Marginal costs in relation to agricultural values

Book 5, Chapter 10

§1. The price of agricultural produce depends on the interaction of supply and demand. If there’s an increase in demand, then higher prices encourage the addition of inputs and effort. Rents from land are not part of this calculation, as they are an inherent return on fertility.

[This chapter, recall, is part of seven “technical” chapters that Marshall advises lay readers to skip. I didn’t because I want to see his thought process. What occurs to me, in comparing these chapters (and the whole book) to contemporary economics books, is that Marshall spends much more time on whatifs, caveats and conditions than “modern” books, which can over-simplify to the point of losing touch with reality.]

§2. Marshall discriminates between monopoly profits (e.g., via collusion) and rents that accrue due to (natural) scarcity. He gives a water example:

It is, indeed, true that if there were more than enough land, all of about the same fertility, to enable everyone to have as much of it as was needed to give full scope to the capital he was prepared to apply to it, then it could yield no rent. But that merely illustrates the old paradox that water, when abundant, has no market value: for though the services of some part of it are essential to support life, yet everyone can get without effort to that margin of satiety at which any further supplies would be of no service to him. When every cottager has a well from which he can draw as much water as he needs, with no more labour than is required at his neighbour’s well, the water in the well has no market value. But let a drought set in, so that the shallow wells are exhausted, and even the deeper wells are threatened, then the owners of those wells can exact a charge for every bucket which they allow anyone to draw for his own use. (p 356)

So rents due to natural scarcity are part of anyone’s profit-loss calculations when starting business, settling “virgin” lands, and so on. Thus frontier settlers endure hardship because they expect to be rewarded in the future, e.g., by selling their appreciated land claims.

[In a later footnote, Marshall quotes Adam Smith’s Wealth of Nations: “High or low wages and profit are the causes of high or low price: high or low rent is the effect of it” p 364, my emphasis.]

§3. A farmer can expand on intensive or extensive margins, e.g., working existing land harder or adding more land, respectively. But this individual decision does not scale, as more land for one farmer means less for others. Thus it’s more socially productive to add effort on the intensive margin. The same is true to a factory owner deciding to increase the effort from workers and machines versus adding more of either.

§4. This section on land taxes is tricky, but I see it as an exploration of elasticity. Marshall says that an increased tax on agricultural output will reduce profits on a farmer earning decent profits because the farmer cannot pass along that tax on consumers (they go elsewhere) whereas a farmer making small profits must pass the tax on to consumers because the alternative is to cut back on production. In terms of elasticity and incidence, I’d translate these scenarios as inelastic and elastic, respectively, on the producers side, i.e., farmers paying a larger or smaller share of the taxes, respectively.

§5. Delving further into crop mix choices and tax elasticities, Marshall explains that farmers will choose the mix of crops (in coverage and rotation) based on profit maximization. If a tax is applied to a particular crop (he uses hops), then its production will fall if profits fall (elastic demand) but not if most of the tax can be passed to consumers (inelastic demand).

§6. Royalties in the case of a depleting mine are not the same as (ongoing) rents, since the royalties represent a fee based on the mine’s falling resource — and thus value.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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