Although this contribution to my blog is aimed at my “Chicago School” students, it may provoke a broader discussion. The problem with agricultural supports became particularly acute during the Great Depression when agricultural production obeyed the predicted supply-demand curve of neoclassical economic theory. During the Great Depression, prices for all goods, including farm goods, dropped to such a level that farmers could not recover the cost of farm equipment, labor, seed, land, fertilizer, etc. they had invested in their production.
When farmers tried to recover their costs by delivering more agricultural goods to market, they discovered that the market price dropped even further until it reached equilibrium for the quantity of goods on the market under current conditions of demand. At the end of the day, farmers were unable to recover the costs of their production no matter the quantity of the production because, well, equilibrium is equilibrium.
“In the long run,” JM Keynes famously observed, “we are all dead.” But also in the long run—so neoclassical economists remind us—production drops to meet demand at the optimum price; yes, displacing agricultural workers who are no longer able to make a living off of farming, but also generating new technologies that can meet demand at a price consumers are willing to pay. Equilibrium is equilibrium.
But let’s look at a real historical example. Roughly a third of all family farms were foreclosed upon between 1929 and 1933, amounting to more than 200,000 farms in the final year alone. But, of course, the hardship did not stop there. Foreclosed farms no longer needed day laborers to plant, till, and harvest crops. Owners of these farms could no longer purchase dry goods. Nor did they require transport of agricultural goods to the rail or local market. And so on . . .
T.W. Schultz, working on these problems at Iowa State in the 1930s, correctly observed that the prices of agricultural products involve “the decisions of literally millions of entrepreneurs, each confronted with a different set of resources, and consumption involv[ing] the decisions of even more millions of consumers with widely different needs, tastes, and purchasing power.” His observation cannot be disputed. Nor can his conclusion: “The decisions and actions can be effectively coordinated through prices.” Yes they can.
Moreover, should these farmers receive subsidies (whether private or public it does not matter), these subsidies would undoubtedly make the market less responsive because it would lead farmers to make decisions about the future based not on demand for their product at a given price, but based rather on this demand and price, plus their subsidy. And, with this, the ability of the price mechanism to effectively guide decisions and actions would be seriously hampered.
But, let us suppose that a private or public actor (again, it doesn’t matter which) has the ability to subsidize these agricultural workers in the short run. Should this private or public actor do so?
We might conclude that he or she (or it) should, at least in the short run, because otherwise it would leave hundreds of thousands of farmers, their suppliers, workers, transporters, etc. in very dire straights—i.e., without food, clothing, housing, medical care, warmth, etc.
T.W. Schultz would argue otherwise. Schultz would caution that we are making two critical assumptions: (1) we are assuming that such subsidies would meet their goal more quickly than an unhindered marketplace; and (2) we are assuming that such subsidies would not leave a lasting imprint on the market, for example, maintaining agricultural subsidies long after their need or value has disappeared and thereby forever preventing price from offering accurate guidance to economic decision-makers, not least to farmers themselves.
The first assumption seems to yield at best ambiguous results. We know that federal aid had an immediate stimulating effect, leading many farming families and dependent industries out of poverty. We also know that the private market appeared unable to accomplish the same results prior to this aid. Would the market have adjusted in the absence of such aid? Who knows, but probably not.
The second assumption yields far more certain, but also perhaps more trivial results. For there is every reason to believe that prolonged poverty among former farming families would have yielded profound shifts in a number of market-directed indicators; shifts that did not take place as dramatically or as swiftly as would have been the case had the market been left to its own devices. The millions of decisions and actions about which Professor Schultz writes would have constrained and moved economic actors in directions different from those that actually constrained and moved them. No question.
Yet, there is a larger question that Professor Schultz appears no longer to be asking. What do we do in the mean time with this huge, inconceivable volume of human suffering?
I am not asking this question from a humanitarian vantage-point, but from an economic vantage-point. Does not any intervention at this point—again, it does not matter whether the intervention is public or private—create the same problem: any intervention disturbs the price mechanism. Charity disturbs the price mechanism. Any medical attention not covered by price disturbs the price mechanism. Any job retraining not directed by price disturbs the price mechanism. Any knowledge that is not paid for by the person benefiting from this knowledge disturbs the price mechanism.
But, clearly, all of these latter kinds of interventions are occurring all of the time, continuously. The price mechanism is disturbed. Moreover, to control for this disturbance requires interventions in other spheres of activity—religious, familial, community, trade, etc.—whose equilibria might be deemed of as much or even greater importance than the price level.
But, then there is Gary Becker. Is it possible that all of these other spheres of activity might themselves be reducible to the price mechanism?
Welcome to the Chicago School.