development of those native re-
puts. In 1962, when the meaning of indus- sources of agriculture that sustained human-
trialization was examined, agriculture was in kind before the first phosphate was mined or
the postwar industrialization surge. Effects oil pumped, and that have never been super-
differed among agriculture's three economies, seded.
as primary crop production, still the least in-
dustrial, was overshadowed by the livestock [Received June 1977; revision accepted Sep-
enterprises and by the third economy of mar- tember 1977.]
In the decade and a half since 1962, higher
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