Agricultural & Applied Economics Association

Optimum Resource Allocation in U.S. Agriculture: RejoinderAuthor(s): C. Richard Shumway, Bruce R. Beattie and Hovav TalpazSource: American Journal of Agricultural Economics, Vol. 59, No. 4 (Nov., 1977), p. 787Published by: Oxford University Press on behalf of the Agricultural & Applied EconomicsAssociationStable URL: http://www.jstor.org/stable/1239417 .

Accessed: 28/06/2014 18:20

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact support@jstor.org.

.

Agricultural & Applied Economics Association and Oxford University Press are collaborating with JSTOR todigitize, preserve and extend access to American Journal of Agricultural Economics.

http://www.jstor.org

This content downloaded from 185.31.194.110 on Sat, 28 Jun 2014 18:20:16 PMAll use subject to JSTOR Terms and Conditions

Optimum Resource Allocation in

U.S. Agriculture: Rejoinder

C. Richard Shumway, Bruce R. Beattie, and Hovav Talpaz

Tyner and Tweeten's (1966) estimates of equilib- rium factor shares were indirect estimates of the exponent parameters for Cobb-Douglas production functions. Given these production functions, they addressed the issue of resource missallocation in each of five decades. Subsequently, we solved for optimum input combinations using the decade averages of the same prices (including the labor wage rate) as those implicit in Tyner and Tweeten's factor share data and concluded there was no evi- dence that the use of any input was greatly out of equilibrium. This result was quite different than that offered by Tyner and Tweeten in their original article and in their reply to our comment.

While they acknowledge in general (for eight of nine input categories) that inappropriate prices were used in their original work, Tyner and Tweeten do not acknowledge any error with regard to the labor price used. The upshot of their reply is that only minor differences in results occur when just the nonlabor prices are corrected, and the im- plications of their original article for resource misal- location in agriculture still hold. They further sug- gest that we erred in the labor price used in the analysis reported in our comment. We think not.

Tyner and Tweeten used the hired farm labor wage rate to determine current expenditures on all farm labor, which in turn were used in the factor share adjustment model to estimate labor's produc- tion elasticity. They then suggest in their reply that "the appropriate 'prices' [for deriving economic implications such as resource misallocation, supply elasticity, etc.] are 85% of the average values for the index 'price of nonfarm labor, 1947-49 = 100' " [italics added] (fn. 2). In effect, their procedure means that one set of prices should be used to determine expenditures on the input and another to reflect its cost when calculating optimum input levels, etc. We contend that to use a nonfarm labor price in the derivations is inconsistent with their method for indirectly estimating labor's production

elasticity, and this inconsistency is the cause of the large disequilibrium they found.'

Perhaps there is justification for arguing that the appropriate shadow price for all farm labor is greater than the nominal price of hired farm labor because of nonpecuniary benefits accruing to both hired and family labor, quality improvements in labor over time, and management skill of operator labor. But if a price equal to 85% of the nonfarm wage rate is the appropriate one for deriving op- timum input levels, it is also appropriate for deter- mining the labor factor share in order to obtain a reliable indirect estimate of labor's production elas- ticity.

It indeed may be that considerable disequilibrium existed in the agricultural sector during the period 1910-61, but the underlying properties of the Tyner and Tweeten model do not reveal it.2

[Received July 1977.]

Reference

Tyner, F. H., and L. G. Tweeten. "Optimum Resource Allocation in U.S. Agriculture." J. Farm Econ. 48 (1966):613-31.

i Whenever the analyst assumes a set of conditions (e.g., prices) markedly different from those perceived by the economic actors, he is likely to conclude that the actors are less rational than they really are. In this particular case, the greater the difference in prices assumed between the two parts of the analysis, the greater the erroneous disequilibrium.

2 Three additional minor points are (a) nominal output prices in our table 1 were computed in the same way as nominal input prices, i.e., by dividing Tyner and Tweeten's current dollar data (adjusted gross farm income) by their quantity data (farm output in constant dollars); (b) our derived equilibrium output in 1952-61 was slightly greater than output adjusted for government pro- grams but less than actual output, and given a competitive indus- try and a negatively sloped demand curve, a downward shift in the supply function implies an increased, not decreased, output ir- respective of the price elasticity of demand; and (c) if actual labor used is 168% of equilibrium labor, then labor is in excess supply by 68%, not 40%.

This content downloaded from 185.31.194.110 on Sat, 28 Jun 2014 18:20:16 PMAll use subject to JSTOR Terms and Conditions