T.W. Schultz's Contributions to the Economic Analysis of U.S. Agriculture^†

Prior to his Nobel Prize-winning work in economic development and human capital, T.W. Schultz focused his attention most centrally on the economics of U.S. agriculture. His research on this subject, published mostly between 1932 and 1951, laid the foundation for his later work. However, the lasting value of Schultz's earlier work may appear to have been called into question even by the author himself. In the three books of collected writings he published toward the end of his life (Schultz, 1990, 1993a, 1993b), very few early writings are reprinted or even cited. Nonetheless, among agricultural economists, Schultz's earlier work has been as influential as his later work became among economists generally. In the American Economic Association's (1969) compilation, Schultz was referenced in the index more than any other economist, and all twenty-two references to his works refer to studies of U.S. agriculture (and only two of them to his work on human capital). In this paper, I review Schultz's contributions under two headings: the economics of farming and agricultural policy.

The Economics of Farming

D. Gale Johnson noted that Schultz was a “keen observer of the world in which he lived. I know of no one who learned more from direct observation than he did” (2000, p. 302). What makes Schultz's contributions great is what he did with what he saw. A key is drawing out the big-picture implications of micro-level observations. In his observations of U.S. agriculture, he took seriously that what he observed on farms and in data should make sense in terms of economic theory. In his first major publication, Schultz (1932) achieved original results from analysis of farm-level observations and data. Using ideas of Allyn Young on increasing returns (see Nerlove), Schultz focused on Iowa's substantial increase in agricultural output while neither the farm population nor the land in farms grew. Pondering the puzzles in these data led him to the centrality of “the ability and skill of farm people” (p. 645), which together with “technological advancements in corn belt farming” from “the test plot and the laboratory” led Schultz to attribute essentially all the observed increase in production to factors that he calls “the favorable changes in the state of the arts” (p. 648). Thus, this 1932 paper contains the seeds of the program of economic investigation in research, human capital, and technological change that he followed and urged upon his students for the following half-century.

Two articles of the late 1930s provide a picture of how Schultz saw the enterprise of economics in action (1939a and 1939b). The former addresses farm management research, which was then the prevalent activity of agricultural economists, in the context of the theory of the firm. It is not surprising that Schultz advocated serious use of the theory of the firm; more striking is what he meant by it. He did not mean production economics, as identified with the laws of production or cost functions, as in the work he cites by Black and by extension with the vast body of theory and application that followed that line (and predominates to this day). Schultz's exemplars are Kaldor and Hicks (1936, chapters, 6 and 7), with a bow also to Coase. What he likes in them is their rejection of production or cost relationships as the basis for a coherent theory of the competitive firm. Instead, the essence of the firm is the entrepreneurial functions of planning and administration under conditions of constant change and uncertainty (see Schultz, 1939a, pp. 573–76). The arguments he gives in support of his view have an abstract cast which is quite unclear.¹ It seems evident that what most bothered Schultz was empirical not theoretical—that the classical laws of production, notably diminishing returns, explained so little of the most important developments in the agricultural economy.

Schultz (1939b) indicates how he sees economics as a science. This article is an assessment of a massive review of the state of agricultural economics, published in 1930–1932 in fifteen studies covering various sub-fields, directed and largely written by John D. Black. The review is largely favorable, but Schultz expresses a fundamental core of dissatisfaction with Black's enterprise (and by extension with the predominance of agricultural economics as practiced). He begins by lamenting “the wide gap between theory and research” (p. 705). His basic complaint is that while the studies reviewed may have been intended to bridge this gap, in fact they badly miss the boat. The studies have theory and findings (from some 780 projects reviewed) but neither sufficiently illuminates the other and we end up with too little enlightenment.

How Schultz sees the situation generally is: “Theoretical economics is not a priori in character as is mathematics or pure logic; instead it is fundamentally empirical as is theoretical physics or as is the abstract structure of any science” (1939b, p. 715). Actually, even quite abstract work in economics is typically done with an eye to its empirical implications, and it is difficult to get a good sense of the gravamen of Schultz's position from this article. But in the context of articles previously cited (Schultz, 1932 and 1939a), the source of his discontent is clear: it is again the failure of the standard core of classical/neoclassical production economics to throw light on, or even to be consistent with, the most important observed events in the agricultural economy. It may not be too much to attribute some of the innovations in agricultural economics by students exposed to Schultz to his insistence that theory had to be pushed in directions that would illuminate events that standard theory cannot explain. The first such task is understanding the causes of increasing returns (or total factor productivity growth).

Agricultural Policy

In his classic survey, Brandow builds his analysis of the U.S. farm policy around Schultz (1945). Brandow discusses ten features of the agricultural economy, all of which he finds in Schultz, that when put together constitute a model that generates economic problems for farmers congruent with those suffered in U.S. agriculture in the 1920s and 1930s (Brandow, pp. 214–16). It is important to recognize, however, that Schultz's lasting contributions stem from his focus on some elements of the farm problem model relative to others. The key line of demarcation can be seen in his view that “the basic causes for the farm problem—the low earnings of most farm people and the great instability of income from farming—are not within agriculture, but elsewhere in our economy” (Schultz, 1945, p. x; italics in original). This view is in stark contrast to the more usual formulation of the problem as one stemming from unique features of the agricultural economy itself, notably inelasticity of supply and demand coupled with technological progress that keeps shifting supply to the right. Schultz does address those features of farming and the agricultural economy at length, so much so that Brandow highlights the inelasticity-related features in what he calls the “Schultz model” (Brandow, p. 214). Nonetheless, the commodity markets are not central to Schultz's thinking, especially as it evolved in later years. In Schultz's revisiting of his 1945 book three decades later, one of the few regrets he expressed is that on land and capital markets “a much fuller treatment was warranted” and with respect to the labor market, his omission of the role of off-farm income (Schultz, 1974, pp. 2 and 6). (The contrasting emphasis can be seen most clearly in Willard Cochrane's “treadmill” model. Fixity or rigidity of commodity supply in the face of lower prices is the central feature, with low prices linked to low farm income.)

A Schultz bête noire is modeling using concepts to represent the economy which, specified mathematically but not empirically grounded, is used to draw conclusions about the economy through simulation or deduction. He was not flattered that Brandow referred to the “Schultz model,” saying that “models have become very cheap; our literature is flooded with models that debase our coin. They drive out solid economic thinking because they omit most of the precious metal of economics…” (Schultz, 1974, p. 1). He particularly did not like growth models, whether neoclassical or Keynesian. The reasons mirrored his disapproval of standard production economics as used in agricultural economics. The models are too mechanical, and most importantly lead users away from rather than toward the unexpected but crucial changes that really drive economic history. It is the economics of disequilibria that matter, and the thrust of model building is to ignore them.

Schultz's emphases from the beginning centered on economic instability and dynamics. Although he is properly seen as a believer in markets as means of organizing economic activity, he was also receptive to problems that arise in markets, and especially the obstacles as well as opportunities that the functioning of markets generate for the alleviation of poverty. As a participant in, as well as student of the economics of agriculture in the difficult years of the 1920s and 1930s, he was during the formative period of his professional work keenly attuned to the severe problems faced by farm people in those times. He was not an adherent of laissez faire in agricultural commodity markets. He (along with D. Gale Johnson) argued at length for “forward prices” that would be set at the expected market price for commodities, and “compensatory payments” that would be countercyclical and “should not disturb trade and production in agriculture” (Schultz, 1974; argued in detail in Johnson, 1947).²

Indeed, Schultz envisaged a large role for government in agriculture. In a detailed discussion (Schultz, 1946), he asks “does agriculture require more than a minimum of administration in the economic sphere on the part of government?” He elaborates: “Can conservation be left solely to market forces? The answer, of course, is no. Will a market economy provide stocks and storages necessary to stabilize our gigantic livestock industries? Again the reply is in the negative. What about credit, housing, farm ownership, medical facilities, education, research and experimental work, old age, and retirement opportunities? None of these can be left wholly to the market.” And he goes on to endorse “crop insurance by government” and forward prices.

In Schultz (1950), he provides his most nuanced presentation of the problems he sees arising in the U.S. market context. The central problem is not a lack of overall economic growth but rather differences between communities, particularly between rural communities that have kept up with per capita income growth in the general economy and communities that have fallen behind. The reasons for falling behind are of two kinds, the first involving the abilities of individuals to produce income and the second involving “factor price equalization” between communities via migration or trade. He highlights the lack, in poor communities, of opportunities to invest in schooling, and indeed to invest in productive capital. This, together with impediments to labor mobility, which Schultz takes very seriously, results in a tendency toward increasing disparity of incomes between communities that he sees no self-generating mechanism to remedy.

The Schultzian view thus leads away from the commodity market approach to farm income support but not away from governmental efforts to improve market outcomes. Public spending on schooling, research, and other investment aimed at improving the human capital of poor communities is at the top of his agenda, as well as plenty of commodity stabilization policy.

The contribution of off-farm income to the personal income of farm people that Schultz lamented omitting from his 1945 book is also not included in the 1950 paper. The spirit of the latter paper is open to off-farm income, in that off-farm income is an alternative route to achieving the factor price equalization which he insisted had to occur to permit real income growth in poor communities. Schultz's main revised thoughts about U.S. policy relate to his endorsement of compensatory payments. It is noteworthy that his regrets do not register what would be many economists' first question: how would it ever be possible to make such payments in such a way as to meet his requirement that they support incomes in low-price periods yet not disturb trade and production? Rather, he concludes that in dismissing the risk of politics turning a good idea bad, “what I said reveals the naiveté of my youth” (1974, p. 9).

While Schultz was in important respects a supporter of governmental action, he was never an uncritical one. And he believed that such criticism is an essential part of the economist's social function.³ Those responsibilities include the choice of research topics, and on that he believed agricultural economists at Land Grant universities were far too parochial.⁴ With respect to the role of governments in fostering economic growth in agriculture, when he became disenchanted with the prospects for political remedies, he characteristically turned to economic analysis of the phenomena and enlisted professional help with the venture. In Schultz (1978), he lamented the absence of follow-up in other countries to the Green Revolution in India, and gave as the main reason that “the state of incentives in many low-income countries suppresses the economic opportunities of farmers.” And further that “interventions by governments are the primary cause of the lack of optimum economic incentives” (1978, p. 7).

Summary

Agricultural economics is a collective effort and it would be surprising if any individual singlehandedly changed much of its direction, methods, or conclusions. But T.W. Schultz was an uncommon individual and there is good evidence that he did influence the profession—not of course, every agricultural economist or perhaps even a majority, but a sufficient number to make a difference in what the profession has produced.

In Schultz's assessment of the worth of what he and his profession were accomplishing, he held fast to the conviction that economics had a job to do, and that job was to contribute to the understanding and alleviation of poverty. The approaches he found congenial in that undertaking include the following: early emphasis on taking economic theory seriously in empirical farm economics;⁵ thoroughgoing attention to the limitations of static equilibrium as the end-point of analysis, with corresponding emphasis on the pervasiveness of “disequilibria,” and the central importance of coping with disequilibria; the centrality of farm-nonfarm economic linkages and the macroeconomy more broadly in explaining low incomes in agriculture; the key role of agricultural productivity growth in the creation of disequilibria through innovations in technology; the role of entrepreneurial abilities and skill in dealing with disequilibria; and an overarching strategy emphasizing integration of the particular with the general, and pursuit of generality in one's investigations without losing sight of the facts.