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Economic philosophy fails Australian agriculture

By Ben Rees - posted Monday, 25 November 2013


Secondly, assumptions underlying supply and demand theory are also deficient when compared to the real world of agricultural production.

The downward trend in real commodity prices need not of itself produce a loss of national income nor a decline in the profitability of commodity producers if the decline in the real commodity or manufactures price is the result of higher productivity NFF , Beating the commodity price cycle, 1995

This excerpt from the National Farmers Federations "Beating the commodity price cycle" is a modern restatement of Say's Law of Markets in terms of commodities.

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Keynes' General Theory (p.18) carries these comments about Say's Law of Markets"

  • From Say and Ricardo , classical economists have taught that supply creates its own demand

And quotes J.S Mill

  • Could we suddenly double the productive powers of the country, we should double supply of commodities in every market - by the same stroke we should double the purchasing power-everybody would buy twice as much as everyone would have twice as much to offer in exchange J.S Mill Principles of Political Economy

Implicitly underlying Mills interpretation of Say's Law is the assumption that costs of production must be covered always by the sale value of output. This assumption becomes the classical theory's axiom of parallels embracing (G.T, p. 21):

  • Social advantages of private and national thrift
  • Traditional theory of the rate of interest
  • Classical theory of unemployment
  • Quantity theory of money
  • Unqualified advantages of free trade
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If you think about Say's Law as explained by J.S. Mills, productivity becomes the policy of growth. Mill's interpretation explains why modern orthodox economics confuse productivity with profitability. They are one and the same in the eyes of Say's Law.

In the real world, productivity and profitability are very different concepts. Profit is revenue less costs whilst productivity is the percentage change in output from a change in an input or inputs. The change in output can be just as easily cash negative as it can be cash positive. So policy emphasis on research and development to boost productivity need not solve the low farm income problem

 

  1. Engel's Law

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About the Author

Ben Rees is both a farmer and a research economist. He has been a contributor to QUT research projects such as Rebuilding Rural Australia. Over the years he has been keynote and guest speaker at national and local rural meetings and conferences. Ben also participated in a 2004 Monash Farm Forum.

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