RODUCTION TO THE COURSE

Agricultural
economics
is
concerned with the underlying
processes
and
contexts
that
influences the functioning and
performance of agricultural sector
and its relationship with economic
development.

It builds on the theory of sectoral labour

shifts which postulates that, while in the initial
stages of economic growth and development
economies will be basically agriculture-centred,
in the later (advanced) stages the process of
growth would be influenced by a transition of
labour from the agriculture to industry and
services.

As a consequence, the predominance of

agriculture in an economy (vis-a-vis the
proportion of agricultural workforce in the
total labour force of the economy and its
contribution to the countrys GDP) shrinks to
occupy a relatively smaller place.
While the process marks the scope for
transformation of an economy from a
developing to a developed status, the transition
itself needs to be facilitated by suitable
institutional and policy support.

Introduction
Right since the early days of modern
economics, issues relating to agricultural sector
(like key determinants of agricultural
development, role of agriculture in overall
economic transformation, etc.) have engaged the
attention of analysts.

In fact, in the history of economic ideas, one of the

most abiding concerns has been the theoretical
analyses of the transition from subsistence
agriculture to modern/capitalist agriculture with
the attendant interrelationships between the
agricultural and the non-agricultural (i.e.
industrial) sectors.
In such a dichotomisation, the scope of agriculture
includes not only the activities of the agricultural
sector
(viz.
production,
distribution,
final
consumption, etc.) but also the activities relating to its
backward-forward linkages with the non-agricultural
sectors.

The forward and backward linkages in Agriculture

Agriculture provides food, raw materials, and export
earnings for the growth of nonfarm sectors. On the other
hand, non-agricultural sectors support agriculture by
supplying inputs (fertilizers, insecticides, irrigation structures,
infrastructure and markets for farm produce).
Consequently, the deficiency in production of one sector
becomes the limiting factor for the growth of other sectors,
thereby affecting the overall growth of the economy.

The introductory block of the course on

agricultural economics, therefore, begins by
emphasising the analytical aspects of
linkages between agriculture and overall
economic development/transformation.

ALTERNATIVE APPROACHES TO ANALYSING

AGRICULTURE

The subject of agricultural economics may be grouped

under three broad analytical categories viz..,
1) Classical Political Economy (CPE) [Adam Smith,
David Ricardo, Thomas Malthus],
2) Neoclassical Economics [Veblen, Hicks, Stigler, etc]
and (The neo-classical economics, together with the
Keynesian economics, dominates what is called as the mainstream economics).
3) The Heterodox approaches. (Covers unorthodox
approaches outside the mainstream economics like:
institutional economics, Marxian economics, postKeynesian/socialist/feminist approaches, etc.)

In neoclassical economics, there is no basic

analytical difference between agriculture and
industry in terms of their respective
production conditions, nature of the markets,
etc.
They are, therefore, supposed to operate in a
context of perfectly competitive markets
similar to those in other sectors.

In sharp contrast to the neoclassical

perspective, the standard analytical frameworks
within the CPE/heterodox traditions assume
that there exist fundamental asymmetries in
overall production conditions between
agriculture and industry.
The extent of asymmetries depend on the
stage of development of an economic system
in which the nature/conditions of such
asymmetries are hypothesised differently.

Thus, the primary concern in the

CPE/heterodox approaches is on macro
economics of agriculture as distinct from
the issues of allocative efficiency of
resources (i.e. the micro economics thrust)
accorded by the neoclassical group.

AGRICULTURE
DEVELOPMENT

AND

ECONOMIC

The literature on the interrelationships between

agriculture and economic development is large. The
present section confines to some of the important
literature (in development economics) that has
evolved in the last few decades many of them
centering around the period of great depression and
the post-world war II years.

Agriculture in Economic Development

Early theoretical literature on the role of agriculture in

economic development can be traced to as far as the 18th
century in the writings of the Mercantilists and Physiocrats.
Their doctrine constitutes the beginning of agricultural
fundamentalism.

The Mercantilists Views on Trade

During the 17th and 18th centuries a group of men
(merchants, bankers, govt. officials and even
philosophers) wrote essays and pamphlets on international
trade that advocated an economic philosophy known
mercantilism.
Doctrine:
The mercantilists maintained that the way for a
nation to become rich and powerful was to export more
than it imported. The resulting export surplus would then
be settled by an inflow of bullion, or precious metals,
primarily gold and silver. The more gold and silver a
nation had, the richer and more powerful it was.

The mercantilists advocated strict

government control of all economic
activity
and
preached
economic
nationalism because they believed that a
nation could gain in trade only at the
expense of other nations (i.e trade was
zero-sum game).

Physiocrates
The Physiocrates discarded the mercantilist
belief that wealth and its increase were due to
exchange. (i.e export > imports)

It is based on three basic principles

1) Agriculture is the only productive industry and consequently the source of all
wealth for the economy.
i.e only agriculture turned out a net product over and above its cost of production
Net product = (Amount of food consumed by the workers + other factors used in
the process of production) < amount of produce raised from the ground
Hence, labour in agriculture is only productive, all the other labour employed
in industry and commerce is sterile.
2)
Beneficial role of natural order (deriving the fruits of earth as given by GOD).
According to Adam Smith, the objective of economic analysis was the understanding
of the nature and the causes of the wealth of nations.
3) Laissez-faire policy that state should not interfere with economic activity.
Free trade within a nation and between nations is required.

Adam Smith
Adam Smith considered agriculture as more productive than commerce and industry.
It is believed that his basic growth model refers only to the agricultural sector.
Food according to Smith, is the conditional factor in the growth of an economy.
In his system, technical improvement in agriculture is the pivotal point for sparking
of development in other sectors of the economy.
Suppose,
St 1
= corn output of the previous year (or wage fund)
w = average wage per worker per period
p = average labour productivity

Then,

St = St 1 (p/w)

Assumption
Whole produce of the previous year has been converted into wage fund (surplus).
But in actual practice, a proportion of this produce may be consumed by unproductive labourers.
Let (1-k) be unproductive consumption of corn from the previous year.
Then,
Corn output will be,

St = St-1(k/w).p
Growth rate of the economy (g), may be defined as
g = (St St-1)/St-1 = [(p/w) (St-1).k-St-1]/St-1

g = (p/w) k-1

So growth rate depends upon the value of p, w, k. Out of these parameters, the value
of w and k are determined institutionally. Value of p depends on the stock of capital invested
and the level of technology.
Hence, in Smiths system, technical improvement in agriculture is the pivotal point for
sparking off development in other sectors of the economy.

David Ricardo
Principles of Political Economy and Taxation (1817)
Ricardo had scientifically explained the idea of Adam Smith. Ricardo
considers agriculture as the most important sector of the economy.
The difficulty of providing food for an expanding population serves as
the focal point for his entire analysis.
Ricardo the principal problem of political economy was to determine
the laws, which regulate the distribution of commodities among the
classes of society.
In Ricardos vision of economic society, there are three major groups of
actors on the economic scene: landlords who provide land, capitalist who
provide capital and workers who provide labour.

As economy progresses by means of expansion in population and an

accumulation of capital, there arises an increasing scarcity of the most fertile
types of land.
In order to meet the rising demand for food, the successive employment of
equal units of labour and capital on poorer grades of land brings diminishing
returns in terms of agricultural output.
As poorer lands are brought under cultivation and diminishing returns occur,
competition among the capitalist for the better grades of land causes a portion
of produce of the land to be transferred to the landlords in terms of rent.
The rate of wages, according to Ricardo, is determined by the cost of
subsistence wage (food and other necessaries) if the supply of labour in the
long run is to be kept intact. This implies that, as the population grows, wage
rates in money terms must rise (because food grains prices have risen due
to the extension of margin of cultivation). This in turn squeezes the profit
rate in agriculture and manufacturing.

Lower profit rate rate of capital accumulation rate of growth

in national income
Thus, the law of diminishing returns from land dominates the
economic scene and governs the fortunes of all classes.
The shortage of land would set a limit upon the expansion of
agriculture, therefore, by implication, upon that of the economy
generally.