Gunthrop's Farm Economics -Reply
ssikerd@muccmail.missouri.edu
Fri, 04 Sep 98 11:50:27 CST
Greg;
I think you have raised some issues of significant importance to the
economics of sustainability. First, as an economist who has spent a
good part of his career teaching risk management, I think your
explanation of the risk reducing impact of low-input farming is sound.
The concept is quite similar to that of "financial risks" or
"leverage" in financial management. The greater the equity relative
to debt, the lower the financial risks. The greater the reliance on
"owned resources" relative to purchased inputs, the lower the cash
flow risks.
With respect to opportunity costs, I know that economists like to
assign "opportunity costs" to everything. "Opportunity costs" is a
valid economic concept in theory but is often misused in practice. In
theory an operation can be said to be "profitable" only if its
productive resources -- land, labor, capital, and management -- are
utilized in their highest valued use. Theoretically, opportunity cost
represents this highest valued use -- the opportunity foregone by
keeping resources in their current use. So, in theory, there must be
some return over total opportunity cost in order for an operation to
be profitable. (There are a dozen different concepts of profit, but
this one is commonly used among economists.)
The problem comes in assigning values to land, labor, capital, and
management -- both in determining their appropriate opportunity
costs and their true value in current use.
First, market values are commonly used in assigning opportunity costs.
So the market rental value for similar land becomes the opportunity
costs of land used on a particular farm, the going farm wage rate
becomes the opportunity cost for labor, bank interest rates represent
opportunity costs of capital, and competitive salaries are used in
calculating opportunity costs of management. Major problems arise in
assigning such opportunity costs in typical diversified family farming
operations because most of the resources on such farms are not readily
marketable -- except for long run "get out of business" versus "stay in
business" type decisions -- as you indicated. For decisions such as
using or not using a few acres of marginal land in a give year, working
more or fewer hours at various seasons of the year, or using a piece of
equipment another year or two, realistic markets, and thus realistic
market values, do not exist.
For larger specialized operations, using market values make sense. A
quarter section of land can be rented out, full-time workers can find
other jobs, and a few thousand dollars of surplus capital can be used
to buy a CD. But for diversified family operations, the use of "market
values" as opportunity costs for owned land, operator and family labor
and management, and equity capital may seriously "over-state" the true
opportunity costs. These resources simply cannot be marketed at going
market rates for rent, wage, salaries, and interest.
In addition, every decision that has economic consequences for a family
farm also has consequences for the ethical and social quality of life
of the family. A family farm is a living entity that includes the
family as well as the farm. Any economic decision of consequence is
inherently an ethical decision that will affect relationships within
the family and between the family and larger community.
Decisions that enhance the economic performance of a family farm must
be accompanied by simultaneous adjustments in the ecological and social
dimensions of the farm/family to accommodate the change. The
"unanticipated" consequences of economic decisions on the ecological
and social dimensions of a farm typically are negative. Thus, apparent
opportunities to enhance the economic performance of a farm may
seriously overstate potential total benefits -- considering economic,
social, and ecological consequences. Non-human farms (non-family
corporate farms) simply ignore the negative social and ecological
consequences of their economic decisions -- if allowed to do so. But
for family farms, conventional economics may seriously overvalue
alternative uses, and thus, seriously overstate the costs of
opportunities foregone.
Conversely, conventional economics may seriously "undervalue" resources
in their current use. In conventional economic analyses a farm is
dissected into its individual components -- enterprises, resources,
inputs, etc. -- under the assumption that the whole in nothing more
than the sum of its parts. A specific resource -- land, labor,
capital, or management -- is assumed to have no value beyond its
contribution to a specific enterprise.
There is no formal process to account for the interdependence among the
components in forming a viable whole. But, in family farming
operations replacing family labor with hired labor for one enterprise,
for example, may have significant consequences for the whole farm
operation, borrowing money to finance expansion of one enterprise may
change the total farm financial picture, and renting out a parcel of
land rather than farming it may significantly change utilization
efficiency of labor, management, and capital resources for the farm as
a whole. A specific configuration of resource use on a diversified
family farm as a unit, as a whole, may have value well in excess of the
sum of their economic values within the various enterprises.
Thus, productive resources (land, labor, capital, and management) when
employed on diversified family farms tend to have lower opportunity
costs and higher current use values than conventional economic analyses
would imply. It is quite logical then, that such farms would rely more
on their internal resources and less on external inputs than would a
larger, specialized operation that is driven by bottom-line
conventional economics. It is also quite logical that family farming
operations could and would persist under conditions that conventional
economic analyses would deem to be "unprofitable."
The economics of sustainability is a different economics leading to
different decisions and different results than those defined as
"reasonable and logical" by conventional economic theory.
John Ikerd
______________________________ Reply Separator _________________________________
Subject: Re: How to get rich selling watermelons -Reply
Author: "Greg & Lei Gunthorp" <hey4hogs@kuntrynet.com> at MU-Internet
Date: 9/3/98 11:05 AM
Bob,
I have one problem with all this talk about not including opportunity
costs and farm labor. And I do have a degree in Agriculture Economics/Farm
Management. (Thats not worth the piece of paper on the wall, but that is a
whole different story.)
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