Digitized by the Internet Archive in 2017 with funding from University of Illinois Urbana-Champaign Alternates https://archive.org/details/syllabusoflecturOOtayl il 4 SYLLABUS OF LECTURES ON AGRICULTURAL ECONOMICS BY HENRY C. TAYLOR, M. S. Agr., Ph. D. Instructor in Commerce in the University of Wisconsin. PART I. ECONOMICS OF FARM MANAGEMENT. MADISON, WIS. 1903. : CANTWELL PRESS, MADISON, WIS. *-a \ cA 5 PREFACE. Or 1 ' 1 Y Four weeks ago the author of this syllabus was asked to give a course of fourteen lectures on Agricultural Economics in the College of Agriculture of the University of Wisconsin. The lectures were intended primarily for the “ second year students” in the 11 short course. ’ 7 In order that the students might have something definite to take away with them, we first thought of mimeographing a brief outline of the lectures. It was found, however, to be cheaper to have the lecture notes printed. This explains why this syllabus has been printed in its present form. The writer makes no pretensions of having presented here a com¬ plete outline of the subject. The needs of the students and the material which the author had in hand determined the character of the course of lectures. Practically all of the time has been given to private agricultural economics because the subjects in¬ cluded under this head are of more immediate interest to the farmer. The author hopes to find time to work this subject out much more completely in the near future. The great haste with which this syllabus has been written and printed has made it impossible to find and remove all the errors which have crept in. Henry C. Taylor. Madison , Wis., January , 1903 TABLE OF CONTENTS Introduction. Part I. — Economics of Farm Management. Chapter. Page. I. Introductory.10 II. Crops and Field Systems.14 III. Crops and Field Systems, European and American . 22 IY. Intensity of Culture. 28 Y. Productivity.40 YI. The Size of Farms.44 YII. Prices of Agricultural Products.48 YIII. Distribution of Gross Returns.56 IX. The Price of Land.68 X. Land Tenure in the United States.72 XI. The Means of Acquiring Land Ownership .... 78 XII. The Renting of Land.92 Agricultural Economics. INTRODUCTION. 1. When man is hungry he desires food. When he is cold he desires clothing and shelter. These desires impel him to exert himself to obtain food and clothing. The soil is cultivated to produce wheat which is manufactured into bread, and con¬ sumed to satisfy the desire for food. Wool and cotton are produced and made into clothing. Wood and stone are con¬ verted into houses. Thus man works to satisfy his wants. This work is economic activity. The products of such work are economic goods. The final purpose of all economic activity and of all economic goods is the satisfaction of human wants. The economist tries to formulate the principles which underlie this economic activity of man. 2 . The time was when each family tried to produce for itself all the food, clothing, and shelter it desired. Each man was a farmer and a manufacturer. But in modern times men have learned that a given amount of work will produce more goods and hence satisfy more wants when each man devotes himself exclusively to some one line of economic activity. That is when each man produces only that which he can produce to best advantage and exchanges his products for whatever he most desires of the products of others, 3 . This specialization in production is more productive because (1) some parts of the world are especially well suited for the production of certain crops, (2) some men are especially suited for performing one kind of work, others can best do some¬ thing else, and (3) any man can accomplish more when he devotes all of his time and attention to one kind of work than when he changes about from one thing to another. See Ely’s Outlines of Economics, pp. 114-116 on the “ Division of Labor.” 4 . This is the reason we have different classes of occupations such as agriculture, manufacture, and commerce. 4 Agricultural Economics. Table I. —Table showing the proportion engaged in each class of occupations of all persons engaged in gainful pursuits in the United States. Classes of Occupations. 1900. Per Cent. 1890. Per Cent. 1880. Per Cent. Agriculture. 35.7 37.7 44.3 Professional service. 4.3 4.1 3.5 Domestic and personal service. 19.2 18.6 19.7 Trade and transportation. 16.4 14.6 10.7 Manufactures. 24.4 25.0 21.8 The percentage of those engaged in agriculture has greatly decreased and the percentage of those engaged in other pursuits has increased, yet we produce a larger surplus of agricultural products than ever before. So it is certain that our agriculture is able to support a much larger population than is found at present in the United States. 5 . We are here interested primarily in agriculture. But we are also interested in manufacture and commerce, because of their influence upon the price of farm products and the price the farmer will have to pay for the goods he purchases. For example in England where such a large share of the population is engaged in manufactures, all kinds of farm produce sell very high compared with prices in the Dakotas, where there is no good market close at hand. The difference in the price of wheat in England and in the Dakotas must be as great, at least, as the cost of sending wheat from the Dakotas to England. The price of perishable goods is much higher in England than in a strictly agricultural country, because the whole supply must come from the local farmers, and because the manufacturers who consume such products are many, and the farmers who produce them are few. The demand for these products is great in pro¬ portion to the home supply, and hence prices are high. 6 Agricultural Economics. Table II.— Proportion of all persons engaged in agriculture , manu¬ facture and commerce, who are engaged in each of these three classes of occupations, in various countries. Country. Date. Percentage in Agr. Percentage in Commerce. Percentage in Mfg. Hungary. 1890 78.7 5.2 16.1 Sweden. 1890 72.1 7.8 20.1 Norway. 1891 58.9 14.0 27.1 France. 1891 49.2 16.5 34.3 United States. 1900 46.7 21.4 31.9 Germany. 1895 43.8 12.4 43.8 Belgium. 1890 31.6 15.9 52.5 England and Wales. 1891 13.2 13.6 73.2 6. Agricultural economics treats of those principles which underlie the prosperity of the farmer and of all other classes in so far as they are dependent upon agriculture. The farmer is prosperous when he is rapidly accumulating means of satisfying his wants. 7 . In ancient times, before agriculture and manufacture were separated and before commerce was developed, the farmer was most prosperous who could produce the greatest variety of pro¬ ducts in sufficient quantities to satisfy the wants of his household. In modern times, however, the farmer produces primarily for the market and purchases upon the market nearly everything he consumes. His prosperity is now measured by his power to purchase the articles desired. This purchasing power is deter¬ mined by his capacity [and opportunity to win a profit. The larger this profit the greater the farmer’s purchasing power and the greater his degree of prosperity. 8 . The thoughtful farmer seeks to win the largest net return. The government regulates by means of laws and institutions the conditions under which the farmer must work. Government, through the Department of Agriculture introduces new crops, im¬ proves roads, publishes bulletins, encourages education, and in many other ways seeks to improve the agriculture of the country. 9. Agricultural economics is divided into two parts. Part one takes the farmer’s point of view and treats of those economic 8 Agricultural Economics. principles which underlie the management of a farm in such a way as will make it yield the largest net return. Part two takes the point of view of the nation as a whole and treats of those economic principles which should guide the statesman in his attempts to regulate and improve the agriculture of the country. (O. In part one, we view agriculture from the standpoint of private interests; in part two from the stand point of public interest or general welfare. Part one may be called private agricultural economics, or the economics of farm management; part two, public agricultural economics, or agrarian policy. Bead Ely’s Outlines of Economics, Chapter XI. PART I. Economics of Farm Management. . CHAPTER I. Introductory. 1. How to win the largest net return, is the one question about which center all other questions in the economics of farm management. 2 . The farmer must use natural agents such as heat, light, air, moisture and the soil. When one acquires land he acquires the use of all these natural agents, so economists include them all under the one term land. 3 . The farmer must use horses and other livestock, tools and machines, and general farm supplies. These, so far as they are used for productive purposes, are classed together as capital goods , and when spoken of abstractly, as capital. 4 . But to apply capital to land man must do his part. The work required for this, whether performed by the farmer himself or by hired men is called labor. But for our purposes, and for the sake of simplicity we shall consider that the labor is performed by the farmer and his family. 5 . The farmer employs capital goods upon land in the production of plants and animals. A knowledge of plant culture and of the art of breeding and feeding live stock are of primary importance, but a farmer may understand these subjects perfectly and yet not understand how to manage a farm in the most profitable manner. 6. The economics of farm management treats of those principles which underlie the employment of capital upon land 12 A gricultural Economics. in such a manner as to win tie largest net return. By the farmer’s net return is meant that share of the gross returns of the farm which is left to the farmer after replacing all capital goods consumed, counting interest at the current rate upon the capital value of all capital goods employed, and paying rent for the land, or, in case he owns the land, counting the sum for which he could rent the land. 7 . Thus we see the farmer’s income may be made up of three parts: (1) The net return or the sum which he can earn as a farmer. (2) Interest upon his invested capital. (3) Bent for the land he owns. Interest and rent are simply normal returns upon the capital value of his land and capital goods, and might be received just as well if he were a banker instead of a farmer. But the farmer’s net return depends upon his capacity to organize and operate a farm. Bead Frhr. von der Goltz’s, Landwirtschaftliche Betriebslehre. 14 Agricultural Economics. CHAPTER II. Crops and Field Systems. 1. The first question the farmer has to settle is, “Which crops shall I produce in order to win the largest net return?” Pliny wrote that he was a poor husbandman indeed who would buy anything which he could produce on his own estate; but Thaer * taught his generation to produce nothing which could more cheaply be purchased upon the market. Pliny was writing for a time when the self-sufficient economy of the villa prevailed and when the goal of the husbandman was the direct satisfaction of all the wants of his household. Thaer lived at a time when commerce had so developed and industry had become so diversi¬ fied that farmers produced primarily for the market. Thaer stated the most fundamental principle of modern agriculture when he said that each farm should be operated in such a way as will make it yield the largest net return through a long term of years, and that only those crops which will help in the pro¬ duction of this largest net return should be included in the field system, all others should be excluded. 2 . It is a commonplace fact that sunshine and rainfall deter¬ mine in a general way which plants may thrive here and not there, or there and not here. Some plants require much heat while others thrive best in a relatively cool climate. Some re¬ quire a great deal of moisture while others manage to get on with a very little. But while all plants will not thrive under the same conditions, there are always several species present to com¬ pete for each piece of land. This is true on every farm, and the more favorable the soil and climate the greater the number of species which enter into this struggle. 3 . When nature is left to herself the plants which are best fitted for this warfare survive, and occupy the land. But when man intervenes plants are divided into two classes, those which ♦Albrecht Thaer wrote extensively on agriculture during the first quarter of the nineteenth century and is remembered as Germany’s greatest agriculturalist. See his Bationelle Landwirthschaft. 16 Agricultural Economics. are useful and those which are harmful or of no use. The harm¬ ful plants are destroyed, the useful ones are cultivated. Under the regime of the self-sufficient agriculture of Pliny’s time all of the useful plants which would thrive were cultivated on each farm. The greater the variety of crops which each husbandman could produce the greater the degree of his well-being, for each household was a little economic world living unto itself. 4 . But under the regime of modern commercial agriculture, where each farmer produces primarily for the city, national, or w^orld market, and buys upon the same market nearly everything he consumes, his well-being no longer depends upon the variety of his own productions, but upon his power to command the desired commodities upon the market. This purchasing power does not depend upon the variety but upon the cost of producing, the quantity produced, and the price of the articles he takes to the market. Cost, or cheapness of production, is not the one determining factor, neither is quantity of the product. The selling price would also be a poor guide in itself; but, when the cost of producing an article, the quantity which one man can produce upon a given area, the capacity of the crop to fit itself into the field system, and the farm price of the product are all taken together, it will be found that with prices as they are at a given time, some crops will make the farm yield a handsome profit while others can be grown only at a loss. The success of the modern farmer depends, then, upon his capacity to select and produce that crop or combination of crops which, one year with another, will make the farm yield the largest net return. 5 . In mechanical pursuits it is the common thing for each man to devote all his time throughout the year to the production of that one class of articles which he can produce to best advan¬ tage. Should the farmer confine himself exclusively to the pro¬ duction of that one crop which will yield the largest long time average net return ? No. The production of anyone crop re¬ quires the attention of the farmer for only a portion of the year, and various crops demand his attention at different times in the 18 Agrciultural Economics. year, so that his labor, horses and machines are usually em¬ ployed more economically in a system of diversified farming, than in a single crop system, even if the crop needing attention at one time is less profitable than that requiring attention at another time. 6. The crops which require attention at the same time of year may be looked upon as a group of competing crops. Thus the crops which require cultivation for six or eight weeks during the early period of their growth, such as corn, cotton, tobacco, potatoes, sugar beets, etc., may be classed together as a group of competing crops, because they compete for the attention of the farmer — for his labor, his horses, his tools and machinery. The winter grains, rye and winter wheat, or the spring grains, oats, barley and spring wheat, may be given as other groups. We may call these separate groups non-competing groups, be¬ cause the members of one group require the attention of the farmer at a different time than do the members of other groups. For example, corn, cotton, etc., do not compete with oats, bar¬ ley, etc. 7. The farmer who seeks to use his labor and capital to the best advantage should select from each group of competing crops that one which will yield the largest average net return and should introduce as many non-competing crops into the field system as will yield a profit. 8. When this principle is followed it will often happen, that of two non-competing crops in the field system, one will yield a larger net return than the other. Yet when the year’s accounts are balanced it will be found that the farmer’s net returns are greatest when both crops are cultivated, even if one is less profitable than the other, for each crop represents the most profitable use to which the labor, horses, and machines can be put at the given time, and if not used in that way they must be put to a less productive use or to no use at all. 9. But of two competing crops, only the more profitable one should be produced. Take for example corn and sugar beets in that part of the United States where the sugar beet region 20 Agricultural Economics. lies within the corn belt. Corn and beets require the attention of the farmer at the same time of year and if the one crop increases, the other must decrease. Hence beets must here prove equally profitable as corn before they can be cultivated with profit. This explains the slow growth of the sugar beet industry in the corn belt. Again, cotton and corn are com¬ petitors in the south. For many years after the war, cotton yielded a much greater net return than corn. As a result corn was little grown in the south, the Supply being drawn from the north where cotton does not thrive. In recent years the profits of cotton growing have been considerably reduced and corn production is beginning to take a more important place in the field system. 10. It is a well recognized fact that different crops make different demands upon the soil, so that a proper system of crop rotation will use the soil, as such, in the most desirable manner. This in itself, however, is not a safe guide in determining which plants should be introduced into the field system, for it might lead to the cultivation of the less profitable of two competing crops and thus reduce the total net return of the farm. 11. The crops being chosen which will make the farm yield the largest net return, they should be arranged in the field system so as best to supplement each other in their demands upon the soil. 22 Agricultural Economics. CHAPTER III. Crops and Field Systems, European and American. 1. A three field system of crop rotation prevailed throughout Europe during the middle ages. In this system, the arable land was divided into three parts. One part was sown with winter grain, one part with spring grain, and the third part was fallowed. The fallow field was cultivated carefully to destroy weeds and to bring the soil into good tilth. The field which was fallowed one year was sown to winter grains the next, and to spring grains the following year, so that each field was fallowed every third year. 2. This system was in very general use throughout Europe down to the close of the eighteenth century, but by that time the industrial and commercial population was making such demands for agricultural products that the more intelligent farmers began to think it too great a waste of land, labor, and capital to cultivate a third of the arable land each year with no crop growing upon it. A general search was made for a crop which could be grown in place of the bare fallow, and at the same time allow the soil to be cleaned of weeds and cultivated preparatory for sowing grain. Indian corn had already been introduced in the countries along the Mediterranean but unfortunately this crop, which is the one grain crop which can be cultivated successfully while growing, was ruled out by the climate in the greater part of Europe, so turnips, potatoes, and beets were resorted to. Besides the root crops, clover was introduced, and the rotation changed into a four-course system in which roots, summer grain, clover, and winter grain succeded each other in the order given. During the last quarter of the eighteenth century and the first half of the nineteenth, this four-course system gradually replaced the old three field system and its bare fallow. The root crops came to be called “ fallow crops, ’’ because they were looked upon as incidental to the fallowing of the land in preparation lor the grain crops. The 24 Agricultural Economics. grains continued, at least until 1875, to be the most valuable crops. 3. Since the fall in the price of cereals, about twenty-five years ago, the.European field system has been quite upset. Those articles which will not stand long shipment, such as milk, vege¬ tables, etc., prove most profitable, because foreign countries can not compete successfully upon the European markets. As a re¬ sult grain land has been turned into grazing areas for dairy cows in eastern England. The production of green fodders for cattle has proved relatively more profitable than formerly. Truck farming has been rapidly developed. In general, the tendency has been for the farmers to disregard all systems of crop rotation and produce such crops as will yield the greatest profit. Com¬ mercial fertilizers are generally used, so that it is possible to ad¬ just the chemical content of the soil to the demands of the plants instead of trying to adjust the plants, by means of crop rotation, to the chemical content of the soil. 4 . The old three field system was the rule in northern and western Europe during the first two centuries of American col¬ onization, yet the bare fallow never became permanently estab¬ lished in the colonies. The colonists were, from the beginning, well provided with valuable crops, which could be cultivated while growing. Corn and tabacco made the bare fallow unneces¬ sary and practically unknown in this country long before “ fal¬ low crops” were introduced in northwestern Europe. And while our country has greatly expanded, cotton, corn and to¬ bacco have continued to make fallowing unnecessary in most parts of the United States. In the greater part of Canada, and in the United States, along the very northern border of North Dakota, Minnesota, and Wisconsin, and along the Pacific coast, and on the high table lands of the Rocky Mountains these crops will not thrive, and the conditions with regard to available crops are nearly the same as in western Europe. 5 . Thus, of the group of competing crops to which corn, cotton, tobacco, and roots belong, the farmers of northwestern Europe have only the roots to select from. It is true that small 26 Agricultural Economics. areas are devoted to tobacco in northern Germany, but this is of no general significance. Hence in Germany, for example, sugar beets have only to prove more profitable than potatoes, which are grown largely for the distilleries, or turnips, and fodder beets, which are grown for the feeding of cattle, in order to be in¬ troduced with profit into the field system. Whereas in the corn belt of the United States, sugar beets must prove as profitable as corn before they can be introduced with profit. Where the sugar beet region extends beyond the corn belt to the north and to the west, or within the corn belt wher e the soil is not suited to the growing of corn, the conditions with respect to crop com¬ petition are about the same as in Europe, and sugar beets have only to prove more profitable than fodder roots, potatoes, or a bare fallow, in order to be introduced with profit. 28 Agricultural Economics. CHAPTER IY. Intensity of Culture. 1. Intensity of culture refers to the quantity of labor and cap¬ ital employed upon a given area of land. Where a small amount of labor and capital per acre is employed, we call the system extensive agriculture. Where a large amount is expended per acre, the culture is said to be intensive. Having decided upon the crops which are to be grown, the next important question is, “How much labor and capital should be employed per acre in the production of any particular crop in order to win the largest net return?” Extensive culture produces the greater returns per unit of labor and capital ; intensive culture produces the greater returns per acre of land employed. This is true because of the law of diminishing returns in agriculture. 2 . It is a familiar fact that in the production of corn, for example, the application of one dollar’s worth of labor and cap¬ ital to an acre of land will ordinarily produce very little or no crop at all. It is possible that two dollars’ worth will produce a small crop, but the the third dollar’s worth will increase the product more than the second, the fourth more than the third, and so on until the point of stationary returns has been reached. After this point has been reached the succeeding units continue, for a time, to add to the total product, but each succeeding unit is less and less productive until a point may possibly be reached where further application will add nothing to the total product. Thus the returns to succeeding units of labor and capital in agri¬ cultural production follow the law of increasing returns until the point of stationary returns has been reached, after which the law of diminishing returns operates. 3 . Let us suppose, for example, that the point of stationary returns, that is the limit of increasing returns and the starting point of diminishing returns, is reached when six units of labor and capital have been applied. Then according to the law of increasing returns each succeeding uuit of labor and capital will be more productive than the previous one until six have been 30 Agricultural Economics. employed, after which the law of diminishing returns operates and each succeeding unit will show a smaller product than the one immediately preceding it.* To state the same thing in more concrete form, the fifth unit of labor and capital will in¬ crease the product more than the fourth, and the sixth more than the fifth; but the seventh will not increase the product so much as the sixth, and the eighth will be less productive than the seventh. 4 . This may be illustrated by means of a diagram. c In Figure 1, the area A E F represents the product of the first unit of labor and capital. Area EXGF represents the quantity of the product of the second unit. And thus the product of each succeeding unit is greater than the one preceding it until six units have been expended, after which each succeeding unit is less productive than the one immediately preceding it. * Indeed it may be true that a law of stationary returns operates dur¬ ing the application of a few units of labor and capital after the final point of increasing return has been reached and before the starting point of diminishing returns has been reached. It may be true also that the line AC, in Fig. I, should rise rapidly with the application of one par¬ ticular unit, say the fourth, then remain stationary or even fall with the application of the fifth, and then rise very rapidly again with the application of the sixth. We have at present no data from which to calculate the exact curve which the returns of succeeding unit will fol¬ low, but the general rise followed by a general fall is certain. 32 Agricultural Economics. 5 . What degree of intensity is most profitable? How much labor and capital should be applied to an acre of land in the pro¬ duction of corn, or in the production of wheat, or any other crop, in order that the farmer may win the largest total net return ? This is a question of first importance, for, if too much is expended the net returns will be cut down, and if too little is employed the net returns will not reach the maximum. There is always some degree of intensity which will yield the largest net return. But what is that degree of intensity ? 6. For the sake of simplicity let us suppose that the farmer can get all the land he may want to use without paying anything for it. Under such circumstances how much labor and capital will he expend upon each acre of land? Let us take the case we have before us in Fig. 1, and suppose the farmer has one thou¬ sand units of labor and capital to expend in agricultural produc¬ tion. With free land at his disposal, how many acres will he use and how many units will he employ upon each acre ? Will he apply five units of labor and capital per acre and use two hundred acres of land? No, his capital will produce a greater total product when he applies six units to each acre and confines himself to one hundred and sixty-six and two-thirds acres. But will this make his labor and capital most productive ? At the first thought we may say yes, because the seventh unit is not so productive as the sixth, but when we look more closely into the matter we see clearly that there is no good reason for ceasing to apply more units of labor and capital simply because the point of diminishing returns has been reached. The seventh unit is less productive than the sixth, but it may be more productive than any one of thg first four units, and the average product per unit of labor and capital will be greater when seven units have been applied than when six only have been applied. Hence the total product of the thousand units will be greater when seven units have been applied to each acre and only one hundred and forty-three acres of land employed. 7 . But at what point shall the farmer cease to increase the application of labor and capital to a single acre ? It is obvious 34 Agricultural Economics. that if all the labor and capital were applied to one acre it would not be so productive as when he employs more acres and limits the number of units applied to each acre. But what is the limit? It is true that in Fig. 1 the sixth unit is more productive than any unit before or after it, but all units cannot be sixth units; the first, the second, and the third are indispensable. It is the maocimum average return which we must keep in mind. The average product per unit increases rapidly until the sixth unit has been employed, and then less rapidly until a point is reached where the slightest increase in the application of labor and capital will not increase the average product and, because the law of decreas¬ ing returns is operating, the application of another unit however small will reduce the average product of all units applied. 8 . The thousand units of labor and capital are used in the most productive manner when the acreage is so limited that the number of units applied to each acre shall be such as to produce the maximum average product per unit. This point of the max¬ imum average product per unit will be some place on the line C B in Fig. 1, let us say at the point Z. Then let us draw a curved line from A to Z in such a manner that the distance be¬ tween lines A Z and AY shall at all points be such that the rect¬ angles formed by drawing a line, O Z for example, through the curve AZP will represent the total product produced when ap¬ plications have reached that point; and that part of the rectangle lying between the lines VI and UK, for example, will represent the average per unit applied up to that point. As illustrated in Fig. 1, the curve of averages reaches the highest point at Z, and the highest average product per unit of labor and capital is gained by employing seven and one-half units per acre. After the point Z is reached the line of averages ZP falls and further application of labor and capital will reduce the average product per unit. Thus when there is no rent to pay, the application of labor and capital should increase until the point of maximum average returns per unit is reached and there it should stop. This is the most extensive agriculture that can be profitable under any circumstances and the most intensive that can be 36 Agricultural Economics. profitable to the farmer where nothing is charged for the use of land. But, may not the case be somewhat altered where land has a value placed upon it, and where one must pay for its use, either in the form of rent or of interest on its capital value. 9. Let us take first the case where a share of the crop is given for the use of the land. Under this condition, will more or fewer units of capital be applied to each acre of land? The farmer will still seek the largest net return, and this means he will increase the labor and capital until the point of maximum average net returns per unit of labor and capital has been reached. The point will be reached after the application of the same number of units as in the case of free land, for the share is subtracted from the product of each succeeding unit, and the result is the same as reducing the productivity of the land one- third. To illustrate this point, draw a curved line from A to B, in Fig. 1, at such a distance from lines ACB and AB as to leave two-thirds of the area of each section between the lines AB and AO'B. Then draw a line through the points of average net returns per unit thus far employed, in the same way as the line of average gross returns per unit was drawn. This new line of averages will reach the point of maximum net returns per unit when the line AZ'P' crosses the line AC'B. The point Z' will be one-third the distance from Z to Y and neither to the right nor to the left. This means that the point of maximum net re¬ turns is reached, in the case of a share tenant, after the applica¬ tion of the same number of units of labor and capital as yield the largest average gross product. This means also, that share tenancy and the most extensive culture will usually be found together. IO. Will the result be the same in case of cash rent ? No, not exactly. Suppose the cash rent is three dollars per acre. This rent is paid once for all. We may think of it as being paid out of the product of the first five units of labor and cap¬ ital. The farmer receives no return upon his labor and capital until the rent is paid. If he ceased to apply labor and capital after five units have been applied, the product would just pay the 38 Agricultural Economics. rent. Hence in this case, the lines passing through the points of average product will start at point K where the line UK crosses the line AB. After the application of the sixth unit the net return per unit applied will be represented by one-sixth of the area UKDC. After the application of the seventh unit it will be one-seventh of the area UKLT. Thus the line will rise rapidly until the line CD is crossed, after which it will continue to rise less rapidly until the line CB is crossed, after which it will fall. Thus the point Z" will be farther to the right than points Z and Z', and the maximum average net return per unit will be gained by more intensive culture in case of a fixed or cash rent than in case of a share rent, because the farmer gets all of the product of the last unit in case of cash rent, whereas he gets only a share, say two-thirds, in the case of share rent. In case the farmer owns the land and counts interest upon his capital invested in land, the conditions will be the same as if he were paying a fixed or cash rent. The intensity of culture will vary with the value of the land, in case the farmer owns the land he cultivates, or it will vary with the amount of the rent where a fixed rent is paid. The higher the value of the land, or the higher the rent, the greater the degree of intensity. The laws which regulate the price of land and the rent of land will be discussed later. 40 Agricultural Economics. CHAPTER Y. Productivity. 1. It was stated in Chapter I that land, capital goods, and farmers are essential to agricultural production. We wish now to point out that all farmers are not equally efficient, that all horses and machines intended to serve the same purpose are not equally useful, and that all pieces of land are not equally pro¬ ductive. 2 . There are more than five million farmers in the United States. From general observation we know that some of these farmers can scarcely make a living 5 others live comfortably, and gradually save enough to buy a small farm; while still others are very prosperous, living well and saving considerable sums of money every year. The relative degree of prosperity which any farmer can attain depends upon his own efficiency. By the efficiency of a farmer we mean his capacity to do work and to manage a farm. Work¬ ing with the same grade of land, horses and machinery, some men can produce a much greater net return than others. Those who can produce a relatively large net return are called the more efficient farmers, those who produce only a relatively small net return are called the less efficient farmers. 3 . Some forms of capital goods are more productive than others. Some machines are better than others which were in¬ tended to do the same kind of work. The binder for example is more useful than the old selfrake, and some binders do better work than others. Some horses will do more work or in some other way be more productive than others. Certain breeds of cattle, sheep, or hogs will convert the food given them into more valuable products than other breeds. Hence, other things being equal, the man who works with the most productive forms of capital goods can produce the largest gross return. This varying productivity of capital goods is apt to be over¬ looked, because capital goods are valued according to their pro¬ ductivity, and when we speak of the amouut of capital employed 42 Agricultural Economics. upon a given farm we have in mind the value of the capital goods, and of course each dollar's worth of capital is just as pro¬ ductive as any other dollar's worth. But is it not true that one man can employ only about so many machines and horses, and that he can feed only about so many cattle, sheep, or hogs ? If this is true, the more productive his capital goods the greater the amount of capital he can employ, and the greater the income he will receive as the owner of capital. But this is not all. the more productive forms of capital goods give the greater oppor¬ tunity for the use of special skill, so that the more efficient farmers can win a larger net return when they employ the more productive forms of capital than when they employ the less productive forms. 4. Land shows varying degrees of productivity in different parts of the country and even on different parts of the same farm. That by a given farmer employing a given amount of capital goods of a specified degree of productivity can produce a greater gross product upon one piece of land than upon another. This variation in productivity is due to the fact that the chem¬ ical and mechanical properties of the soil, and the tempera:ure and humidity of the climate differ greatly from place to place. Thus the arid plains ot the West are warm enough, and the soil contains plant food enough to grow large crops, but lack of moisture leaves the land unproductive. The frigid regions of the Xorth may have all the other requisites of a productive coun¬ try and yet, because of the low temperature, produce nothing. Where all of the requisites are present in great abundance, the land is very productive. 5. But how productive must land or capital goods be, in order to be employed with profit ? How efficient must the farmer b^ in order to make a living ? The answer to these questions, depends upon the farm price of the produce, the extent to which certain classes of capital goods are in use, the relative scarcity of the more productive land, and the number and efficiency of the farmers who are competing in agricultural production. 44 Agricultural Economics. CHAPTER VI. The Size of Farms. 1. How much land will enable the farmer to win the largest net return? This depends upon the kinds of crops which he grows 5 the intensity of culture; the character of the horses, the tools, and the machines which he uses; the number and charac¬ ter of the laborers he employs; and the efficiency of the farmer himself. 2 . Where tobacco or sugar beets are grown one man cannot cultivate so large a farm as where corn is the principal crop. In the tobacco districts of Dane county, farms have decreased in size in recent years; while in the dairy districts they are larger now than ten years ago. In New England, where mixed or grain farming has been unprofitable for the last twenty-five years, some regions have, in recent years, been devoted to dairy¬ ing, and others to fruit growing. Where fruit growing has re¬ placed the old agriculture, farms are smaller than formerly. Where dairying has been generally introduced the average farm is larger than before the change. 3 . Intensive culture requires more labor upon a given area of land and hence it is impossible for one man to cultivate so many acres. In a new country like the United States where land is relatively abundant and where extensive culture is gen¬ erally most profitable, tie average size of farms is much greater than in an old country where land is scarce, land values very high, and intensive culture most profitable. 4 . A farmer can use more land when he has the most effi¬ cient horses and machines with which to work. The fact that five times as many men are often employed upon a given area of land in England as upon the same area in the United States is nob explained wholly by the different degrees of intensity of cul¬ ture in the two countries. American farmers have more labor saving machinery. 5 . The efficiency of the farmer is an important factor in de¬ termining how much land he can use to best advantage. The en- 46 Agricultural Economics. ergetic man whose clear head and strong arms enable him to plan his work most economically and to do it quickly and well, can operate a much larger farm than his neighbor who may be characterized by the opposite qualities. 6. It is obvious that if the farmer employs a number of laborers he can operate a larger farm than where he performs all of the labor himself. The kind of crops, the intensity of culture, the efficiency of the horses, the machines, and the farmer him¬ self, remaining the same, the greater the number of laborers, of a given degree of efficiency, who are employed by one farmer, the larger the farm may be to advantage. The farmer who pos¬ sesses superior managing ability, can increase his total net returns by operating a large farm by means of hired laborers who may have little managing ability themselves, but who have ordinary capacity to perform farm labor when directed by an efficient farmer. In the southern part of the United States the average size of farms has been greatly reduced since the Civil War, because many men who had been slave laborers upon large plantations have become self directing cultivators of the soil. 48 Agrciultural Economics. CHAPTEB VII. Prices of Agricultural Products. 1. What determines the price of an agricultural product? u Supply and demand, ” is the popular reply. But what deter¬ mines the supply, and what the demand ? The intensity of the buyer’s desire for a particular article, determines how highly he values it, and what price he is willing to pay for it; but, ordin¬ arily, the more he must pay for an article the less of it he will consume. On the other hand, the amount of labor, capital and land required, will determine how high the price of an article must be, before the farmer can afford to produce it. The more cheaply he can produce it, the lower the price for which the farmer will continue to offer the article upon the market, and the more generally it will be consumed; but the more generally an article is consumed, the less intensely it will be desired, and the less highly it will be valued. Therefore we may say that “ Value is the capacity to excite desire, and so depends upon the intensity of the greatest unsatisfied want.” u Price is an expression of value in terms of money.” Bead Ely’s Outlines of Economics, pages 121-137. 2 . What determines the price of wheat? The value which the wheat consumers will place upon wheat is determined by the intensity of their desire for wheat bread; but the intensity of that desire varies with the amount per capita they are consuming from day to day. The more they consume each day, the less intense the desire for wheat, and the less the consumers are will¬ ing to pay far it. But, again, the less the consumers are willing to pay, the fewer the farmers who can introduce wheat into their field systems with profit, and the smaller the supply will tend to become. Thus the price rises when the demand increases rela¬ tive to the supply, and falls when the supply increases relative to the demand. 3 . Wheat can be shipped all over the world. It is the wheat crop of the whole world, and the demand of the entire population of the earth for wheat, that must be taken into ac¬ count when we try to work out the conditions which determine 50 Agricultural Economics. the price of wheat at any given time. Many countries produce more wheat than they consume, while other countries draw a part of their supply from abroad every year. The most import¬ ant countries having a wheat surplus are : The United States, Canada, Argentina, Chile, Uruguay, Austria-Hungary, Bulgaria, Roumania, Russia, Turkey, British East Indies, Australasia, and North Africa. The most important wheat importing countries are: Great Britain, Belgium, Denmark, France, Germany, Greece, Italy, Netherlands, Portugal, Spain, Norway and Swe¬ den, Switzerland, Japan, and China. Wheat is sent from the United States to Europe where it competes with wheat brought from India. Wheat is sent from India to China and Japan and and there meets the product of the great wheat farms of Califor¬ nia. Thus we see that the commerce in wheat is world wide and the price of wheat is determined by supply and demand upon the world market. Hence we should not expect the price of wheat to vary inversely as the yield in any one country; for the wheat producing countries are scattered widely over the surface of the earth, and the conditions which reduce the crop in one country may not be present in other countries or even in different parts of the same country, and hence a short crop in one country is often made up for by an unusually large one in another country. Read the Report of the Industrial Commission, Volume VI, pages 36 and following. 4 . There are certain products which can be substituted for each other and thus tend to keep prices from rising very high or sinking extremely low. Rye bread, for example, is consumed very largely in northern Europe, and when the rye crop is larger, and the wheat crop smaller than usual, more rye bread and less wheat bread is consumed. When the rye crop is smaller than usual, there may be a larger wheat crop to balance the shortage in rye. Thus, it is the world’s supply of wheat and wheat substitutes, and the world’s demand for bread and bread substitutes that fixes the price of wheat on the world market at any given time. Read the article on the “ Influence of Rye on the Price of Wheat.” By E. T. Peters, in the Yearbook of the Department of Agriculture, for 1900, pages 167—182 52 Agricultural Economics. 5 . Liverpool is the center of the world’s wheat trade, and the conditions which regulate the price of wheat on the Liver¬ pool market may be said to regulate the price throughout the world. More wheat is produced in the United States than is consumed at home. The surplus of the great wheat producing states is brought together at the primary grain markets. The most important of these primary markets are Chicago, Minneap¬ olis, Duluth, Superior, St. Louis, Milwaukee, Toledo, Kansas City, Peoria, Cincianati and Detroit. From these primary mar¬ kets, wheat and its products are sent to the various parts of the United States where wheat is not produced in sufficient quanti¬ ties to supply the demand. But after all the deficit areas of the United States are supplied, a large surplus still remains, which is sent to Liverpool. 6. The price of wheat in any primary market will equal the price in Liverpool minus the cost of putting the wheat on the Liverpool market. The local price at any point in the surplus producing regions will equal the price at the nearest primary market minus the cost of sending the wheat to that market. The local price at any point where less is produced than consumed will equal the price in the nearest primary market plus the cost of bringing the wheat from that market. 7 . Circumstances are somewhat different in the case of corn. The United States is the principal corn producing country; and nearly the whole crop is consumed at home. Over three-fourths of the corn crop is consumed in the county where grown. Only one-fifth of it enters into the internal commerce of the country, and from five to ten per cent., only, enters into foreign distribu¬ tion. Thus corn is used largely for the feeding of stock. From year to year the farmers count on selling about so many fat cat¬ tle and hogs, and it is for this purpose that most farmers grow corn. When the crop is short, as in 1901, the shortage here is not balanced, as in case of wheat, by good crops in other coun¬ tries, because there is no country to ship corn to the United States. The demand for pork is fairly regular and the result of 54 Agricultural Economics. a short corn crop shows itself at once in the price of corn and only less directly in the price of pork. 8 . The potato market is yet more local than the corn market. We never find statistics on the potato exports of the United States. Each locality is more dependent upon the local supply and the price will be influenced much more by the yield of the local crop than in the case of wheat. Some regions are regularly wheat sellers, others wheat buyers, from year to year; but in the case of potatoes, where the aim of so many farmers is simply to supply the demands of the local markets, the same region may have a surplus one year and a dificit^the next. The cost of ship¬ ping potatoes is a large percentage of their total value. The sur¬ plus of one year can not be kept until the next year, and in case there is a surplus the local price will be relatively low, while in case of a deficit the local price*will be relatively high. Clover seed is a very uncertain crop, and for this reason the supply fluctuates very greatly from year to year. The price is very high one year and very low the next. 56 Agricultural Economics. CHAPTER VIII. Distribution of the Gross Returns. 1. Having sold his produce upon the local market, what de¬ termines the share of the gross returns which the farmer may keep as payment for his labor and enterprise, and what deter¬ mines the proportion which must be accounted to capital goods and to land ? There is a complex sefc of circumstances which make it necessary for a given farmer at a given time and place to ac¬ count a certain proportion of his gross returns to capital goods, and another certain share to land ; but at another time on the same farm or on another farm at the same time, or with a dif¬ ferent farmer on the same farm at the same time, the proportion received by each factor may be different. We find farmers of varying degrees of efficiency employing capital goods of varying degrees of usefulness upon land of varying degrees of produc¬ tivity. With these three variables united in varying proportions in the production of articles which vary in their market value from place to place and from time to time, what determines the share of the gross returns, which each variable will receive ? 2 . Let us examine the different factors of production—farm¬ ers, capital goods, and land—and see how much each factor must receive in order to participate in production. Land is passive. The owner of land takes all he can get, but will still allow the land to be used no difference how small a share can be accounted as rent; though it is true that, in a progressive country where agriculture is expanding, the rent must be at least enough to in¬ duce men to convert raw land into farms. Capital goods are somewhat different. Horses must be fed, and tools and machines must be kept in repair, or they cannot be used. Capital goods, then, must at least be maintained. But capital goods are not found ready made, and in a progressive country the returns must not only be sufficient to maintain the present supply but to en¬ courage men to produce new machines, new horses, or other forms of capital goods. The conditions are similar in the case of labor. The farmer must receive at least enough to sustain his body in a 58 Agricultural Economics. working condition. But man usually wants to support a family, so we may say that the least return that will induce a man to become a farmer is maintenance for himself and his family. 3 . The farmers are the aggressive factor in agricultural pro¬ duction. The farmers we need to consider, are those who em¬ ploy capital goods upon land for the purpose of gaining the means of satisfying their wants. The smallest net return that will induce any one to farm must be sufficient to maintain himself and his family. He will take as much more as he can get, but he will not farm long unless he can make a living. All the more pro¬ ductive grades of capital goods and of land are limited in quan¬ tity, and have a value placed upon them. The farmers compete for the use of capital goods and for the use of land. What share of the gross returns of the farm will the farmer pay for the use these instruments? Manifestly he must retain a living. The gross returns minus a living, then, is the maximum share which any farmer can continue to account to these two factors of pro¬ duction. Many men who would like to be farmers, are compelled to drop out of the list of competitors, when competition forces the price which must be paid for these instruments so high that they cannot live from the net returns. But the greater the num¬ ber who drop out of the business the smaller will be the supply of agricultural produce and the higher the price. When com¬ petition has worked out its logical result, an equilibrium will be struck, for the time being, where the least efficient farmers who are necessary to supply the given demand receive a living, and the remainder of their gross returns is accounted to capital goods and to land. These farmers we shall call farmers of marginal efficiency or simply marginal farmers. The more efficient farmers will not be required to pay so large a share of their gross pro¬ duct for the use of capital goods and land, hence, their net return will be a greater proportion. They will receive a surplus above the amount which marginal farmers can demand. 4 . Out of the lump sum which must be accounted to capital goods and land, at a given time, capital goods must be maintained intact; that is u wkr and tear” on machinery must be accounted 60 Agricultural Economics. for and all capital goods which have been consumed must be replaced so that the invoice at the close of the year shall balance that made at the beginning. In addition to this replacement fund a certain sum must be paid for the use of capital goods. Men estimate their present desires more highly than their future desires, and when they refrain from consuming wealth today in order that it may be turned into capital goods they must have an assurance of a greater amount of wealth in return in the future. This explains why something must be paid for the use of capital goods aside from sufficient to maintain these goods intact? In old countries where there is much wealth accumulated, present desires, of the wealthy classes at least, are more completely sat¬ isfied, and future wants are estimated relatively more highly than in a poor country where present wants are more intense. Hence the current rate of interest will be lower in rich countries than in poor countries and the share which must be accounted to capital goods will vary accordingly. Hence, of the sum which the farmers are willing to pay for the use of the two agents, a certain share is cut off for replacing and paying rent upon the capital goods. The remainder is accounted to land and is called rent. The amount of rent which a given piece of land will yield is de¬ termined by the value of that shai^ of its gross product which competition forces the farmer to account to land. The minimum which this share can reach, in a country where agriculture is progressive, must be sufficient to pay normal returns upon the investments necessary to convert the raw land into farms. The price of agricultural products must be sufficient to enable mar¬ ginal farmers to live, to maintain and pay a necessary rent for the use of capital goods, and to pay the necessary minimum rent for the use of land, in order to keep agriculture in a progressive state. 5. The rent of land varies from place to place because of differences in the productivity of the land and in the efficiency of the farmers, and because of variations in the price paid for the same article on different local markets. Where prices are higher a smaller share of the gross product is necessary to sup- 62 A gricultural Economics. port the marginal farmer, and competition for the use of land will force rent to a higher level. The least productive land which is required for supplying the market at a given time will receive rent enough to pay for bringing it under cultivation. This we call marginal land. All land which is more productive than the marginal land, will have a higher rent accounted to it because it is more desirable, and the farmers will compete with each other for this more productive land until the rent rise to a point where it would be as desirable to take less productive land at a lower j ate. Will the difference in the amount of competitive rent paid for different pieces of land be measured by the differ¬ ence in the productivity of the two pieces f No, because different classes of farmers are in competition for different classes of land. The more efficient farmers find greater opportunity for the em¬ ployment of their superior knowledge and skill upon the more productive land and where prices are high, thau upon less pro¬ ductive land and where prices are low. Hence, the more effi¬ cient farmers will compete only for the more productive land and will pay more for it than the marginal farmers can afford to pay. The less efficient farmers go on competing for the less productive land until marginal farmers are shifted to marginal land. Hence, the difference between the rent of marginal land and that of more productive landijS^be greater than the differ¬ ence between the productivity of the two pieces of land, when we measure their productivity by the amount of product which men of equal efficiency employing equally productive capital goods, can produce. 6. The share of each factor in agricultural production varies from time to time. When prices rise, the share of the product of a given farm, which can be accounted to land, increases. When prices fall, this share must fall. Again where the popula¬ tion of a country is increasing, all the sons of all the farmers can¬ not become farmers. It is true that all will not desire to do so, but more than are needed may desire to be farmers and competition will continue to drive the poorer ones to the wall, until the mar¬ ginal farmers will be more efficient than formerly. As a result, 64 Agricultural Economics. a larger share will be accounted to land at the expense of net profit. Superior forms of capital goods are ever being introduced. The productivity of capital goods is ever increasing and other things being equal the share of the product which must be accounted to capital goods decreases as a country grows richer, leaving a large surplus, which with free competition and progressive agriculture, will be accounted to land. This is the way the distribution of the gross product works itself out where competition is perfect. In actual life competi¬ tion is not perfect, but under most circumstances the con¬ stant tendency is to approach this ideal. The more alert and intelligent the farmers, the more nearly the ideal is attained. 7 . In some places the competitive principle is not operating. There is land, in Scotland, owned by a rich lord who never allows it to come into the open market where farmers could com¬ pete for its use. The land is allowed to remain in the possession of the same families from generation to generation. The amount of the rent is arranged between the farmer and the landlord. The rent under such circumstances can never be more than com¬ petitive rents; for then the farmer could afford to leave. In fact such rents are determined more or less by custom, and are usu¬ ally less than competitive rents. Again, it often happens, in the United States, that a son, who is a very inferior farmer, inherits land and occupies it for many years without producing enough surplus over a living and necessary return to capital goods, to pay a competitive rent for the land. Such land is out of the range of competition, and such farmers cannot be counted as competing farmers; for they do not respond to changes in price, nor compete for the use of land. 8. Again, it often happens that competition is keener in some regions than in others, even though the land be as produc¬ tive and the prices of agricultural products as high in the one place as in the other. Some districts produce more high grade farmers each generation than do other districts. A strong motive is required to impel the surplus of farmers in one dis- 1 66 Agricultural Economics. trict to remove to another. Competition in the oversupplied district goes on until rents are forced considerably higher in the district which has the surplus of high grade farmers, than the rents for land of the same grade in the other district. That is, the marginal farmers of one district are much more efficient than the marginal farmers in other districts, and this is another rea¬ son why the rent of land will not vary in the same ratio as the differences in the degrees of productivity. 68 Agricultural Economics. CHAPTER IX. The Price of Land. 1. What determines the price of farm-land? It is easy to say that the price of land is determined, like the price of any other economic good, by the forces and conditions which determine the demand and the supply; but this is too general to be of any help to the farmer who is trying to estimate the value of a par¬ ticular piece of land. 2 . In Chapter VIII we have seen how competitive rents are determined. The gross competitive rent which is paid for the use of a farm, minus the amount which is necessary to keep the im¬ provements in repair, may be called the annual value of the farm. The annual value is the basis for figuring the value of the fee simple. 3. The annual value should be capitalized at the current rate of interest on safe loans. That is, it should be determined how much money would be required, when loaned on first-class se¬ curity, to yield an income equal to the annual value of the farm. For example, if the annual value of the farm is five hundred dollars, and the current rate of interest on first-class loans is five per cent; divide the five hundred (500) by five-hundredths (.05) and the quotient, ten thousand, will be the amount of money which will be required to yield the same income; and we may say the fee simple of the farm is worth at that moment ten thou¬ sand dollars. This we call the capital value of the land. 4 . Other factors remaining the same the capital value of land will rise or fall as the amount of the net rent rises or falls. The net rent is determined by the amount, and the local market value, of that surplus which competition makes it necessary to account to the land; and this surplus is determined by and varies with the productivity of the land, the number and effi¬ ciency of the competing farmers, and the local market price of the produce. 5. The net rent may remain the same and yet the price of land may rise or fall because of a change in the current rate of in- 70 Agricultural Economics. terest. When the current rate of interest falls the capital value of land rises and when the rate rises the capital value falls. 6. The market price of land is sometimeshigherand sometimes lower than its present capital value. When prices of agricul¬ tural products are rising and the surplus which is accounted as rent is increasing from year to year the purchasers of land spec¬ ulate upon the future rise in price, and the market price of land is something more than its present capital value. Again, when prices are on the decline, and it is believed that the capital value of a farm will not be as great in the future as at present, the market price will fall somewhat below the present capital value. 7 . Land is sometimes valued for the social distinction which it attributes to its owner. Under such circumstances the market price will rise above the capital value. This is one reason why the landlords of Great Britain have long been willing to pay more for land than the farmers could afford to pay. 72 Agricultural Economics. CHAPTEE X. Land Tenure in the United States. 1. Less than two-thirds of the whole number of farms in the United States, are cultivated by their owners. According to the census for 1900, 22.2 per cent of the farms were operated by share tenants, 13.1 per cent by cash tenants, 1.0 per cent by managers, .9 per cent by owners and tenants, 7.9 per cent by part owners, and 54.9 per cent by owners. A landowning farmer is rarely seen in England. More than 85 per cent of the farm land is operated by tenant farmers. Nearly all the remainder is managed by bailiffs hired for that purpose by the landlords. In France 10.6 per cent of the farm land is operated by share tenants, 36.6 per cent by cash tenants. Germany is preeminently the land of peasant proprietors. In 1895, only 12.38 percent of the farm land was leased, and of the whole number of farms only 16.42 per cent were solely of leased land, 9.59 per cent were more than half leased land, 20.89 per cent were half or less than half leased land, and 53.10 contained no leased land. * 2 . There has been a decline in the percentage of landowning farmers in the United States since 1880. This will be shown in the following table. Table III.— Tenure of farms in the United States. Date. Percent of Farms Operated by: Owners. Cash tenants. Share tenants. 1880 74.5 8.0 17 1890 71.6 10.0 18.4 1900 64.7 13.1 22.2 I