The Economics of Subsidising Agriculture: A Study of British Policy 9781487580049

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UNIVERSITY OF GLASGOW SOCIAL AND ECONOMIC STUDIES

General Editor: Professor D. J. Robertson

1 THE ECONOMICS OF SUBSIDISING AGRICULTURE

UNIVERSITY OF GLASGOW SOCIAL AND ECONOMIC STUDIES

Old Series published by Cambridge University Press General Editor: Professor A. K. Cairncross, C.M.G.

1. 2. 3. 4. 5.

The Crofting Problem ADAM COLLIER The Scottish Economy EDITED BY A. K. CAIRNCROSS Adam Smith and the Scotland of his Day c. R. FAY John Millar of Glasgow WM. c. LEHMANN Factory Wage Structures and National Agreements D. J. ROBERTSON

6. Economics of Shipbuilding in the United Kingdom J. R. PARKINSON

7. Glasgow Limited: Industrial War and Peace

T. T. PATERSON

New Series published by George Allen & Unwin Ltd General Editor: Professor D. J. Robertson

2. The Economics of Physiocracy

RONALD L. MEEK

THE ECONOMICS OF SUBSIDISING AGRICULTURE A Study of British Policy BY

GA VIN M7 CRONE

WITH A FOREWORD BY

PROFESSOR E. F. NASH

UNIVERSITY OF TORONTO PRESS

FIRST PUBLISHED IN

1962

This book is copyright under the Berne Convention. Apart from any fair dealing for the purpose of private study, research, criticism or review, as permitted under the Copyright Act, 1956, no portion may be reproduced by any process without written permission. Enquiry should be made to the publisher.

© George Allen & Unwin Ltd 1962 Published in North America By University of Toronto Press Reprinted in 2018 ISBN 978-1-4875-8107-7 (paper)

PRINTED IN GREAT BRITAIN

FOREWORD

Agricultural policy is an embarrassing subject to all political parties. Sensible people of all shades of opinion admit that much of it fails to make sense. Intelligent farmers criticize it freely. But the general public is not really interested and many of those directly concerned would strongly resist any material changes. The ambitious politician, looking for an issue on which to found a reputation, studiously avoids the subject. The quality of the parliamentary discussion it receives is low and the national press devotes little attention to it. Like the British currency, the system of weights and measures, the betting laws and the drink licensing system, it has become one of the institutions which most people who have thought about them admit to be indefensible but which we put up with because hardly anyone thinks it worthwhile to propose any serious reforms. Mr McCrone's book is an attempt, and I think a very successful one, to get to grips with the economics of the subject and to explain the issues which it raises. He discusses the extent of the support given to agriculture by governments in different countries and the reasons commonly given to justify it such as the supposed need to safeguard the food supply, to protect the balance of payments or to influence the terms of trade. He concludes, in my opinion quite rightly, that none of these reasons is capable of standing up to serious economic argument and that the real purpose of agricultural subsidies is to protect the incomes of farmers. It seems to me that a recognition of this fact is necessary if the problem is to be seen in its true perspective. Much of the information in this book ought to be well known, but the discussion of agricultural policy would be much more firmly grounded than it usually is if this were so. I hope therefore that it will receive the attention to which its merits and the importance of its subject entitle it. Department of Agricultural Economics University College of Wales Aberystwyth

7

E. F. NASH

PREFACE In writing this book I have had the benefit of much help and advice. In particular I would like to thank Professor E. F. Nash, who has long been known for his work on agricultural policy. There are doubtless some differences between Professor Nash's approach to the subject and my own, but to all those familiar with his work, it will be clear how much I owe to him. I would also like to thank Professor A. K. Caimcross, Professor T. Wilson and Professor D. J. Robertson, all of whom read drafts of the book and whose comments enabled me to make many improvements. At an earlier stage I had the benefit of much help and encouragement from Mr J.E. Vaizey and Mr E. A. Attwood, both of whom read parts of my first draft and made many useful suggestions. The publication of the book has been made possible by a financial guarantee: for this I am indebted to the Carnegie Trust and the University College of Wales, Aberystwyth. My thanks are also due to the Milk Marketing Board of England and Wales, one of whose research scholarships I held for two years; this award was completely free of conditions and the choice of subject was entirely my own. Finally I should make it clear that no one but myself is responsible for the views expressed or for any errors that remain. University of Glasgow May 11, 1961

GAVIN M~CRONE

CONTENTS FOREWORD BY PROFESSOR E, F. NASH

7

PREFACE

9

13

INTRODUCTION

PART I: THE PRESENT POSITION OF BRITISH AG RI CUL TORE

23 46 60

1. Agriculture in the British Economy 2. The Cost of Agricultural Support 3. Agricultural Expansion Since 1939

PART II: AGRICULTURE AND THE BALANCE OF PAYMENTS

4. An Analysis of the Balance of Payments Problem 5. The Contribution of Agriculture to the Balance of Payments 6. The Effect of Increased Self-Sufficiency on the Terms of Trade

69 74 88

PART III: THE PROSPECTS FOR IMPORTED FOOD SUPPLIES

7. 8. 9. 10. 11. 12.

The Factors Governing International Specialization Long-Run Movements in the Terms of Trade The Growth of the World's Population The Outlook for European Food Supplies British Agriculture and the Common Market The Threat to Britain's Food Supply

CONCLUSION

103 111 122 135 147 154 170

APPENDIX:

Tables A-C: Population Density of Selected Countries Tables D-F: Food Output in European Countries INDEX

179-181 182-184 186

INTRODUCTION

It is frequently stated that the object of Government policy is to produce a 'healthy' home agriculture. There are probably few who would disagree with this as an objective; but there is scope for substantial disagreement on the methods employed to carry it out. It is well known that agriculture suffered years of severe depression before the war; and it is clear that its condition was not healthy then. Since the war it has benefited from substantial Government subsidies, and in consequence it has enjoyed boom conditions. But it seems that these subsidies must continue indefinitely if agricultural prosperity is to last. This situation cannot be described as healthy either. The National Farmers' Union and others connected with the industry frequently point to the very real achievements of British agriculture since the war; outsiders often complain at the burden of support involved. But although lip service is paid to the ideal of a healthy agriculture which would be able to stand on its own feet, few have tried to suggest how this should be attained. It may be that there are good reasons for subsidizing a particular industry more or less indefinitely; but if so these should be clearly understood. Since the war there has been much loose talk about agriculture's contribution to the balance of payments or the prospect of a world food shortage; but these issues are not widely understood, and in fact most of the arguments commonly given to justify support for agriculture could equally well apply to the coal industry or indeed many others. Those connected with agriculture are inclined to regard with some asperity the economists who write about subsidies; but if the arguments for and against giving agricultural support are not properly understood, little complaint can be made if it is taken away. Agriculture plays a smaller part in the British economy than it does in any other country. The purpose of this book is to consider what part it ought to play and whether the subsidies are applied in the most suitable way. The subject is dealt with primarily as an economic question, and agriculture's role in the economy is analysed with the historical background leading up to the present position. Subsidies can have a profound effect on developments in the agricultural industry: they may, if correctly applied, encourage efficiency and help the industry to play the part desired of it in the national economy; but they can equally well shield inefficient producers from competition and encourage all the wrong developments. The heavy burden which agricultural support imposes on the economy as a whole must be justified either by the present economic situation 13

THE ECONOMICS OF SUBSIDISING AGRICULTURE

or by probable future developments. For this reason the industry's contribution to the balance of payments and the possibility of a food shortage affecting overseas supplies must be considered. Of course, there are other reasons apart from those of a purely economic nature which may justify support for home agriculture: these are what may be called the strategic and social reasons. The United Kingdom suffered in both world wars from her inability to feed her population from her own resources. This dependence on overseas supplies has been an Achilles' heel in time of war; and it has undoubtedly been worsened by the free trade policy of British Governments throughout much of the last hundred years. This policy greatly expanded British trade; it kept the cost of living low by the import of cheap food; and it greatly enriched the nation by concentrating productive resources in the activities where they were most profitable. But it exposed the country to grave dangers in time of war. Even in this respect, however, the policy can be defended: it enabled Britain to become more industrially developed and hence more competent to wage war than she would otherwise have been; it gave her a wealth of foreign investments and a large merchant fleet in which to carry essential supplies; even the reversion of land to permanent pasture can be claimed to be a means of storing up fertility in the soil. Thus agricultural production could be fairly rapidly increased when the need arose and merchant ships could be released for the transport of other goods, while the foreign investments provided a source of capital with which to wage the war. It is obviously difficult to judge these arguments without knowing either the cost of maintaining greater self-sufficiency or the level of self-sufficiency which it would have been practical to maintain. It is certainly possible that slightly higher self-sufficiency would not have involved any very excessive cost and it might have contributed much to easing the burden in wartime. Whatever the contribution of stored up fertility may be in some cases, there was much land which went out of heart and lost its quality; and it always takes several years to step up agricultural output in time of war. This is clearly a source of considerable danger, and one which could have caused the defeat of the nation. Two world wars have caused many people to appreciate the importance of this lesson. So well was it learnt that it formed one of the main reasons for statements made by various governments to the effect that the heavy support for agriculture must continue even after the immediate post-war shortages had been overcome. Obviously 14

INTRODUCTION

this is a military and political decision and not something about which the economist in his professional capacity can advise. The economist's job is to help those who have to decide by estimating the cost to the nation of such a policy. Not only does the heavy burden of support have to be borne by the taxpayer and the consumer; but, if an actual expansion of home agriculture is envisaged, resources will be employed which would have given greater productivity in other uses. Therefore, for both these reasons the economy will be poorer than it might otherwise be. But it should be noted that this strategic argument has been voiced far less in political and military circles in recent years. This is because of the military revolution caused by the possibility of atomic and hydrogen warfare. Unless a prolonged 'conventional' war can be envisaged, the danger of defeat by starvation has now been outdated. It is difficult to imagine what another major war would be like; but it is said that it would be short, sharp and final. Those who use the social argument to advocate agricultural support, seem to regard it as some sort of extension of the Welfare State, though they rarely admit this. They make the political value judgment that those engaged in agriculture would receive under conditions of laissez-faire an inadequate reward for their services. This is essentially the same sort of argument as that used to advocate the setting up of schemes for old age pensions or the establishment of a Health Service; and, like them, it depends on a basic value judgment, which the majority of people may or may not accept. In the case of the two latter it appears that they have, but in the case of agriculture it seems doubtful if they would. Once again it is no business of the economist to pass judgment, but only to point out the implications if such a policy be adopted. The idea that those engaged in agriculture are paid less than they deserve stems largely from the fact that in most countries of the world a larger proportion of the total employed population is engaged in agriculture than the proportion of the national income which they receive. In Britain these proportions are about equal at present, but there would be a big difference if agricultural support were withdrawn. This in itself is of little significance. There is no more reason why those engaged in agriculture should receive the same proportion of the national income as they form of the employed population than there is for the dockers, or the shipbuilders, or the actors as a group to have earnings which are equal to the national average. In fact the earnings of any particular group in society may be either above or below the national average, depending on the 15

THE ECONOMICS OF SUBSIDISING AGRICULTURE

conditions of demand and supply and the relative attractions of different occupations. Indeed it is no more surprising to hear that farmers' earnings as a group are below the national average than it would be to be told that guardsmen as a group were above the national average in height. In both cases there is a reason for it. In terms of economic theory, agriculture as an industry is receiving its long-run equilibrium earnings when these earnings are not so great as to cause it to expand, nor yet so small as to cause it to contract. In terms of a dynamic analysis, equilibrium will obtain when the rate of expansion of agricultural output is exactly sufficient to keep pace with the increase in demand caused by a rise in the standard of living or the total population. This mechanism is analysed in much greater detail in Chapter 8, but it will be clear already that, whether the proportions of employed population and national income earned in agriculture are equal or not, is irrelevant to the equilibrium conditions. As the analysis of Chapter 8 shows, people spend a greater proportion of their incomes on items other than food as the level of income rises, so that in most countries there is a tendency for the proportion of resources used in agriculture to decline. Once the population stops growing rapidly this will probably mean a gradual transfer of resources out of agriculture into other occupations; and since this process is likely to be slow, income may fall quite low before the necessary transfer is obtained. Therefore, although those who would support agricultural income on social grounds may have very good reason for doing so, the economist must point out that by so doing they may only be aggravating the problem and causing themselves to pay out an ever increasing sum. Such a policy would tend to slow down the rate of transfer of resources to other occupations and so make their actual productivity at free prices much lower than it would have been, if the process had not been interfered with. The result may therefore be to add a cumulative burden to the support cost. This point is not without relevance to the rising burden of agricultural support in many countries. Unfortunately, although there may be a case for supporting agriculture on social grounds, it is frequently advanced by people who make no attempt to conceal a strong emotional bias for all things rural. The idea that there is something essentially noble and cultural about country life, especially the life of the small farmer, is very commonly found but by no means widely accepted. It predominates not as might be expected among the agricultural population, many of whom manifestly ignore it by seeking work in the towns, but among 16

INTRODUCTION

the more romantic sections of the middle classes. As the Economist has aptly said: 'The "social justification" for preserving the small farm in being -that the small farmer is "part of the pattern of our countryside" and a specially deserving character by reason of his hard working independence-can be used for "preserving" him like an inordinately and increasingly expensive museum piece, whose net material contribution to the national wellbeing is nil or negative and whose social contribution is mainly to demonstrate the power of a welldug-in pressure group.' 1 Agricultural policy has been much discussed since the war, and political parties vie with each other in trying to please the farmers, because the importance of their votes in the marginal seats is out of all proportion to their actual numbers. The social contribution of agriculture has consequently had a sympathetic hearing and has tended to obscure the economic issues in nearly all discussions on agricultural policy. It is probably because, as is so often said, agriculture is a way oflife, that people become so much more sentimental and romantic about it than they do, for example, about the cotton industry. The degree of romanticism varies from those who are just vaguely in favour of agriculture and allow this to blind them to the great cost of agricultural support, to those who advocate a general return to the land, because for some reason they regard everything not connected with the land as vaguely immoral and corrupt. In the words of Massingham and Hyams 'Every great artistic culture has risen out of a peasant community. ' 2 The most unfortunate feature is that such views and opinions have not been confined to arguments about agricultural policy on purely social grounds, but have influenced discussions on the economic aspects as well. Thus in spite of all the talk about agricultural policy, comparatively few people, even in the farming industry itself, have really got down to considering the basic economic issues on which policy should be based. When the subject has been debated, there has been a widespread difference of opinion, which has shown little tendency to resolve itself. This is partly because agricultural experts and economists look at the problem from very different points of view. If the vested interest, which all too frequently plays a part, can be discounted, the agricultural Economist, October 18, 1958, p. 215. H. J. Massingham and Edward Hyams, Prophecy of Famine, Thames & Hudson, 1953, p. 19. 1

1

17 B

THE ECONOMICS OF SUBSIDISING AGRICULTURE

expert tends to be greatly impressed by the fact that agricultural production cannot be turned on and off like a tap: expansion is a slower process than in many other industries; and normally a high standard of efficiency can only be reached after many years of hard work, much investment in equipment and constant efforts to improve the land. He regards all this as a lasting asset which it would be folly to throw away because of the particular conditions of the market at any one time. There is much justification for this, but it can be argued that it causes him to put too little emphasis on the importance of economic factors and the need for agriculture to be adapted to the requirements of the economy as a whole. On the other hand the economist considers agricultural policy not as something on its own but as part of economic policy as a whole; and it may be argued that he attaches too little importance to the particular problems of the industry, especially the importance of maintaining the productivity ofland, a problem which does not arise in other industries. But even among economists there have been wide differences of opinion. Professor Nash and Professor Robinson, 1 who are the two main protagonists in this field, hold very different views about the gain to be obtained from the present high level of agricultural support. Professor Nash considers what has been spent and what is achieved; Professor Robinson bases his arguments on the theory of tariffs and predictions of movements in the terms of trade. These are two quite different ways of looking at the problem; and it is perhaps not surprising, therefore, that their authors have been led to different conclusions. Many people connected with agriculture point out that other industries are protected as much if not more than their own; and they claim that it is unreasonable therefore to single it out for criticism on economic grounds. In a sense this is perfectly true: several industries for example enjoy tariffs of 30 per cent, and as will be shown in subsequent chapters this probably exceeds the level of protection 1 E. F. Nash, 'The Competitive Position of British Agriculture', Journal of Agricultural Economics, Vol. XI, No. 3; 'Some Reflections on Agricultural Policy', Lloyds Bank Review 1956; 'The Sources of Our Food Supplies', ICI Conference, Agriculture in the British Economy, 1956, published March 1957. E. A.G. Robinson, 'The Changing Structure of the British Economy', Economic Journal, 1954; and in Three Banks Review-'The Future of British Imports', March 1953; 'The Problem of Living within our Foreign Earnings', March 1954; 'Some Comments on Mr Scott's Article', June 1955; 'The Problem of Living within our Foreign Earnings Further Considered', June 1958; 'The Cost of Agricultural Import Saving', December 1958; ICI Conference as above, 'Agriculture's Place in the National Economy'. With R. Marris, 'Use of Home Resources to Save Imports', a note, Economic Journal, 1950.

18

INTRODUCTION

given to agriculture by subsidies and other means. As a defence of the present position of British agriculture, however, this is unsatisfactory. The criticism is not simply that agriculture enjoys protection, but that it requires this protection to compete with other nations. Many industries which have tariffs protecting their home markets are nonetheless quite competitive, and are able to sell substantial parts of their output abroad in markets where they are not protected. The motor industry provides an example of this: British cars are protected in the home market by an import duty of 30 per cent on foreign cars; but the industry demonstrates its competitive position in export markets, particularly in the United States. It is certainly true that, if tariffs were lifted, more foreign cars would be sold in this country; but, if the abolition of protection was mutual, more British cars would be sold in such countries as France and Germany. Although there are doubtless some industries which are exceptions to this and do rely on protection for their existence, they are only a small minority. This was demonstrated during the discussions on the Common Market and the Free Trade Area, when industry's comparative willingness to grasp the opportunity of freer trade in Europe stood out in marked contrast to the attitude adopted by British agriculture. It is this inability to face competition which makes the economics of subsidizing agriculture important and sets it aside from the tariff protection enjoyed by so many other British industries. In the chapters which follow the subject is divided into three main parts. Part I outlines the part played by agriculture in the British economy. Chapter 1 compares this with the position in other countries and shows how the unique situation in Britain can be largely explained by the economic conditions which have faced the country during the last hundred years. In Chapter 2 the support given to the industry from all sources is set out in detail and compared with the position in other European countries. Chapter 3 examines the expansion of British agriculture since 1939. The rest of the book is concerned with the arguments used to justify agricultural support on economic grounds. Part II deals with the contribution of agriculture to the balance of payments. This involves an analysis of the balance of payments problem in Chapter 4 and of agriculture's contribution in Chapter 5. The veiw that the balance of payments may be helped by trying to tum the terms of trade in Britain's favour is examined in Chapter 6. The third part of the book forms a study of the prospects for imported food supplies, since the danger of a world food shortage is one of the arguments most consistently used to justify support for British agriculture. Chapter 7 contains 19

THE ECONOMICS OF SUBSIDISING AGRICULTURE

a study of the factors governing international specialization. This explains the reasons for countries concentrating on the production of primary or manufactured goods and the conditions which make particular industries uncompetitive. Chapter 8 analyses trends in the terms of trade to see if these give support to past predictions. The growth of the world's population, the prospects for food supplies in Europe and the effects of the emergence of underdeveloped countries on Britain's imported supplies are discussed in Chapters 9 to 12. The last chapter gives a brief summary of the main findings and outlines the importance of these for agricultural policy.

20

PART I THE PRESENT POSITION OF BRITISH AGRICULTURE

CHAPTER 1

AGRICULTURE IN THE BRITISH ECONOMY

ONE of the chief characteristics which distinguishes British agriculture from that of other nations is the small part it plays in the national economy. There is no other country in the world which produces so small a proportion of its own food supply, employs so small a part of its working population in agriculture or earns from the production of food so small a part of its national income. It is necessary to consider the historical development which has led to this situation before asking whether it is the most satisfactory role for British agriculture.

1.

AGRICULTURE IN BRITAIN COMPARED WITH OTHER COUNTRIES

The present position is that 4 ·1 per cent of the working population of the United Kingdom are employed in agriculture, and they receive 4·2 per cent of the Gross National Product. How different this situation is from that prevailing in other countries is illustrated in Table 1. In no other country of the world is the percentage of the working population engaged in agriculture below 10, more than twice the British figure. In Europe the percentage is in most cases between 15 and 20, with the less advanced nations such as Ireland, Portugal, Spain and Greece about 40 per cent. Yugoslavia and Turkey have the highest figures of the OEEC group, the former with 67 and the latter with 77 per cent. Looking at the world as a whole it is found that most of the countries normally classified as underdeveloped have between 60 and 80 per cent of their population engaged in agriculture, while the more advanced nations have percentages which in some cases fall as low as 10. 1 All this shows how remarkable the situation in the United Kingdom is. Even Western Germany, a country which 1 Figures for many countries other than those given in Table 1 can be obtained from FAO Yearbook of Food and Agricultural Statistics. But these figures are in many cases some years out of date.

23

THE ECONOMICS OF SUBSIDISING AGRICULTURE

is very similar in other respects, employs 17 per cent of her active population in agriculture. TABLE 1 THE AGRICULTURAL SECTOR IN SELECTED COUNTRIES I I II II United Kingdom 4·1 31 4·2 Greece 48 Belgium Portugal 10 7 48 21 Switzerland Spain 15 7 49 26 Netherlands 12 Yugoslavia 10 67 30 Sweden Turkey 18 6 77 45 West Germany 17 7 Denmark 17 16 United States 12 5 Norway 18 8 Canada 7 19 France 26 14 Austria 30 Australia 25 12 16 Irish Republic New Zealand 30 38 32 18 Italy 32 21 Note: Col. I = Population working in agriculture as a percentage of total working population. Col. II = Agricultural production as a percentage of Gross National Product. Sources: FAO Yearbook of Food and Agricultural Statistics. OEEC Statistical Bulletins. OEEC Agricultural Policies in Europe and North America, Second Report, Paris, July 1957. U.K. Annual Abstract of Statistics. National Income and Expenditure.

Danish figures from E. F. Nash and E. A. Attwood, The Agricultural Policies of Britain and Denmark, Land Books, 1961.

It might be thought that the availability of agricultural resources, particularly in relation to resources for industry, would be the factor which would principally determine the proportion of the labour force employed in farming. But while this is important no doubt, the figures show that it is not the main factor. Rather it is clear that the countries which are most advanced economically are the ones which have small agricultural sectors in terms of both the proportion oflabour employed and the proportion of income earned. The United States provides a clear case of this: despite her vast agricultural resources she employs only 12 per cent of her working population in agriculture, and they earn only 5 per cent of the Gross National Product. These figures are amongst the lowest after the United Kingdom, and they are all the more remarkable because the United States is not only able to supply most of her own food requirements but is also an important exporter. 24

AGRICULTURE IN THE BRITISH ECONOMY

It might have been expected also that the food exporting countries -Denmark, Holland, New Zealand and Australia-would employ a large proportion of their working population in agriculture. But in both Denmark and Australia the proportion is between 16 and 17 per cent and in New Zealand it is 18 per cent. These figures are all markedly lower than those prevailing in underdeveloped countries and considerably below such countries as Spain, Italy and the Republic of Ireland, which have between 30 and 50 per cent. This demonstrates quite clearly that, while the comparative advantage in industrial and agricultural resources has its importance, the principal factor determining the size of the agricultural sector in any country, measured in terms of the proportion of labour employed, is the stage of economic development reached. It so happens that in the United Kingdom's case both these forces combine to reduce the relative size of the agricultural sector, so that the high level of economic development in conjunction with a remarkable dependence on imported food produce the unique situation where only 4·1 per cent of the labour force is employed in agriculture. By and large the percentage of the Gross National Product produced by agriculture varies between countries in much the same way as the percentage of working population employed. From this point of view agriculture has again less importance in the economy of the United Kingdom, where it is responsible for only 4·2 per cent, less than in any other country. Again the highest figures are recorded for the less developed nations. Figures for Far Eastern countries are not available but among the OEEC group the highest is Turkey with 45 per cent followed by the Irish Republic 32 per cent, Greece 31 per cent and Yugoslavia 30 per cent. Once again, therefore, the importance of agriculture in the national economy seems to depend more on the stage of economic development reached by the country than on the distribution of industrial resources, although this is also important. In the United States, despite the enormous land area and high degree of self-sufficiency in food, agriculture contributes only 5 per cent of the Gross National Product. In the Netherlands it contributes only 10 per cent and in Denmark 16, while in the industrial countries of Western Europe it varies mainly between 7 and 15 per cent. 2.

TENDENCY FOR AGRICULTURAL EARNINGS TO BE BELOW AVERAGE FOR THE ECONOMY

One of the most significant facts which emerges from this analysis is that the proportion of the Gross National Product produced in agri-

25

THE ECONOMICS OF SUBSIDISING AGRICULTURE

culture is in almost every case considerably smaller than the proportion of the working population employed in its production. This means that in nearly all countries of the world the members of the agricultural population receive less than the average earnings for the working population as a whole. It can be said that the realization of this simple fact is fundamental to many issues debated by agricultural economists and tends to underlie most discussions on agricultural policy. Its importance is therefore very difficult to exaggerate. For the explanation of this state of affairs one must look to the rapidly growing demand for goods and services other than food and the slowness of labour to transfer itself to these new occupations. This transfer is largely brought about by a depression of agricultural earnings in relation to those elsewhere. Since the tendency is for expenditure on food to form a smaller and smaller proportion of total expenditure as income rises, the condition becomes chronic; and, although the proportion of the labour force employed in agriculture declines with technical progress, it never seems to decline fast enough to catch up with the proportionate fall in demand and so equalize earnings in agriculture and elsewhere. This is a rough explanation of the mechanism which is at work; the process is described more fully and the underlying theory analysed more carefully in Chapter 8. In the less developed countries there is another explanation which tends to reinforce the above. In the earlier stages of development, capital rather than labour is the scarce factor of production. Shortages of capital and land would cause a section of the labour force to remain in chronic unemployment; but in such a country this does not assume the form of the unemployment so well remembered in Britain, Germany and the United States in the 1930s. Rather it results in 'disguised unemployment' on the land. Instead of a few people working hard and efficiently, a larger number of people work below capacity to produce the same output of food, very often duplicating each other's efforts and hindering themselves. This inevitably means that agricultural earnings must be depressed; it merely enables the unemployment problem to be shared by a large section of the community instead of the brunt being borne by a smaller number of people as in an industrially advanced nation. These two situations between them seem to explain the disparities between agricultural earnings and those elsewhere. In most cases there is a mixture of both. This may seem surprising, since the one is based on a shortage oflabour in industry and the other on a surplus in agriculture. In fact these conditions do exist side by side sometimes. 26

AGRICULTURE IN THE BRITISH ECONOMY

It requires a certain financial inducement to persuade even a disguisedly unemployed agricultural worker to move to a new occupation and very often a new locality. There seems little doubt that it is a mixture of these forces which cause the very wide disparities between the proportion of the working population employed and the proportion of the Gross National Product earned in agriculture in such countries as Turkey, Yugoslavia and Italy. The latter, though advanced in the north, is very backward in the south where disguised unemployment and poverty are widespread. The countries which form exceptions to this rule are interesting. Australia and New Zealand are the only two at present where the percentage of the Gross National Product produced exceeds the percentage of the working population employed in agriculture, but for many years this situation also occurred in the Argentine. In Denmark the proportions are virtually the same and in the Netherlands the difference is small. The United Kingdom has also in recent years come within this group. As Table 2 shows, the percentages of TABLE 2

1949 1951 1953 1955 1957 1959

Agricultural Working Population as %of Total Working Population 5·3 Agricultural % share of GNP•

6·3

5·0 5·5

4·7 5·2

4·5 4·6

4·3 4·4

4·1 4·2

• GNP at factor cost. Sources: National Income and Expenditure, 1958, CSO, London. Annual Abstract of Statistics, No. 95, 1958, CSO, London.

working population employed and Gross National Product produced by British agriculture are about equal at present, being 4·1 and 4·2 respectively. But during the earlier post-war period the percentage of Gross National Product was distinctly higher, being 6·3 compared with 5·3 for the working population in 1949. Since that time the difference has narrowed, and it is possible that in a few years the earnings of those engaged in agriculture will be rather below average. The apparent high profitability of British agriculture compared with that of some other nations is not so remarkable as it may seem at first sight. It is largely an artificial situation created by the very high level of support. It is not possible to estimate what the contribution of agriculture would be to the Gross National Product in the absence of support; but according to the analysis in Chapter 2 the amount of support given to British agriculture is considerable, and its withdrawal would be likely to alter the situation quite markedly. In all

27

THE ECONOMICS OF SUBSIDISING AGRICULTURE

probability the proportion of the Gross National Product produced in agriculture would then fall to somewhere between 3 and 4 per cent. The United Kingdom would then become normal in the sense that, like most other countries of the world except two, those engaged in agriculture would be receiving below average earnings. But of course it would remain exceptional for the small size of its agricultural sector in the economy as a whole. The exceptions, Australia and New Zealand, are both countries with rich land resources, as yet not fully exploited; they are both still sparsely populated in relation to these resources and their industrial sectors are still at a fairly early stage of development. These conditions combine to make them the cheapest food producing nations in the world. It is primarily because they still have such an abundance of rich agricultural land while their industries, although potentially efficient, do not have an equivalent advantage, that they find themselves in this exceptional position, with a level of earnings in agriculture which is above the average in the economy as a whole. When these industries are more developed and start to benefit from economies of scale, or when the country is more crowded and the ratio of land to other resources becomes less favourable, these conditions may cease to apply; and the balance may then move in favour of other industries. Neither Denmark nor the Netherlands can boast such an advantage in the relationship of land resources per head, nor are their agricultural industries heavily subsidized like the British. In both of these countries, therefore, the ability of those in agriculture to obtain earnings which are more or less comparable to the average of the economy as a whole can only be ascribed to their own high standard of efficiency. 3.

EFFECTS OF THE AGRICULTURAL REVOLUTION IN BRITAIN

The stage of economic development reached has been shown to be the main determinant of the relative size of the agricultural sector in the economy; but this cannot explain why Britain imports such a large amount of her total food supply or why the proportions of her labour force engaged and her national income earned in agriculture are lower than in other countries at a similar stage of economic development. This position is still remarkable and needs further explanation. There are various reasons for the exceptional part that agriculture 28

AGRICULTURE IN THE BRITISH ECONOMY

plays in the British economy. Undoubtedly one of these is the particular form which the industry took in Britain when it emerged from the revolution caused by the Acts of Enclosure and the abolition of the manor system. Many of the characteristics which British agriculture then acquired have had a profound effect on the industry ever since and distinguish it from its Continental counterparts. Agricultural revolutions of various types took place all over Europe during the last two centuries; but the important characteristic of the British one was that the bulk of the power was vested in the landlord rather than the peasant proprietor. For the most part the landlords arranged the enclosures and let out the land to tenants who remained under their overriding control. This meant that many of the poorer people, in particular the yeoman cottar class, found themselves deprived of a livelihood and were gradually compelled to seek work in the new industrial towns. The lack of social justice in such a system may be deeply deplored; but there is no doubt that it made for an ultimately more efficient and more flexible agriculture than that which emerged in many other countries. Under the landlord-tenant system the landlord had the power to reorganize the holdings to a more efficient size. In practice he was able to do this not only at the time of enclosure, but subsequently whenever the tenants' lease expired. This could mean that, if the changing economic conditions and the requirements of new technical improvements made it desirable at any time to increase the size of holdings, the landlord could, in theory at least, carry out such a reorganization. In other countries, especially in France, the agricultural revolution took the form of turning the peasants into small proprietors. Owing to the problem of finding enough land for everyone, this probably meant that holdings were below their optimum economic size even when they were formed; and with the coming of mechanization and labour-saving techniques this has become increasingly so. The most unfortunate aspect of this arrangement has been that once the units have been set up it becomes thereafter extremely difficult to reorganize them. Each man becomes his own master and will submit to no one. The French system has also been unfortunate in that the land was frequently divided between members of the family instead of passing to the eldest, which led to further fragmentation. In the United Kingdom such a problem also arose in Ireland and in the north-west of Scotland, where after much hardship the rights of the small holder to his land were ultimately made secure in consequence of the suffering which had occurred in both of these areas. But in the rest of Britain the system remained much more flexible 29

THE ECONOMICS OF SUBSIDISING AGRICULTURE

and the 'underemployed' or 'disguisedly unemployed' were more easily weaned from the land to be employed in the rapidly expanding industries. There was consequently a much more rapid exodus of the working population from agriculture than there would have been if each farmer had inherited and owned his piece ofland as was common in other countries. If British farmers had had more security on their holdings during the eighteenth and nineteenth centuries it is very likely that a much larger section of the working population would be employed in agriculture today. This then is one of the reasons for the small size of the British agricultural sector; and it also explains why, although there are many small farms in Britain, the average size of farm is larger than in almost any other Western European country. In Britain, for example, 61 per cent of the land is on holdings of over 120 acres, while the corresponding figure in France is only 25 per cent and in Western Germany 10 per cent. 1 This has also had an influence on the earnings per head in the agricultural sector, since it is clear that, if labour had moved out of the industry less easily, there would have been less scope for the introduction of machinery. The productivity of labour would therefore have been lower and its average earnings would have been much below average earnings in the economy as a whole, even with the present scale of subsidies. 4.

THE HISTORICAL DEVELOPMENT OF AGRICULTURE'S PART IN THE BRITISH ECONOMY

Although the type of agricultural revolution may account for much in the part this industry plays in the economy, and probably was a necessary condition for the present economic structure, it cannot alone explain all the peculiarities of that position. In other countries the feudal power of the landlord was maintained, yet agriculture continued to play a much larger part in the economy, and the migration from the countryside to the towns was much less marked. To understand this situation properly it is necessary to investigate the historical background of the economy during the last 150 years. From 1801 to 1941 the population of Great Britain grew from about 11 million to 48 million, an increase of over four times. 2 Throughout such a period it might be thought that the continued OEEC, Agricultural and Food Statistics, Paris, 1959. • G. R. Porter, The Progress of the Nation, New Edition edited by F. W. Hirst, Methuen, 1912, p. 3; G. P. Jones and A. G. Pool, A Hundred Years of Economic Development in Great Britain, Duckworth, 1940, p. 16. 1

30

AGRICULTURE IN THE BRITISH ECONOMY

pressure of increasing population would cause a permanent boom for agriculture, if not actually causing a food shortage. In fact this was very far from being the case. It is true that during the first half of the nineteenth century food was very often in short supply; but after 1870 British agriculture became depressed and remained more or less so, except for a recovery in the First World War, until 1939. 1 Output contracted and in 1941 was considerably below the 1870 level in many products. That this was able to happen at a time when the population was growing, and when the standard of living was rising, is an indication of the tremendous growth in world food supplies at this time. In the earlier years, the Napoleonic Wars interrupted the flow of trade between the United Kingdom and her Continental neighbours, with the result that prices were often very high and food scarce. This applied particularly to bread grain. Even after the French Wars were over, years of shortage occurred; and this was most probably due to the increase in population combined with periodic bad harvests. All this is reflected in the unrest of the 'hungry forties' and the campaign to abolish the Corn Laws. The fact that this campaign was successful, however, did not mean that the farmers were immediately plunged into difficulties as so many of them feared. The proportion of Britain's food supply which came from overseas was certainly increasing during this period; but the bulk of the imports came from the Continent, especially France and Prussia, rather than the New World. And British agriculture continued for some time under boom conditions. In 1849, for example, 4,835 thousand quarters of wheat and wheat flour were imported into Great Britain; and of this France supplied the largest single amount with 742 thousand, Prussia next with 619 thousand and then United States with 617 thousand: a further 551 thousand came from the Black Sea region. Of the total 78 per cent was supplied by European countries. 2 Despite the repeal of the Corn Laws the new primary producing countries were neither ready nor able to seize the opportunity offered to them; and populations all over Europe were expanding so fast that there was little fear of the market being flooded by cheap food. Indeed the period up till 1870 was one of great prosperity for British agriculture. The agricultural revolution caused by the Enclosure Acts was consolidated, and boom conditions were widespread. 1 There was an improvement in prices in the decade before the First World War, but this was not sufficient to arrest the declining trends in the agricultural sector. • G. R. Porter, op. cit., p. 194.

31

THE ECONOMICS OF SUBSIDISING AGRICULTURE

The main turning point for British agriculture did not come before the 1870s, thirty years after the Com Laws had been repealed. Until this time agricultural prosperity was at its height, output was steadily increasing, land was being reclaimed and mechanical inventions for agriculture were beginning to appear. The reason for the delay in the change of fortune which ultimately came on British agriculture is that the repeal of the Com Laws alone was not sufficient to flood the market with cheap food. That was certainly a necessary condition; but it had to be followed by the ending of the American Civil War and by the spread of railways across the United States before a change in the conditions of food supply great enough to counteract the rapidly growing population could be felt. The American Civil War lasted from 1861 to 1865; and, while it caused great dislocation in the American economy, it also, as is the way with wars, forced the pace of many new developments. This was primarily so in the north, where the demand for munitions had fostered the growth of the iron and steel industries, and the need for transport the spread of the railways. The expansion of the iron and steel industries produced the implements which made the ploughing and harvesting of the prairies possible. This area, once it had been reclaimed, was to prove invaluable for the production of wheat and maize and for dairy farming, although previously it had been regarded as a sort of desert suitable only for wandering herds of beef animals. Among the many inventions which helped agricultural expansion in the west, the development of a strong plough capable of breaking up the tough prairie land and of barbed wire for fencing fields were fundamental. Without the latter, the change from ranching to arable farming could not have been made, because there was no suitable fencing material. In 1869 the first American transcontinental railway was completed. This marked the dawn of an era of cheap transport to the remotest parts of the United States and opened up the possibilities of trade in foodstuffs on a scale that could not be imagined before. The turning point came in the 1870s because then for the first time all these conditions coincided. The willingness of Britain to import was not enough to bring a change in the prosperity of home agriculture. This had to wait for the revolution in the capacity of the exporting nations which was beginning to have its impact in 1870. Looking back over the developments which have taken place in British agriculture, there is not the slightest doubt that this period did mark a turning point; and it is interesting to see in what ways the change came about. Table 3 shows that the agricultural area in 32

n

TABLE 3 AGRICULTURAL TRENDS IN GREAT BRITAINt

1870

Total Agricultural Area• Arable Area Permanent Pasture• Wheat Barley Oats Beans w Potatoes w Turnips and Swedes Mangolds Rotation Grass Bare Fallow Sugar Beet Cattle Sheep Pigs Horses

1890

1913

30,407 18,335 12,072

32,768 16,751 16,017

31,927 14,360 17,567

3,501 2,372 2,763 530 589 2,210 306 4,505 610

2,386 2,111 2,902 358 529 1,948 331 4,809 508

1,756 1,757 2,913 274 591 1,485 421 3,969 396

-

5,403 28,397 2,171 1,266

-

6,509 27,272 2,774 1,433

-

6,963 23,931 2,233 1,324

1937 1931 1920 1918 Agricultural Area (000 Acres) 31,749 31,246 29,916 29,351 15,852 15,400 12,632 12,015 15,896 15,846 17,281 17,336 2,636 1,635 4,023 259 803 1,305 403 3,449 414 -

1,929 1,842 3,304 263 707 1,417 388 3,886 573

-

1,247 1,117 2,486 161 575 982 272 4,116 363 234

1,832 903 2,041 219t 590 771 210 3,669 550 314

Livestock (000 Head) 7,909 7,273 6,713 7,410 23,353 19,744 25,580 24,712 3,883 2,945 2,122 1,825 1,004 1,091 1,580 1,336

1948

1957

1959

>

0

28,789 17,393 11,396

28,878 16,607 12,271

28,832 ~ 16,855 11,977 t"'

2,274 2,077 2,945 86 1,338 650 279 4,889 245 413

2,109 2,608 2,109 87 708 505 153 5,719 313 430

1,927 ::,:1 3,032 ti:1 1,833 79 719 ~ 478 ti:1 132 td 6,212 ~ 370 ::! 434 f=

g

➔

e

z

t,:I

8,839 17,589 1,816 634

9,908 23,867 5,232 208

n

0

10,328 z 26,601 0 5,135 s::

t Including peas. • Excluding rough grazings. Source: Ministry of Agriculture and Fisheries, Agricultural Statistics. London, HMSO. t Comparisons cannot be made from United Kingdom figures owing to the secession of the Irish Republic.

>