1 Economics of World agriculture

L11112 & L11113

Lecture 2

Peasant Agriculture

In today’s lecture we will develop a simple model that describes the economic
characteristics of peasant (i.e. subsistence) agriculture. This economic system,
where consumers of food are also the producers of food, is a generalisation, but one
that characterises the earliest phase of development in what are now the developed
countries of the world, and to some extent also applies in the poorest developing
countries today. It is a stylised view, but one that will be helpful in explaining if,
how and why the process of economic development takes place.

As our point of departure, we need to know what we are modelling. What are the
essential ingredients that our model should accommodate. The list is by no means
exhaustive but it contains the key facts.

Characteristics of Peasant Agriculture

1. Subsistence (NOT commercial) farming predominates (80%+ of population

engaged in subsistence farming) - small family farms, high degree of self
sufficiency. Majority of output for family consumption, some cash crops.

2. Land is usually a scarce factor, quality of all factors is typically quite low.
Much farming on semi-arid lands prone to drought.

4. Low Technology system. Very little capital/machinery agro-chemicals

(primitive technology)

5. Abundant labour. Labour is the only variable factor of production. The only
factor that can be increased to produce more food, given the fixed/low supply
of land and capital.

6. Sustainable systems (few bought in inputs).

An Economic Model of Peasant Agriculture

We can now develop a simple economic model to better understand subsistence
agriculture that accommodates the basic characteristics we have described. Again,
it is a stylised view, but necessarily so to keep things as simple as possible. With
land and capital as scarce factors the only way to increase output is for the farmer
to spend most of his time working the land. Labour intensity is high. Indeed,
labour is typically the (only) abundant factor of production and the only one easily
(cheaply) expandable in the capital and land constrained environments we are
thinking about.

However, applying a lot of labour to a small amount of land and capital inevitably
means that the productivity of labour is low. Consequently, we may expect the
system to be characterised by low incomes. We can model this in a stylistic way
using standard (although possibly not yet familiar to many of you) micro economic
analysis. Consider the top panel of Figure 1.
 2 Economics of World agriculture
L11112 & L11113

Figure 1 : TP, AP and MP in Peasant Agriculture

Food Output

Subsistence Output

Maximum Output

TPL  N , K 1

Labour
L1

Food Output

implicit wage
rate of peasant farmer
at
income

APL1
Labour
L1
MPL1

We’ll assume that the farm size and access to capital (e.g. technology, machinery)
is fixed in supply, i.e. to the peasant farmer they can be taken as given and above
 3 Economics of World agriculture
L11112 & L11113

all is at a very low level (small plots of land, little if any technology). We can draw
a diagram with units of labour on the horizontal axis and food output on the vertical
axis. The Total Product of Labour TPL curve plots the response of output (food
production in our case) as we increase the amount of labour, keeping the other
factors of production fixed. Labour is the only variable factor of production. As such
we can write, TPL  f ( L, N , K ) where bars over symbols denote that land and
capital are fixed, and labour is the variable factor of production.

The first thing to realise is that the total product curve is low and shallow implying
the underlying productivity of labour is low due to the fact that labour is
combined with very small amounts of capital and land. In many real-life situations
the land may be described as ‘marginal land’ (poor soils) with poor climate and
weather (lack of rainfall) and an absence or paucity of technology (drainage,
fencing, agro-chemicals, machinery). Consequently, as we apply increasing amount
of labour to the small and fixed land and capital stock the TPL curve rises only
slowly. Note that the TPL is drawn as a curve. This is not by accident because we
want to incorporate one the first and most important economic ‘laws’ that exist,
that being the ‘law’ of diminishing marginal returns (to a factor). All this says is
that each successive unit of the variable input (labour) is less productive than the
last.1 As a result of this law, as more labour is applied, output grows but at a slower
and slower rate. Each additional unit (say week) of labour applied is less productive
than the last. At some level of labour intensity the TPL curve peaks and starts to
fall implying that labour intensity beyond this point lowers output (perhaps the
farmer is so tired, working such long hours, that he makes mistakes). The slope of
the TPL curve is thus steepest at low levels of labour intensity. Indeed under our
assumption, productivity falls from the outset implying that the first unit of labour
is the most productive and hence all subsequent units of labour spent on the farm
are successively less productive Remember this is simply because we are
assuming that the ‘law’ of diminishing marginal returns kicks-in from the outset.

Let’s now take a closer look at the productivity of labour implied by this TPL curve.
It is shallow implying that increasing labour does not increase output very much.
The average product of labour, the total product (output) divided by the units of
labour used to achieve that output level,
TP
APL 
L
can thus be derived from the information in the top panel. Although average
product has to be positive, when we plot it against labour input, it is downward
sloping owing to the ‘law’ of diminishing marginal returns.

The marginal product of labour, ( MPL ) is the contribution of each additional unit of
labour to total product. It too may be derived from the top panel of Figure 1, and
represents the slope of the TPL curve i.e. the change in total product that results
from a change (lets say, a one unit change) in labour use,
TP
MPL  .
L

1
In more complicated representations, it initially rises and then starts to fall but let’s just assume the
simplest case here.
 4 Economics of World agriculture
L11112 & L11113

Given that the total product of labour (output levels) are low because of low levels
of capital and land, then it follows that the APL and MPL are also low. Note that
by definition the APL curve must lie above the MPL curve given that diminishing
marginal returns are assumed to begin from the outset of labour use, and that
when the TPL curve reaches a maximum, MPL must be zero. (If you are not
confident about why these are so, you need to look at any introductory micro
textbook)

Let us assume further that as a subsistence farmer, your objective is to obtain a

level of food production sufficient to feed your family. We’ll discuss whether it is
rational (optimal) to do so in a moment. However, note that experience tells the
farmer that he can expect little else – even in good years. Let’s say that the amount
of food (i.e. income in our simple economic system) necessary to feed the farmer’s
family (the subsistence level of income) is given by F1 on the first panel of the
diagram. Notice that this is near the maximum achievable, given the land and
capital the farmer has at his disposal.

In order to obtain this subsistence level of output F1 the farmer has to apply L1
units of his labour. Given that this is labour level is not far away from that which
maximises output, and that the TPL curve is very flat as we approach the
maximum, the farmer must be working very long hours with low productivity at this
labour intensity. To examine the productivity in more detail, look at the second
panel on Figure 1.

First though, note that the subsistence level of food, F1 is given the red area in
the diagram (which is simply, APL  L1 ). It represents the amount of labour applied
multiplied by its average productivity and that must give the level of total product
(output). Whereas the APL tells us the average rate of return of the farmers effort
if he worked for L1 units, the marginal product of labour ( MPL ) tells us the
amount of food that each additional unit of labour is producing throughout the
range of labour input use. The L1th unit of his labour is producing food equivalent
to in value to w . Hence, we could think of this as being the ‘earning power’ of the
L1th unit of his labour. Accordingly, we could think of w as being the farmer’s
implicit wage at L1 .

Note that because the system is starved of land and capital, both the average and
marginal products of labour are low. Consequently, peasant agriculture is
characterised by very low output (implying low yields). Labour input is
however very high. In other words, subsistence agriculture is characterised by
people working very hard for very little. They remain poor.

We can now ask two questions

1. Is this behaviour desirable?
2. Is this behaviour optimal (i.e. economically efficient in the sense of using
resources optimally)?

The first question is not really in the realms of the economist since it is a
normative question, and the answer depends on your opinions and views. Since
 5 Economics of World agriculture
L11112 & L11113

the peasant farmers are poor and work hard we may reasonably conclude that this
behaviour is not ideal (in the sense of fairness, socially desirability) although we
should recognise that the answer depends on your social beliefs and preferences. If
you think that peasants should work long hours (because say it gives them
something useful to do with their time) then the situation is ‘desirable’.

However, is this behaviour optimal? Now, this question is where economists can
contribute to inform the debate. The answer does not depend on views and
perceptions (although it may depend upon certain assumptions), it simply depends
on the economic conditions that prevail.

In general, there is nothing optimal or efficient about producing the subsistence

level of income. It may be optimal, but as always in economics, the answer
depends. To be precise about optimality/efficiency we need to know what is the
farmer’s opportunity cost (the alternative foregone by being a peasant farmer)
i.e. what is the wage he could obtain by using his labour in his next best alternative
employment.

If he could obtain a wage greater than w in alternative employment he would be

better to switch in to the alternative employment. Would he reallocate all his
labour? No - only those units that earnt less than the alternative wage rate.
Referring to the diagram, as he reduces his labour input on the farm his MPL rises
(although farm income falls) so unless the alternative source of employment is
extremely highly paid he is unlikely to switch occupations altogether. In other
words, as he works less on the farm his marginal (and average) product from
farming rises – although total product is falling as we move back down the TPL
curve. At some point his marginal product on the farm will equal that obtained in
the alternative employment. At that point he is indifferent to working on either. At
all lower levels of labour his marginal product (his implicit wage on the farm) is
higher thus he prefers to work on the farm. Clearly, if the alternative wage is less
than w (his implicit wage in agriculture) then staying in farming is the optimal
thing to do. In this way, i.e. by comparing his marginal product of labour with his
opportunity cost at various input levels we can establish whether the farmer is
using his labour optimally.

It is important that you recognise that we use the MPL curve NOT the APL curve to
establish the optimality in general. This is because we are assuming that he can
make small (marginal) shifts in labour use, to or from agriculture. If however the
employment decision was an ‘either or’ decision, the marginal and average would
be the same so it wouldn't matter which was used). Since we assume that marginal
changes to labour input in each occupation are possible, it is the MPL that is the
relevant concept in general).

So, returning to our question, is farming at the subsistence level efficient (or
optimal)? As an uneducated farmer his opportunity cost would be as a landless
labourer or some even more menial job, such as running messages or shoe-shining,
collecting firewood, etc. The wage would be very low and probably below that
earned on his own farm at L1 , i.e. w . For simplicity let’s just say that w also
corresponds to the wage rate in his next best alternative occupation, as a labourer
on someone else’s farm. So, although incomes in peasant farming are very low,
farmers in such circumstances are probably applying the optimal amount of labour
 6 Economics of World agriculture
L11112 & L11113

to their farms. Despite being a possibly undesirable outcome, farmers are

optimising, at least given the constraints they are faced with.

Indeed, many studies have sought to ascertain whether peasant are acting as
optimising agents (despite being unable to read or write) and the answer is usually
‘yes’, given the constraints.