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
Association
Stable URL: http://www.jstor.org/stable/1240159
Accessed: 21/06/2010 04:56

Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at
http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless
you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you
may use content in the JSTOR archive only for your personal, non-commercial use.

Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at
http://www.jstor.org/action/showPublisher?publisherCode=black.

Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed
page of such transmission.

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.

Blackwell Publishing and Agricultural & Applied Economics Association are collaborating with JSTOR to
digitize, preserve and extend access to American Journal of Agricultural Economics.

http://www.jstor.org
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
Robinson.

Key words: Impactof resourcedepletion,industrialization

of agriculture,raw materials.

A half century ago three giants of economics
contended in the language of "empty eco-
nomic boxes" about the meaning of increas-
ing, constant, and decreasing returns (Clap-
ham, Pigou, Robertson).' They thereby set
in motion new channels in the evolution of
economic thought. As often happenswith pre-
cursors, they doubtless did so without pre-
science.
As also is not rare, the essence of their
argument remains with us yet. It applies to
modem agriculture,for the configurationof its
returnsfunction has much to do with produc-
tivity and other attributesof agricultureunder
changing-tightening-conditions of access to
the industrial resources on which today's
technology relies.
To give more clues in advance to how the
logic of this paperwill be developed, the three
kinds of returnshelp to explainthe differences
between the land-basedand the industrialas-
pects of modem agriculture.Those differences
were the subject of my "Three Economies"
article published in 1962. At that time indus-
trializationwas proceedingapace and increas-
ingly giving its imprintto agriculture.The es-
sence of the 1962 article will be reviewed
briefly. Since then, as also will be recounted
here, a slow reversal has begun. Indus-
trialization has begun to ebb. Although
changes are still scarcely perceptible and oc-
casionally denied, they are significant and,
some would say, ominous.
Moreover, insofar as industrial features of
agriculture have faded, the cause lies not in
industrial processes as such and definitely not
in institutional structure, but in a consid-
eration that has largely been neglected or
taken for granted; namely, the economics of
the extractive sector of the economy. An ag-
riculture that relies on petroleum, phosphate
rock, and dozens of metals is implicitly subject
to the situation in that sector. Growing scar-
city and rising cost of those materials consti-
tute a changing resource environment for ag-
riculture.
A neglected sector is not often theorized
about. The three economists referred to above
did not explain extractive economics very
well, nor have many of their successors. A few
notes on the distinctive features of the eco-
nomics of extraction, and lessons to be drawn
for our day, will conclude this article.
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
nated by agriculture.Early economic thought
had an agriculturalbias. The patternof returns
in agriculturewas not in question. It was de-
creasingor, bettersaid, eventuallydecreasing.
Still, in our day, the subtle inferences to be
drawn from factor combinationsthat eventu-
ally are less yielding occupy the minds of sa-
vants.
Increasing returns are of another genre.
Imaginativethinkerswere fascinatedby them.
They also were perplexed.Returnsthat do not
(eventually) decrease pose such annoying
questions as, "where, if ever, can equilibrium
be established?" They also offer a hopeful
note to which economists of the "dismal sci-
ence" school were unaccustomed.
EmergentTheory
Worth brief comment are the directions sub-
sequently taken by economic theory. One is
now known as industrialorganization.Sraffa
and Robinson in England and Chamberlinin
the United States took note of human in-
genuity in devising institutionalarrangements
that would make returns curves turn down
(and cost curves up), thereby improvingfa-
vored firms' chances to make a protected
profit. Theirs was the fertile explorationinto
imperfect competition. In agricultural eco-
nomics in the United States today the
foremost exponent is WillardMueller.
The other direction came to be known as
economic development. The gradual emer-
gence of this school is a story of itself. The
"essentialoptimism of increasingreturnsgave
it impetus. Progress was slowed initially by
picayune disputes over details such as the na-
ture and significance of capital goods-their
lumpinessand the meaningof length of time.2
Robertson clarified a bit by introducingthe
idea that, "given time, methods of technique
and of organisationare capable of improve-
ment" (p. 146). (Page references are to the
most convenient source of the three articles,
Stiglerand Boulding.) A few years later Allyn
Young sprung the whole subject loose from
the shackles of individual-firmthinking.In an
article significantlytitled "Economic Returns
and Economic Progress" he observed that
"the mechanismof increasingreturns [arises
2
Amazing to our era, Clapham wrote, "Economics . . . is not
concerned with geological time .. " (p. 121).
Amer. J. Agr. Econ.
from] the progressive division and specialisa-
tion of industries .... Whatis requiredis that
industrial operations be seen as an inter-
related whole. . . . In this circumstance lies the
possibility of economic progress" (p. 539).
Two RobinsonianModels
The ultimate connection between increasing
returnsand developmentwas set forthlaterby
Joan Robinson in a perceptive 1962 article.
She began by outlining two models, one en-
tirely undeveloped and the other fully devel-
oped. The firstis primitiveand grim. Mankind
subsists on whatever means are natively
available. Humaninstitutionssuch as markets
are inapplicable.If an exchange price is used it
is conventional.
The opposite model, the ultimate in devel-
opment, is exclusively capitalusing. Clapham
had initially suggested that increasingreturns
were the "economies of an organised indus-
try" (p. 123)and Robinsonnow posited a fully
organizedeconomy. In it all factors of produc-
tion are internally produced to human spec-
ification. Paradoxically,in such an economy,
viewed without time as a constraint, returns
would not be increasingbut constant. Thus is
refuted, at least conceptually, Clapham's
claim that "constant returns . . . must always
remain a mathematical point, their box an
empty one" (p. 125). Constancy of returnsis
sufficient for unbridledhope.
The Robinsonian industrial model can be
characterized also in terms of mobility and
divisibility of resources. In her model of a
totally industrialeconomy, all resources are
perfectly mobile and divisible. Mishan had
made mobility-divisibilitya reference point in
his welfare economics. I later borrowed the
coinage in interpreting structural trends in
marketingfarm products (1976). As a simple
illustration,both the location of the processing
of those products and the competitiveness of
local tradingare influenced incisively by the
mobility of materials and by their divisibil-
ity-the ease of their differentiation.
Manifestly, Robinson's industrialeconomy
of mobile and divisible resources in which ev-
erythingincludinghuman skills can be tooled
to man's instructionis a halcyon prospect. It is
the ultimate in development; it is the goal,
however remote and elusive, to which mea-
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
base for agriculturecame into view. Instances
of fear for future food supplies bordered on
panic; and they were matched, as usual, by
some iconoclasm. Both have largely dissi-
pated, beingreplacedby a near-consensusthat
industrialinputs, though not critically scarce,
will not be as cheaply availablein the futureas
in the past. Their prices may continue to in-
crease relative to farmproductprices, instead
of laggingas in earlier decades.
(Between 1960and 1976both the consumer
price index and wholesale price index fell
short of doubling, but the wholesale price of
fuels and power nearly tripled. Farmers'
prices paid for tractors and "other self-
propelledmachinery"increased 140%just be-
tween 1965 (first year of data) and 1976.)
The developments, moreover, were unex-
pected, heightening their drama. In 1962
scarcely a murmurwarned of any brakingto
continued industrialization."There is as yet
no sign of let-upin [trends]underway.Primary
production continues to become more capi-
tal-using. Livestock enterprises still threaten
to leave their traditional home. Marketing
gains ever more size and dominance" (Brei-
myer, 1962, p. 690).
Evidenceof ChangedTrends in
the Three Economies
Before evidence of post-1962trendsis consid-
ered, a reminderis in order. Seldomin historic
evolution does a trend so about-face that the
status quo ante is restored. More often, not
only is the picturemixed but changesare small
and subtle ratherthan graphic.
So it is with observations for the period
since 1962.But there are enoughpositive indi-
cators to suggest that a shift from steadily
decreasingrelativeprices of nonfarminputsto
currentand prospectiveincreases has palpable
effects.
Perhapsmost meaningfulis the alteredpub-
lic attitude toward food productivity, and to-
wardfood policy, that follows fromawareness
that industrialresourceswill not henceforthbe
so plentiful. Smaller crops in the 1970s and
disappearanceof reserve stocks of grain un-
questionablygave the farmand food economy
a rare conspicuousness. As of late 1977a new
surplus of wheat seemed to be building up.
Whetherit will dispel public attentiveness re-
mains to be seen. But an entry will have been
written in history's logbook: citizens become
Amer. J. Agr. Econ.
alert when they believe their food supplyto be
threatened.
Gross Productivity
Manifestly, a partly industrial agricultureis
sensitive to productivityin the entireeconomy
in a way thatthe older agrarianagriculturewas
not. On a common sense as well as theoretical
basis higher cost energy has macro effects re-
tardinggrowth. Rasche and Tatom allege that
recognition of the effect of energy cost has
come slowly because of the "usual practiceof
estimatingthe functionalrelationshipbetween
[aggregate]output and only labor and capital
resources," which "implicitly assumes that
changes in the stock and flow of energy re-
sources are capturedby the movementsin the
capital stock and need not be explicitly taken
into account." They take energy explicitly
into account as they enter it "as an integral
part of the productionfunction." When they
do so, estimates of the potentialoutputof the
economy are reduced several percentage
points (June 1977, p. 14 and ff.).
Relative Growth Rates of Agriculture's
Economies
When we look at agriculturealone, we natu-
rally find that although productivity slowed
somewhat in the 1970s, it is virtuallyimpossi-
ble to isolate energy-cost from climatic and
other influences. Even so, a feature of trends
since 1962has been a differentpatternof rela-
tionship between the three economies than
prevailed before. The change could hold
meaning.
Recapitulating:in 1962 the most industrial
economy, marketing, had been growing the
fastest and the least industrial, primarypro-
duction, the slowest. Recountedthen was that
in 1948the farmer'sshareof the retailvalue of
all food had been 51%, but by 1961 it was
down to 38% (Breimyer, 1962, p. 688).
In the mid-1970sthe farmer'sshare climbed
to above 40%. In 1976it was 40%. Marketing
had not continuedits gain relativeto the other
two economies; if anything, it had slipped a
bit.
More clearly to be seen, however, was a
slowdown in the livestock economy. Over
many previous decades livestock and poultry
production had prospered. It outpaced crop
production in volume and in contributionto
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.
monthly.
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
by plantingmore acres--" fence row to fence
row" (a literary figure, as many fences had
been removed).
Yet in an ironic twist, in other quartersdur-
ing the 1970s, the nonfarminput of petroleum
and other fossil fuel energy came to be recog-
nized as an instrumentof control. At the time
of the oil importembargoand allocations,with
further tightness threatened, the oil supply
was seen as an instrumentto hold farm pro-
duction up.
If need for more productionbecame at that
time a rationalefor askingto protect fossil fuel
supplies to farming,the counterpartwould be
to turnniggardlyat time of farmsurplus.If the
inflow of oil from abroad should be slowed
when farm products are in oversupply,
chances are that petitions for 100%allocation
for farmingwould not be heeded.
So long as oil enters the United States as
fast as supertankerscan deliver it, the pros-
pects are that "production control" will be
confined to setting aside land. Such a policy
was built into the 1977 farm law and applied
immediately to wheat. It bids to prove no
more effective than before.
A less contrived way to regulate farm pro-
duction is to establish quantity marketing
quotas. They allow the agrarianresource of
land and the industrialone of nonfarminputs
to be balanced more rationally, and more ef-
fectively, than is possible when only acreage
of land is controlled. Except for some types of
tobacco and a few specialty crops, quotas
have not been employed. Nor are they likely
to be soon.
In looking at productioncontrol, however,
we could easily overaggregate.Energy policy
could intrudelocally, apart from the national
scene. An instanceis energyfor high-intensive
forms of irrigation.Signs are that discrete de-
cisions will be made about allocating energy
and they will not be wholly concessionary to
agriculturalinterests. Some pump irrigation
fueled by naturalgas may be the firstcasualty.
Focus on Land
If nonfarm inputs will not be so generously
availablein the future,farminputswill climb a
notch or two on the prestige scale. They will
also attract more policy attention. Consistent
with developmentsof the time, a new appreci-
ation of the crucialrole of farmlandseemed to
appear in the 1970s. Unlike production con-
trol, its context is long run.
Amer. J. Agr. Econ.
Haltingsteps beganin the 1970stowardpro-
tecting land for farming. Differentialassess-
ment schemes were one. If they promisedlittle
lasting benefit, their announcedintent was no
less noteworthy. In 1976Secretaryof Agricul-
ture Earl Butz called for the first time for a
farmland-preservationingredient in USDA
policies. His successor, Robert Bergland,
echoed the theme.
Elasticity of Farm-level Demand
In 1962it could be said with some confidence
that farm-leveldemandfor primaryproducts,
such as grains and cotton, had become highly
inelastic.
If agricultureis now less industrialized,or if
at least some of the thrust toward indus-
trializationhas eased, is that demandnow less
inelastic?
Neither statistical studies nor logical deduc-
tion can provide an answer. Statisticalanaly-
sis will not do so because the time series for
the new periodis too short for reliableresults.
Logically, we coulrdexpect that if the market-
ing economy has revertedeven slightlytoward
selling primaryproducts instead of merchan-
dising brand-named processed ones, farm-
level demandwould show just a little less in-
elasticity than before. We can doubt this has
happened.
The snag in reaching a judgment is the na-
ture of export demand, which has grown
stronger since 1962. According to traditional
theory, world demandfor a nation's products
is elastic because the world is so big and each
nation's exports so small. The world is indeed
big, but demandis fractionatedand separated
into national clusters, each of which has its
own behavioral syndrome. Also, for some
products the United States is not a small ex-
porter. No resolutionof the demand-elasticity
issue seems possible. In today's tradingworld,
the concept of aggregateelasticity of demand
seems to be inappropriate.
The Economicsof Value Determination
Economics is concerned not only with the
physical wealth of nations but also with the
determination of value. Perhaps the latter
ranks first in importance.My 1962article im-
plicitly if not explicitly sketched a functional
relationshipbetween the value (price) of non-
farminputs and of farmresources, principally
Breimyer
land. Heavieruse in farmingof cheap nonfarm
inputs, I wrote, would lead to a "gradualsub-
ordination" of land values in agriculture(p.
691).
By parallel logic, the idea of basing com-
modity price supports on cost of production
took on some credibility. "To the extent farm
output now rests on variablenonfarmcapital
inputs, cost of productionmay at last achieve
respectable status. At the least it is not as
inapplicableas it once was" (p. 697).
It is questionablewhether land prices ever
were subordinated, gradually or otherwise;
and in any case, they did not continue so. One
complication is the mixed relationship be-
tween an input such as commercial fertilizer
and land: it is partly complementary,partly
substitutive(Breimyer, 1977,p. 22). Events of
the mid-1970s nevertheless suggest that the
perceived scarcity and higher price of inputs
such as fertilizer, pesticides, and herbicides
contributed to skyrocketing land prices. Al-
though inflation-sped,tax-subsidizedspecula-
tive demandalso was involved, the highercur-
rent and prospective prices for industrialin-
puts to agriculturehelped to send land prices
upward.The nationalindex of farmlandprices
more than doubledbetween 1972and 1977and
some regions reported substantiallyfaster es-
calation.
With regard to nonfarm inputs and cost of
production,in the 1973farmlaw the cost crite-
rion was acknowledged,and in 1977it attained
"respectable status." Although the recogni-
tion may have come a little late, it is still
germane. But as another instance of irony, it
would have been a bit easier to base produc-
tion costs on nonfarminputs in the late 1950s
and early 1960s. The price of land was less
volatile then.
Buildinga productioncost into a farmprice
support law is relatively easy so long as only
the cost of purchasednonfarminputs need be
covered---nuisanceproblems of specification
notwithstanding.To try to protect any sub-
stantialpartof landprices is anothermatter.If
land prices should continue to propel them-
selves upward, it will be increasinglydifficult
to exclude them from cost data for price sup-
port. Farmers' protests of inequity, not en-
tirely baseless, will then overrideeconomists'
objectionsbased on the contrastingeconomics
of land and nonfarminputs.
Pure Ricardianscould remind, though, that
marginalland yields no rent and that to fail to
include any rent in support prices discrimi-
Agriculture's Three Economies 43
nates against farmers of that land. Testimony
the Missouri Farmers Association offered the
U.S. Senate in connection with 1977 farm
legislation was more introspective than that of
some economists (Carpenter, p. 2).
Industrialization and Rental Return to Land
The primitive (agrarian) and industrial models
for an economy have opposite welfare implica-
tions including those of income distribution.
As set forth by Robinson and myself, the in-
dustrial model, though requiring highly sophis-
ticated management, allows production to be
subservient to consumer demand. Income-
distribution, in Robinson's words, is free of
"persistent differences between factors of
production" (p. 6). As all products are tai-
lored to consumer specification, returns are
constant and there can be no consumer or
producer surplus: no rent. Would there be
quasi-rent? Possibly but if so it would be short
term and limited to consumability of capital
goods. As I noted, the fact that the industrial
model is not fully achieved does not vitiate its
significance (1962, p. 681).
It must be admitted that although the indus-
trial model in pure form yields no differential
returns to factors, partial monopoly and guild
rules can replicate rent-like returns. Also,
Galbraith asserts that in the contemporary in-
dustrial world consumer sovereignty is re-
placed to high degree by producer sovereign-
ty. As with most models, coexistent reality
does not conform at all closely; and an indis-
criminate welfare-judgment transfer from the
model to the "real world" is not warranted.
It is the primitive economy, not the indus-
trial, that by its very nature yields differential
returns. Higher return to super-marginal than
marginal land, the unearned income known as
rent, has always been disruptive. When ag-
riculture is organized as composite entre-
preneurial ("family farm") units, the distribu-
tional effect is minimized because rent be-
comes an indistinguishable supplement to in-
come from the operator's labor and man-
agement. But contrariwise, the greater the
rent, the stronger the pressure to change the
organizational structure and stratify the roles
for landholders and operators.
The trend toward industrialization of ag-
riculture once bade to even out rents just a
bit--although creating separate issues of who
will hold the industrial (finance) capital of ag-
44 February 1978
riculture and who will provide the technical
management. If industrialization now lags to
any appreciable degree, both current rent and
its capitalization into capital gains will be of
persistent significance. Contests will ensue to
get and keep the right to receive both, and will
become entwined in income and estate tax
rules. In other words, we will see a repetition
of episodes such as those of the mid-1970s. In
1972-76 real estate value in agriculture alone
increased $233 billion, appreciably more than
the $152 billion net income from farming oper-
ations including net rent paid to non-operator
landlords (Breimyer, 1977, pp. 47-48). And
the long-established income and estate taxes,
as partial redistributors of income, ran into
almost violent opposition for the upsetting
reason that the capital-value inflation that gave
rise to tax liability also created cash flow prob-
lems. Tax shelters were sought, and an ag-
gressive Ag-Land Fund proposal of Continen-
tal Illinois National Bank was widely pub-
licized (Matthews and Rhodes).
Whether the future brings an industrially-
based high productivity in primary agriculture,
dampening values in land and land rents, or
whether the opposite occurs, will have a great
deal to do with both income distribution and
structural organization in agriculture.
The Economics of Raw Materials
We turn now to a new topic, the economics of
extractive industries.
Joan Robinson considered only two models,
the primitive and industrial. The latter in turn
derived from the exciting revelation that there
can be constant returns in the economy or
even increasing ones, as described in the
empty boxes trilogy. Thereupon optimism
reigned as principles of economic develop-
ment were formulated and espoused.
An industrial economy is a fabrication econ-
omy. It brings together and "works up"
cruder materials. The industrial model itself
contains no concern for the terms of availabil-
ity of those materials. Implicitly they are re-
garded as costless except for the mechanics of
extraction, itself incorporated in the industrial
process. That is to say, in Robinson's indus-
trial model there is no room for a reservation
price on the crude oil or coal or metallic ore,
no calculus of the anticipated price effect of
progressive exhaustion of a stock material.
Nor, in fact, is there any occasion for rent to
the better oil fields and mines.
Amer. J. Agr. Econ.
It is not coincidence that the beneficence of
industrializationwas given both scholarly and
politicalexpression duringa periodin Western
history when raw materialswere plentifuland
the expectation was that new discoveries
would be more yielding than the previous
ones.
The empty boxes authors, nevertheless, did
not entirely overlook the extractive economy.
None of them, however, took note of the arti-
cle on the subject published by the U.S. ag-
riculturaleconomist L. C. Gray in 1914. Gray
recognized the "indistinguishableelements"
in rent from "exhausted" and "inexhausted"
properties, namely, "returnfor the coal used
up and the return for the site value of that
coal" (p. 468). He also pondered distinctions
between royalty (depreciationfund) and rent
(p. 484).
Claphamnoted mineralextractionas a spe-
cial case, perceptively and presciently. "Na-
ture's response to the mineris notoriouslyre-
luctant," he wrote. Furthermore, "A time
must come in the history of the planet, as a
time comes in the history of every pit, when
equal successive 'doses' of resources will
yield small physical returns" (p. 121). But in
keeping with the sanguinityof his generation
Claphampettifogged in terms that there were
new lodes of coal in the Transvaal and the
world was "fast becoming a single marketfor
coal .... So far as our economist knows the
work is not yet begun," he concluded (pp.
121-22).
We can readinto Clapham'sevasiveness the
assumptionthat stock resources were neither
to be given a reservation value nor allowed
any sort of private monopoly. The returnsbox
into which coal miningwas to be placed would
depend solely on productivity in extraction.
As Claphamwas optimistic about productiv-
ity, he seemed to swallow hardand put coal in
the increasing returns category.
So it proved to be. So it was for a long time
with coal, and with oil and metals too. There
were, in fact, increasingreturnsin the extrac-
tion process. Cheap iron was used to drill for
cheap oil which in turnpowered excavation of
more ore; and both iron and oil relieved the
humanback in miningcoal. It was a nice sym-
biotic relationship.
During this comfortable interlude, few
economists reconsidered the extractive phe-
nomena. Hotelling took up the issue in 1931.
Depressionand war distracted;and only in the
1960s and 1970s, under institutionalsponsors
such as Resources for the Future, was the
Breimyer
subject opened up widely. In his Fellows ad-
dress of 1977, Kelso recapitulated strains of
thought about the extractive economy and re-
monstrated his profession for its lagging inter-
est. He chose the contemporary language of
spaceship earth as a closed system: "All of us
must incorporate in our analytical struc-
?. the conception of the closed spaceship
ture
earth, improvement in the well-being state
rather than maximization of the throughput of
the system. . . ." (p. 27).
Raw Materials and an Industrial Agriculture
The economics of extractive industries is rele-
vant to our topic because, insofar as the trend
toward industrialization 'of agriculture has
slowed, the cause lies, as was stated above,
not in inadequate technological processes but
in higher cost of mineral raw materials, fossil
fuel energy above all.
For the bulk of the nonfarm inputs that have
contributed so much to the productivity of all
three economies of agriculture are derived
from extracted materials-the fossil fuels,
mineral rock (phosphate and potash primar-
ily), and metal ores. During the glory days
of drawing on those resources they were
available at a price that was almost perfectly
elastic (i.e., the quantity agriculture chose to
use had little perceptible effect on the supply
price), and in real terms was constant or de-
clining. Even the quotas on delivery of oil
administered by the U.S. Department of the
Interior and the Texas Railroad Commission
were scarcely restrictive; and depletion allow-
ances were intended to keep the crude flowing
and prices comparatively low.
Now that those palmy conditions no longer
hold and are even less likely to prevail in the
future, what is the meaning for agriculture and
particularly for the industrial part that has re-
lied so heavily on abundance and cheapness in
basic materials?
It is a new problem. Obviously, as mineral
deposits become less accessible, by no stretch
of the imagination is the returns box the in-
creasing one nor is it even constant. It is de-
creasing. Moreover, in all likelihood deposits
in some sources will be much less accessible
than in others. The extractive model then dis-
plays much in common with the primitive
model associated with agrarian agriculture. It
particularly reintroduces the factor return of
rent. At whatever high cost source a mineral
price is established, all other sources will
enjoy a superior return, which is rent.
Agriculture's Three Economies 45
Sharplydifferent,however, from the primi-
tive model of agricultureis the element of res-
ervation price. Once progressive depletion of
a resource is recognized, its price can have a
reservation component. Superficially,attach-
ing a reservationprice resemblesmonopoly. Is
it true monopoly?If so, it is monopolywithout
necessarily havingmonopolists!Hereinwe get
the unique feature of economics of extrac-
tive industries.
Any holder of a stock resource, however
small and powerless, who believes that the
depletionprocess will result in a price uptrend
exceeding the rate of interest on money will
find it advantageous, if his liquidity situation
permits, to hold instead of selling. This is a
temporal-reservation function. Agricultural
economists will recognize the parallel with a
corn farmer'sguessing whether the price out-
look favors his holding or selling. The crucial
difference is that more corn will be produced
next year. No replacement oil will be forth-
coming.
Separatelyfrom that, if the holder or coali-
tion of holders is large enough to exert mo-
nopoly power and thereby make a future
price rise more certain, the attractionto ration
currentoutput becomes greater. Thus, where
reservationpricingis appropriate,the tempta-
tion to form organizedoligopoly or monopoly
is enhanced. (The implicit present- versus fu-
ture-monopoly calculations of OPEC heads
are interestingto simulate. Few if any data are
available as clues.)
Withoutoverstatement,the returnsto a firm
in an extractiveindustrycan potentiallybe the
sum of a nonmonopolizedreservationprice, a
monopoly booster to it, and a bonus for any
favorableness of location and accessibility.
The most dramatic current illustration is
OPECpetroleum.Reportedly,for some Saudi
Arabian oil, easily extracted and delivered,
the reservation,monopoly, and rental compo-
nents add to 80% or more of the cartelized
delivery price. As of 1977 it was U.S. policy
to compromisethe price consequence by tier-
ing the price of domestically produced oil.
Thereby oil would be made available at the
average of two marginalcosts, the simplest
case of average-ratherthan marginal-costing.
So it is that the economics of a steadily
depleting raw materialresource base has be-
come an element in the economics of modern
agriculture.It becomes that via the intermedi-
ate stage of economics of the industrial
process. If the economics of the extractive
sector has been neglected in the past, cir-
46 February 1978
cumstances will force more attention in the
future.
And as both practices and policy in agricul-
ture respond to extant forces, irrespective of
whether they are given intellectual expression,
we can expect counteracting activities to make
their appearance. Decision choices are ines-
capable between trying to protect agriculture's
access to remaining supplies of nonfarm inputs
of extractive origin and the opposite course of
developing anew, in imaginative variants, the
native (primary) resources of agriculture. In-
deed, whenever a farmer plows under legumes
or dries corn with sunlight or delivers fresh
vegetables to a nearby village market, he
counteracts by agrarian means the conse-
quences of an oil supply that is not only run-
ning out but being reserved by its holders.
Resume
In the foregoing pages a two-stage message
has been presented. The first is a reconsid-
eration of trends toward progressive indus-
trialization of U.S. agriculture, a reconsid-
eration prompted by a sudden increase during
the 1970s in the relative price of nonfarm in-
puts. In 1962, when the meaning of indus-
trialization was examined, agriculture was in
the postwar industrialization surge. Effects
differed among agriculture's three economies,
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-
keting.
In the decade and a half since 1962, higher
costs of nonfarm inputs have slowed the pace References
of industrialization. Some consequences have
appeared. Marketing has not outrun the other Breimyer,
two economies as it did before, and the live-
stock and poultry economy has felt some re-
straint. More clearly to be seen are an
awakened public interest in farm and food af-
fairs, a resurgence of the primary crop econ-
omy to prominence, and a newly expressed
regard for farmland as an essential and irre-
placeable resource. Whether the larger crop
harvests of 1977 and reappearance of sizable
stocks of grain will defuse some of the recent
trends remains to be seen. A major reversal
seems unlikely, for the reason that the higher
cost of nonfarm inputs in the 1970s is ascrib-
able to changes in the supply and price of raw
materials that will persist.
The second stage of analysis is directed to
Amer. J. Agr. Econ.
the economics of extractive industries, a sub-
ject neglected for so many years when abun-
dant raw materials were taken for granted.
Models for primitive agrarian and industrial
economies, useful for tracing the indus-
trialization of agriculture and themselves de-
rived from three classic articles on "empty
economic boxes," are inapplicable to the ex-
tractive sector. The analysis sketched here is
not definitive yet echoes ideas as old as those
of Gray of 1914, and recognizes in the pricing
of extractive products an implicit temporal-
reservation price to which is added any
monopolization element plus the rent some
suppliers get by virtue of their advantaged lo-
cation.
The principal inference to be drawn is that
the economics of agriculture will henceforth
comprise not only the economics of its unique
resource of the land together with that of
superimposed industrial processes, but also
the economics of access to mineral raw mate-
rials that are constituents of industrial tech-
nology. The practice and politics of agriculture
will divide two ways, between sheltering ag-
riculture from the deleterious effects of more
costly raw materials, and fostering the protec-
tion and development of those native re-
sources of agriculture that sustained human-
kind before the first phosphate was mined or
oil pumped, and that have never been super-
seded.
tember 1977.]
Harold F. Economics of the Product Markets
of Agriculture.Ames: Iowa State University Press,
1976.
-. Farm Policy: 13 Essays. Ames: Iowa State Uni-
versity Press, 1977.
"The Three Economiesof Agriculture."Amer.J.
.
Agr. Econ. 44 (1962):679-99.
Carpenter,L. C. "Statement[on] the Food and Agricul-
ture Act of 1977,Senate Bill 275, Presentedto Senate
Committee on Agricultureand Forestry, February
23, 1977."Mimeographed,MissouriFarmersAssoci-
ation, Columbia,Mo.
Clapham,J. H. "Of Empty Economic Boxes." Econ. J.
32 (1922):305-14.
Gaffney, Mason. "The Benefitsof FarmPrograms:Inci-
dence, Shifting,and Dissipation."J. Farm Econ. 47
(1965):1252-63.
Gray, L. C. "Rent Underthe Assumptionof Exhaustibil-
ity." Quart. J. Econ. 28 (1914):466-89.
Breimyer Agriculture's Three Economies 47

Hotelling, Harold. "The Economics of ExhaustibleRe- Pigou, A. C. "Empty EconomicBoxes: A Reply." Econ.
sources." J. Polit. Econ. 39 (1931):137-75. J. 32 (1922):458-65.
Kelso, M. M. "NaturalResourceEconomics:The Upset- Rasche, RobertH., and John A. Tatom. "The Effects of
ting Discipline." Amer. J. Agr. Econ. 59 (1977). the New Energy Regime on Economic Capacity,
(Page citation is to mimeographedcopy.) Production, and Prices." Federal Reserve Bank of St.
Louis Review 59 (May 1977):2-12.
Krupp,ShermanRoy. "Typesof Controversyin Econom- Robertson, D. H. "Those Empty Boxes." Econ. J. 34
ics." The Structure of Economic Science: Essays on (1924):16-30.
Methodology, ed. ShermanRoy Krupp, Englewood Robinson, Joan. "The Basic Theory of Normal Prices."
Cliffs, N.J.: Prentice-Hall,1966. Quart. J. Econ. 71 (1962):1-19.
Matthews,StephenF., and V. JamesRhodes, "Ag-Land Stigler, George J. and Kenneth E. Boulding,eds. Read-
Fund I: A FinancingProposalfor Agriculture."Eco- ings in Price Theory. Homewood, Ill.: Richard D.
nomic and Marketing Information for Missouri Ag- Irwin, 1952.
riculture.CooperativeExtensionService, University Young, Allyn A. "Increasing Returns and Economic
of Missouri, 20 (May 1977). Progress." Econ. J. 38 (1928):527-42.