Theories Explaining the Persistence of Low Resource Returns in a Growing Farm Economy

Abstract Low rates of return (defined as earnings below opportunity costs) on farm resources have long been considered a major farm problem and one justification for government commodity programs. This paper first analyzes influences (such as economic growth, inflation, and technology) that generate disequilibrium and low returns. But the major issue analyzed is why farm disequilibrium persists after an extended period of full national employment, a strong national economy, an expansion of the aggregate farm plant, and a slow growth of farm productivity in the 1960's. The fixed resource theory, the increasing returns to size theory, and the imperfect competition theory are examined to explain persistence and permanency of disequilibrium and low returns. The fixed resource theory explains low returns as a labor fixity problem and suggests that the problem is either nonexistent or temporary. The increasing returns to size theory points to an extended duration for the low returns problem as long as the large majority of farms continue to operate on uneconomic size units. Finally, the imperfect competition theory depicts low returns as virtually permanent, given the economic structures of the farm and nonfarm sectors.