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May 18, 2008

Maybe it raised inefficiency

In the 1930s, after the Depression wiped out so many small farmers, the federal government introduced "price supports," which lifted the return to farmers on basic crops. Higher prices got the attention of innovators in farm equipment, seeds and other so-called inputs.

Sally Clarke, a historian at the University of Texas, has found in a study that higher prices enabled Midwest farmers, then reliant chiefly on animal-drawn plows, to justify investment in tractors, raising efficiency.


A Brighter Side of High Prices

When the government subsidizes unprofitable producers and they produce more, that may be productive (output per worker) but why would that be more efficient? If the farms would have been most profitably operated with tractors, they would have had them unless farmers were highly risk averse or capital constrained. Given the life of a farmer, risk aversion doesn't work. Risk averse people, even in the beginning of the 20th century, could get factory jobs in the US. If they were capital constrained, how did they buy the tractors later?

The real story is that these farms couldn't justify the capital investment before is because they were unprofitable at the unsubsidized prices and profitable at the subsidized prices. And then their output goes up. So even though the output goes up, both the excess capital expenditure and the subsidy are inefficiencies, not efficiencies.

Posted by OneEyedMan at May 18, 2008 8:47 AM

Comments

You've neglected the possibility (probability) that the higher prices (and thus, profits) relieved them of the capital constraints they had been under previously, so that they were able to go out and buy those tractors after a year or two of price supports.

Posted by: REggert [TypeKey Profile Page] at May 20, 2008 12:30 PM

That's true. However, I have hard time believing that farms with borrowing constrained. The reason why all those farmers lost their farms is that they could make the payments on the money they borrowed against their farms. Hell, if the farming equipment was so fabulous that it made unprofitable farms profitable, why wouldn't the manufacturers of farming equipment rent them to farmers instead of sell them?

Posted by: TheOneEyedMan [TypeKey Profile Page] at May 20, 2008 3:16 PM

I believe they were. Through the 1930's, a significant number (around 1/3 in some states, according to Wikipedia) of farmers were sharecroppers who needed to borrow money (from their landlords at exhorbitant rates) just to buy seed and fertilizer (from their landlords), which makes it unlikely that they had sufficient credit to additionally buy (or rent) expensive equipment such as tractors. Of course, the reforms that introduced price supports coincided with those that effectively abolished sharecropping, so it is difficult to separate the effects of each from those of the other to determine what impact price supports had on the ability of farmers to invest in equipment.

Posted by: REggert [TypeKey Profile Page] at May 21, 2008 10:38 AM

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