Theory of the Firm, or Theory of the Farm?

It would be silly to suggest that all of neoclassical economics is simply ‘wrong.’ I happen to think much of it is, sure, but some is right, and some may be merely incomplete. However there is another possibility, one I want to focus on in this post: some neoclassical theories are sound only if one defines for them a clear domain. In mathematics, a domain refers to the range of numbers one can feed into a function (what you ‘do’ to the number) and get non-nonsensical (sensical?) answers. Similar rules apply to many scientific theories: the perfect gas model is not appropriate for steam; Newton’s Laws do not apply at very large or very small levels, etc etc.

Economists do already use domains, to a limited extent. This is mostly done in theories of the firm, for which there are different ones depending on the number of firms ranging from perfect competiton to oligopoly through duopoly and finally monopoly. These theories are only supposed to hold in industries with the appropriate number of firms. However, even within these there are few criteria for distinguishing between when a firm will behave, for example, Cournot-y (varying quantity only) and/or Bertrand-y (varying price only), and hence which of these models is appropriate. So economists might still have a hard time knowing when to use which theory. DSGE has similar problems.

One area I’ve been thinking might be more sound if a specific domain – agriculture – were applied to it is marginalist economics: specifically, the much maligned perfectly competitive theory of the firm. It is perhaps no coincidence that economists are rather keen on using examples from agriculture in their parables about marginalist concepts: it’s the area where their analysis is most appropriate. There are a few reasons to believe this:

(1) Agriculture, for the most part, has perfectly divisible inputs and outputs. These are a core assumption of basic producer (and consumer theory), one which is blatantly unrealistic in most cases. However, it may be realistic in agriculture. Food and fertiliser are literally perfectly divisible, as they can always be cut down to smaller quantities; certainly at any level relevant for production. Livestock are not perfectly divisible when alive, but even so they are generally farmed in large quantities that can be continually adjusted, so perfect divisibility is at least a good approximation. Tractors, ploughs etc. are example of indivisibilities, but they are not often purchased and can be thought of as the exception to the rule, covered under ‘fixed capital.’

(2) Diminishing marginal returns. Agriculture is one of the few areas where we observe rising costs as output rises. This is partly because a major factor of production – land – is fixed. This is a standard assumption for the short run neoclassical theory of the firm; with land, it is also true in the long run, though some improvements in productivity can be made over the long run with the aforementioned fixed capital expansions.

(3) Perfect competition. Nothing better resembles the atomistic neoclassical ideal than many farmers competing on a single market with homogeneous goods like wheat, not having any discernible effect on price. With certain foods, some product differentiation (through quality) might be observed but even this would be captured by the theory of imperfect competition. Overall, a farmer is less likely to have discretion over the price of what they sell than, say, a retail store, or a lawyer.

(4) Lack of clustering or ‘QWERTY‘ effects. It is an obvious observation that firms in particular industries tend to cluster together geographically. Manufacturing requires a continuous stream of inputs, so firms at different stages in the supply chain will group together to minimise transaction costs. Manufacturing often – though not always, to be sure – requires workers with a particular set of skills, so employees and employers who best match together will tend to converge. Services, by their nature, requires face-to-face interaction, as well as even more specialised skills, so they too will group together.  In both cases the easy transfer of knowledge around clusters also helps significantly. Clusters become self-enforcing: you set up shop in a cluster because everyone else in your industry is there. QWERTY effects create emergent properties that may suggest a role for government intervention.

However, agriculture, in most cases, does not exhibit QWERTY-like characteristics. First, agriculture requires large expanses of land so it is difficult to create ‘clusters.’ Second, most agricultural labour is not particularly specialised. Third, agriculture also follows an obvious harvesting cycle, so rather than a continuous stream of inputs, there are intermittent large purchases of supplies, making transportation costs less of a systemic issue. Fourth, agriculture does not really rely on information about new trends, management, techniques or what have you; it has followed similar techniques for centuries.

The reader might note that I’ve primarily been referring to extensive agriculture, rather than intensive agriculture – market gardens and so forth. Intensive agriculture does exhibit some characteristics similar to extensive farming: it produces the same type of goods, for a start, so much of the above still applies. Nevertheless, the use of technology and organisation is greater than extensive farming, and market gardens generally take up a smaller area, which suggests that the perfectly competitive market may not be appropriate. Modern market farming might be thought as a way to ‘capitalist-ise’ agriculture, hence rendering the perfectly competitive theory inappropriate.

So what are the implications of this, for extensive farming at least? Seemingly, our conclusions will align with the conclusions of basic economic theory. Price controls and subsidies are not advised under normal circumstances or in the name of long term policy goals; a monopoly would probably not be a result of innovation and would be unlikely to be superseded by technology, and so would be unambiguously bad.

Most of all, economists will be pleased to hear that their favourite theory, comparative advantage, is more directly applicable in the world of agriculture. This is for two main reasons. First, the most commonly used rationale for why a country might have ‘comparative advantage’ – resource endowments – is obviously applicable in agriculture: nobody questions why the UK doesn’t try to create a cocoa industry, or why New Jersey doesn’t grow as much wheat as Iowa. Fertility of soil and climate are determined by powers mostly beyond humanity’s control, and we must specialise according to this. Second, unlike manufacturing, short term losses in trade will not strengthen an industry to the point where it is more efficient in the long term.

This is basically a ‘market knows best’ mantra that may not sit well with my regular readers. To be sure, there will still be exceptions where governments might intervene: environmental concerns; ensuring national self sufficiency; emergencies; basic standards. Nevertheless, the disaster that is the CAP, with absurdities such as food mountains and paying farmers not to use their fields, as well as the effect it has on farmers in poor countries, seems to illustrate that if economist’s favourite creeds hold anywhere, it’s in agriculture.

Model-wise, there will still be issues with perfect competition even in agriculture, where it is at its most relevant. I fully expect superior, more comprehensive theories than the perfectly competitive firm can be (and have been) developed for agriculture. Nevertheless, insofar as perfect competition might apply to anything at all, it seems most suited here. It would at least be a start for economists to admit certain theories have only limited application, instead of extrapolating highly restrictive models onto situations where they don’t apply.


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  1. #1 by Robert Nielsen on April 7, 2013 - 12:29 pm

    It made sense for Classical economists to describe the economy as a world dominated by small scale individuals actors with diminishing returns and little market power. That’s what England was like at the time. However, modern economists have no excuse for failing to keep up with the changes in the world.

    • #2 by Unlearningecon on April 7, 2013 - 8:48 pm

      Don’t be so harsh on the classical economists, they had more foresight than the neoclassical ones!

      Actually, industrial Britain was quite perfect competition-y. There were mostly small firms and workers were trained on the job.

      • #3 by Jon Cloke on April 8, 2013 - 9:25 am

        Classical economists may have an excuse for constructing theory based on what they saw around them, but neoclassical economists have no excuse for turning that phenomenological theorization into a nomothetic (law-making) structure through inexcusable extrapolations – aggregating those ‘small-scale actors’ into a demand curve would be one example of that. And firms in Britain may well have passed through a brief historical era in which there were very few oligopolists/ monopolists, but as we all (hopefully) know the era of conglomeration that started at the beginning of the 20th Century (give or take) rapidly put paid to that – or are we to suppose that the US Anti-Trust laws were based on a figment of government imagination? Neoclassical economics stands accused of cherry-picking certain trends and aspects from the historical development of capitalism, isolating them from their social and cultural context and then setting them in aspic, so that they compliment the rose-tinted views of the high priests of this cargo cult….

  2. #4 by K Michael Wilson 白非马 (@kmichaelwilson) on April 7, 2013 - 2:35 pm

    I think your observations hold, but maybe only in national setting. Internationally, it would be, and generally has been, devastating, especially for LCD countries, to seize upon their comparative endowments if in the process they lose self-sustainability, especially given the predatory nature of international politics and financial flows. Reaping the benefits of comparative advantage, I think, necessitates a more decent world (simplifying here). Also, even if a crop is suitable for a given area, it still might devastate the soil if produced too aggressively, usually too much fertilizer, not even fallow time, or what have you. You know better than I—how would the theory of the firm account for this dynamic? So, you mention diminishing marginal returns vis-a-vis the quantity of land, but would the theory of the firm account for diminishing marginal returns on a given quantity of land (diminishing quality of land, or something…) Maybe chalk it up as fixed capital depreciation?

    There’s a decent book, Hungry World, from which I probably am drawing my reservations. Long story short, it was something of a disaster. The question is whether these first-world scientists in the third world were blinded by the scientific method as such, or whether neoclassical economics were also leading them astray.

    Still, you’re totally right that we have to, I think, develop the ability to distinguish the baby from the bath water when it comes to neoclassical economics. A kind of baby-bath-water-processing-station…

    • #5 by Unlearningecon on April 7, 2013 - 8:45 pm

      Reaping the benefits of comparative advantage, I think, necessitates a more decent world (simplifying here).

      Perhaps this is true. We live in a world of the IMF and USA, which certainly ‘violates’ the assumptions of perfect competition, to say the least.

      You know better than I—how would the theory of the firm account for this dynamic?

      It doesn’t. In fact as far as I can see, a neoclassical profit maximising firm would exhaust all available resources as quickly as possible.

      Overall, I think perfect competition might be a good starting point in agriculture. But it doesn’t go much further than that.

      PS I added that book to the list 🙂

      • #6 by K Michael Wilson 白非马 (@kmichaelwilson) on April 8, 2013 - 7:18 pm

        I was thinking about my reply, and your reply to that. Particularly with regard to diminishing marginal returns on land. To be a little more precise — there are diminishing marginal returns, given certain historical periods, on land not simply because land is limited but because good land, arable farmland is limited, and naturally the good land is utilized first. This is why , perhaps, mountainous regions tend to be poorer, ‘marginalized.’

        It’s pretty fascinating something this abstract really does seem to have the residue of Malthus and agricultural society. The wikipedia entry on diminishing marginal returns is almost entirely agricultural examples…

        Makes me wonder what weird historical artifact diminishing marginal utility has. Coca-cola? Copulation?

      • #7 by Unlearningecon on April 9, 2013 - 11:01 am

        This was Ricardo’s contention and why he believed growth would enter a steady state as what he called ‘marginal land’ was used up.

        Makes me wonder what weird historical artifact diminishing marginal utility has. Coca-cola? Copulation?

        Prayer? Something stupid, no doubt.

  3. #8 by W on April 7, 2013 - 3:08 pm

    When the widespread victorian ethics fully supported the international (central banking) monetary arrangement over time, then the anchors of world macroeconomics were set (and at least partially, for each country´s). Then it might not be eccentric to think in terms of such a smooth distribution (at this point it would be pretty useful to recall the mathematical meaning of a distribution which, in its turn. implies a certain set of limiting processes within a topological space…take the Reals, for example) process as perfect competition.

    On one side, you have Historical Anchors on society (on an institutionally brought economy), and on the other, perfect competition approach (through, smooth distributions).

    So it seems that theories like perfect competition make sense only as a function of the strength of historical anchors over time. In accordance to this, it would be said that these theories are “long-run” ones.

    But as far as historical anchors erode (therefore eroding the foundations of monetary arrangements-.central banking for instance, “long-run” theories surely went astray.

    The agriculture case is probably (this being unnoticed as well, perhaps) one of the best analogies with the basic split of an economy into the anchors´ strengh element over time (victorian ethics, supporting central banking arrangements worldwide, in fhe former case; and a seemingly unbounded land-surface as the anchor for agriculture) and the features, either smooth on not, say, of distributions processes within.

    So at the heart of the “Domain-problem” within economics, probably laid the ignorance of the very causes of historical change (and so on).

  4. #9 by Jon Cloke on April 7, 2013 - 4:08 pm

    If you don’t think neoclassical economics is quite simply ‘wrong’, I invite you to read Jonathan Nitzan and Shimson Bichler’s 2009 book ‘Capital as Power’, where they destroy in detail the notion of capital as a measurement of utility or the social return on investment; simultaneously they debunk the Marxist idea of capital as related to the value of labour.

    This book (as important as Steve Keen’s Debunking Economics) points out quite clearly that both schools of thought and their fragmented variations start from an ideological viewpoint of what they believe capital ought to represent and then completely dismantles the complex logical and mathematical facades on which these representations of capital have been built.

    The authors then put together an unarguable theorization of capital as power, at the same time as pointing out that neoclassical economics is constructed as a moral framework depicting laws of capitalism as if they were laws of physics or nature, whilst being completely unable to define, quantify or effectively measure capital, that thing of which it purports to be the champion:

    “”My name is Friedmann, king of economics:
    Look on my works, ye Mighty, and despair!”
    Nothing beside remains. Round the decay
    Of that neoclassical debris, boundless and bare
    The lone and level sands stretch far away

    • #10 by Unlearningecon on April 7, 2013 - 8:55 pm

      Capital is an important issue and commenter Dan recently noted what you’re saying: even heterodox and marxist economics don’t really know what to do with it. That book is actually already on my wish list so I will read it sooner or later, sounds interesting.

      • #11 by Jon Cloke on April 8, 2013 - 9:14 am

        The nature of capital is surely *the* issue, in an intellectual system such as neoclassical economics which has as its’ purpose the explication of the fundamental relationships between capital, labour and productivity, based on a universally-supposed but fundamentally flawed understanding of capital?

      • #12 by Dan on April 12, 2013 - 11:21 pm

        Its always nice when you hear someone else say something that you thought up before. It makes me think that maybe I’m not crazy after all. 🙂

    • #13 by Cameron Murray (@Rumplestatskin) on April 7, 2013 - 11:15 pm

      Consumer theory has much ‘right’ – wealth effects, substitution etc. But the theory of the firm, the market model etc is, as UE suggest, only applicable is a particular domain that is a tiny fraction of the market economy.

  5. #14 by Min on April 7, 2013 - 6:04 pm

    I would like to hear your thoughts on the Dust Bowl and the years just before it. Particularly with regard to the assumption that for farmers to assume that other farmers like them would not do as they themselves would do is rational. (Farmers did act as if they made that assumption, to their detriment.)

    • #15 by Unlearningecon on April 7, 2013 - 8:40 pm

      I admit I’m not familiar enough with it to instinctively know what you’re talking about, particularly wrt the assumptions Are you talking about storing for emergencies?

      • #16 by Min on April 9, 2013 - 4:22 pm

        Thanks for the response. 🙂

        Sorry to be so late in reply. I subscribe to comments, but I guess I missed it. 😦

        Here is what I had in mind. (Almost verbatim from a post of mine on WCI last November.)

        I watched Ken Burns’s documentary on the Dustbowl the other night. I found the following narrative interesting from an economic point of view.

        At first, the market crash and Great Depression were hardly felt in the Great Plains. Then one year (I don’t remember exactly when) wheat prices dropped significantly, about 30% as I recall. In response the farmers planted more wheat and had a bumper crop. Predictably, the bottom dropped out of the market and wheat was piled up, unsold. In the documentary one person commented that the answer was always to produce more. If the price went up, produce more. If the price went down, produce more.

      • #17 by Unlearningecon on April 10, 2013 - 11:42 am

        That’s interesting. Reminds me of when I spoke to a shop keeper and he said if demand goes down people all raise their prices to recoup the losses.

        I’ve been trying to figure out a model that is less linear than supply and demand and captures behaviour like this, but I wouldn’t hold mine (or anyone’s breath).

      • #18 by Jon Cloke on April 10, 2013 - 12:27 pm

        You forget also the land conservation measures that farmers themselves forced on other farmers and the role of the government in helping to try and ‘fix’ the soil through insisting on methods such as terracing and laying fallow. It might make for an interesting mental exercise to talk about these issues as if they really were some real-life apparition of a neoclassical abstract, but it tells you absolutely nothing about what really goes on and how farmers maker decisions. Remember, neoclassical theories are a cargo cult intended to provide a moral framework for capitalism, a kind of economic scientology, if you will – they have nothing at all to say about the real world…

      • #19 by Min on April 9, 2013 - 4:58 pm

        About the farmers’ assumptions. If, as a farmer when prices dropped 30%, my first reaction was, then I need to sell more wheat, my second reaction would have been, what if everybody plants more wheat? That seems rational to me. Obviously, not too many wheat farmers thought that way, or they did, but saw no alternative.

      • #20 by Min on April 10, 2013 - 5:33 pm

        @ Jon Cloke

        This happened before the adoption of those conservation practices. Which agribusiness dispensed with long ago, anyway. I think that there is a high probability of another dustbowl by 2050.

  6. #21 by Josie on April 7, 2013 - 7:51 pm

    Unlearning, if you are going to say things like this then you should be aware of the history of free market agricultural reforms in sub-Saharan Africa over the past 30 years. I don’t agree with the CAP either, but it always seems to me like free market propaganda when people talk about the effects of the CAP on farmers in poor countries, without mentioning the other side to the story.

    In the 1970s many sub-Saharan countries had left wing governments and used to subsidise things like agricultural inputs, seed, farmer training, veterinary services. Food was bought by government agencies and subject to price controls. After the IMF and World Bank sunk their teeth into the continent all this was stripped away at their behest. Everything was “liberalised”.

    The immediate result was food riots as the price of food shot up. The long term results are, as ever, controversial, as you can always say that something happened despite, not because of, the reforms. But yields have definitely fallen dramatically, and poverty and hunger increased. This is an excellent report on it all:

    • #22 by Unlearningecon on April 7, 2013 - 8:25 pm

      I agree but to what extent is this problem due to the fact that developed world farmers receive massive subsidies etc? Or speculation?

      Don’t get me wrong, I’m the last person to advocate liberalisation in an imperfect world and disregard political realities. Obviously the state control should have stayed.

      Anyway, as Michael Wilson commented, perhaps my analysis only applies at a national level.

  7. #23 by Jim Whitman on April 8, 2013 - 4:57 am

    I experienced Agriculture around Adelaide recently. Mine was not an agricultural study, but agriculture certainly scaled up at some time, evidenced by some ‘hamlets’ disappearing back into the earth, and a fall off in population & traditional purpose in some towns. There also seemed a uniformity in the grain product farmed. That’s not to mention also the huge scale of grape growing. This is just an example of how maybe not competition but price setting is most likely to be at work if farmers or their banks act ‘rationally’. You mention emergence – I read about suicide in Cumbria catching on when farms failed – a strong marker perhaps for emergence playing a strong part amongst apparently atomised firms. In New Zealand there has been work on creating a market in clean water credits amongst farmers – for me that’s not neo lib but cooperation and the active improvement of the commons. There has also long been a money/banking dimension to agriculture with trade also making the dynamics of agriculture far from atomised. Agricultural labour is historically badly paid and the cornerstone of inequality between rural and urban areas (I read James Galbraith’s book on inequality and his discussion of the modern relevance of Kuznets). Can an argument be made for agricultural work as always having some highly skilled features – I read a study of 19thC Kentish agricultural work and life. Finally (for me at the moment) has agriculture ever, over history, not been the subject of some level of intervention by powerful interests? But these are all sketchy socio historical feelers I am putting out.

  8. #24 by Olle J. on April 8, 2013 - 7:46 am

    A small note: A colleague of mine, who have studiet markets for wheat, claims that wheat in fact is not a homogenous product (he has used a Bernanke-quote claiming this as a straw man). It takes quite a lot of innovation (plant breeding etc) for farms in one part of the world to be able to have the same quality as the best quality wheat on the world market. Of course, an economist looking at the big picture might argue that such details are not important.

    • #25 by Unlearningecon on April 8, 2013 - 3:25 pm

      Interesting. I sort of made this post with the intention of being disproved.

      However, as I noted, the theory of imperfect competition may cover situations like this.

  9. #26 by Luis Enrique on April 8, 2013 - 1:55 pm

    I know it wouldn’t have helped your catchy title, but the theory of the firm is a different thing from theories about market structure which is really what you’re talking about.

    I don’t know what to make of this argument. Here’s a truism: the relevant domain for theory X is whatever domain theory X is relevant for. I think economists already think about where and when their theories are applicable and where they aren’t. You can always say a model isn’t appropriate for the task in hand, and economists already think of models as things that are useful in certain settings but not in others.

    [n.b. ain’t increasing marginal costs is usually a short run assumption, assuming fixed capital? The intro micro text book I used differentiated between long run and short run supply curves]

    • #27 by Unlearningecon on April 8, 2013 - 3:24 pm

      As I said, economists do have some domain-talk but it’s often not strictly defined enough.

      Here’s a truism: the relevant domain for theory X is whatever domain theory X is relevant for.

      It is something of a judgment call. Like all theories, you need to look at both internal mechanics and empirical relevance to determine where it applies.

      [n.b. ain’t increasing marginal costs is usually a short run assumption, assuming fixed capital? The intro micro text book I used differentiated between long run and short run supply curves]

      Sure, but in the real world it generally isn’t true in the short run because businesses have spare capacity which they can utilise at a similar marginal cost to their existing capacity.

  10. #28 by yorksranter on April 8, 2013 - 11:12 pm

    It is an obvious observation that firms in particular industries tend to cluster together geographically

    Agriculture does this; think of wheat in East Anglia, sheep in the Yorkshire Dales, irrigated fruit’n’veg in the Inland Empire of California. Land is not of uniform quality, and sector-specific capital and skills accumulate where the land needs them. That done, if you have the tools and people, to some extent you can change the land. so you’d certainly expect clustering.

    agriculture does not really rely on information about new trends, management, techniques or what have you

    well, it does. it’s experienced quite a few big technological breakthroughs, and what’s more, the classic literature on the diffusion of innovations through society is based on fieldwork among farmers. Frank Bass of curve fame was an agricultural sociologist.

    The reason why this work was done, though, was because FDR’s administration thought it was necessary for government to do basic research in agriculture and to actively promote new technologies into the rural world, as a way of recovering from the Great Depression, and later because international aid agencies tried to do the same in poorer countries in order to prevent starvation and relieve poverty, and also because the CIA saw improving agricultural productivity as a way of fighting communism*. all three efforts worked, oddly enough.

    *I wonder if there’s a Soviet literature on innovation diffusion, based on the work of KGB-funded agronomists? The Bass curve was independently discovered in several different contexts, notably medical sociology, fashion, criminology, and marketing.

    • #29 by Unlearningecon on April 9, 2013 - 10:50 am

      Agriculture does this;

      That did occur to me but I think it’s a different type of cluster, determined not by information/worker/supply exchange and a subsequent positive feed back loop but by – as you say – natural resources. In this sense the role for government policy does not apply as it is difficult or impossible to engineer a cluster in agriculture.

      well, it does. it’s experienced quite a few big technological breakthroughs, and what’s more, the classic literature on the diffusion of innovations through society is based on fieldwork among farmers.

      Fair point. But what I was essentially saying, though I didn’t express it well, is that the agricultural industry is less characterised by ‘creative destruction.’

  11. #30 by Ayn Rant on April 12, 2013 - 6:24 am

    You have made a big mistake! Farming is not neoclassical perfect market yada yada at all. Farming has big negative externalities! Ecological externalities!

    The dust bowl was mentioned earlier: that was a major ecological disaster caused by negative externalities in farming. That’s just one example. When we are talking about farming, we are talking about potentially destroying entire species, we are talking about monocultures which can create the potential for rapid spread of infection plant disease, and so on.

    Agriculture requires ecological policy, period.

    • #31 by Unlearningecon on April 13, 2013 - 9:40 pm

      I agree. But presuming environmental policy is sufficient, is there not some truth to what I said?

  12. #32 by Dan on April 12, 2013 - 11:44 pm

    Agriculture is in my opinion the root of human economies and the origin of the surplus. Before agriculture, humans spent most of their time hunting and gathering food. Once we started farming, humans had extra “energy” that had formally been devoted to finding food that could now be devoted to other activities.

    Furthermore, when you are entirely reliant on farming for food, it encourages surplus production. Farmers needed to save enough grain each season to use as seeds for next year’s growing seasons. This meant they were consciously growing more plants than what they needed just to eat that year. So they are already thinking about future production and resources well into the future, making plans far further in advance than their hunter gatherer ancestors. Now imagine a herd of elk breaks into their field and eats some of their crop one year, and the next year grasshoppers ravage 1/3 of their crops, and mold takes out half of their harvest the year after that. Farmers learned quickly that nature was unpredictable, and as a result they learned to grow even more than what they needed, and grow as much as possible. And if a year went by where no elk or grasshoppers or mold showed up, they suddenly found themselves with more grain than they knew what to do with. They would have created a surplus for themselves. So they would trade it with their neighbors who did need grain, or if their neighbors already had grain than they could turn it into beer which commanded a special demand of its own because of the novelty of drunkenness. And it was from this process of surplus and what to do with it that markets emerged.

    And to touch on what Jon Cloke said earlier, I think this does play into the idea of capital. Because what is capital if not simply a transfer of “energy” into some kind of activity. Even under the theory of capital as power this holds true, because the farmers with a surplus of food had power which the people without food did not have. Starving people do whatever you ask of them if you dangle a loaf of bread in front of them. So perhaps capital is the “power” that one gains over others from having a surplus of resources to the degree that they can not only trade with others, but command them to do things in exchange for a slice of your surplus.

    And it was the process of agriculture taught man how to create a surplus in the first place. Man started farming, farming created a surplus, surplus created capital, and capital created the rat race.

    • #33 by Unlearningecon on April 13, 2013 - 9:42 pm

    • #34 by Bill Murray on April 14, 2013 - 3:55 am

      “Agriculture is in my opinion the root of human economies and the origin of the surplus. Before agriculture, humans spent most of their time hunting and gathering food. Once we started farming, humans had extra “energy” that had formally been devoted to finding food that could now be devoted to other activities. ”

      This is not correct. Hunter-gatherer societies spend 3-5 hours a day in food gathering and preparation, although this can be greater (maybe up to 7 hours 6 days a week) depending on the area. Farming generally requires longer time per day. This did help produce more quantity of food, although with less quality, which was a strategy to feed the increasing number of children brought about by the milder post-Ice Age climates and excellent food value the H-G’s experienced. The adoption of agriculture led to a considerable drop in height, which is a good proxy for health.

      So people neither had more free time nor more energy per person with the adoption of agriculture

      • #35 by Dan on April 14, 2013 - 9:44 pm

        I think you are missing my point entirely. Even if hunter gatherers had more “free time” or had more “energy” from a better diet, they still had overall lower productive output per person into activities which increased development and surplus.

        The HG lifestyle is centered around getting all your subsistence needs from natural sources, as a result they had to continuously migrate to find new food sources when old ones were exhausted. This made it so the opportunity costs of developing permanent infrastructure were greater.

        So the opportunity cost of building a permanent home was lower for a farmer than for a HG. Even if a HG spent less time finding food, they spent more time finding shelter than farmers did. The same goes with things like resource extraction, shipbuilding, and technological development in general.

        The basic point I’m saying is that Agriculture gave human long term supplies of food, far longer into the future than what HG societies could get. This meant their entire way of living was changed, people could diversify into different careers and actually invest in development and infrastructure. Humans could engage in long term projects that simply didn’t exist in HG societies. The opportunity cost went down for something with high up front costs but in the long term lowered total costs (like building a home or boat). The labor put into building an irrigation canal can be benefitting people for generations. In an HG society these kind of long term investments simply don’t exist.

        So the idea that HG people had more “free time” to devote to other activities is simply a cost illusion, sure the HG lifestyle requires fewer inputs of energy in obtaining food, but it is limiting by its very nature and increases the opportunity costs of wealth building. And when you factor in the elements of HG lifestyle creating higher opportunity costs for innovation and investments in efficiency, you get a society that has overall less horsepower, aka “energy”.

        So yes, farming did give humans greater productivity (aka energy per person) than the hunter gatherer lifestyle did.

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