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Title: Perverse supply response : the importance of produced means of production and uncertainty in agriculture
Author: Ozanne, Harrison
Awarding Body: University of Manchester
Current Institution: University of Manchester
Date of Award: 1991
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In debates concerning the reform of the Common Agricultural Policy, it has been suggested that options are restricted by the likelihood that lower output prices would stimulate increased production - an example, ceteris paribus, of perverse supply response. This thesis investigates the theoretical basis and empirical evidence underpinning such arguments. Some are dismissed as relying on theoretically unsound views of producer behaviour and mistaken interpretation of historical data. Others, concerning the economics of peasant production, are interesting but not relevant to agricultural supply in developed countries. Consequently, the bulk of this thesis focuses on two assumptions underpinning the Law of Supply which were deemed to merit further attention. The first concerns the separation of inputs and outputs into two distinct commodity groups. This fails to take account of the importance of produced means of production in agriculture - a criticism identified as part of the broader, Sraffian critique of neoclassical economics. A simulation exercise designed to investigate the importance of produced inputs in U. K. agriculture is reported. This exercise found evidence of perverse aggregate supply response resulting from a feedback effect induced by the use of feedgrain, an output from the cereal sector, as a produced input in the livestock sectors, together with the greater responsiveness of the latter sector. However, it is suggested that this (apparent) perversity arises from failure to take account of the produced input, and that computing net output equivalents would nullify the feedback effect and reestablish simulated responses consistent with the Law of Supply. The second assumption investigated was that farmers operate under conditions of perfect knowledge. It is widely accepted that uncertainty exists in both the technological and market environments in which farmers operate, and that risk aversion moderates the decisions of some, if not all, farmers. Furthermore, it can be shown that risk averse producers who maximize expected utility may respond perversely to changes in mean output prices. These arguments are investigated theoretically and empirically using U.S. data. However, no evidence of risk aversion is found, ensuring that the estimated aggregate supply response is positive. Thus, the overall conclusion drawn from this workis that, although theoretical models can be constructed which allow for perversity, farmers, at least in developed countries, do respond normally to changes in prices. There is insufficient evidence to support the argument that uncertainty and risk aversion lead to perversity, at least in U.S. agriculture; while, although a perverse aggregate supply response was identified in U.K. agriculture, this arose from failure to take account of the existence of produced means of production and associated linkages between the cereal and livestock sectors. During the course of this work, the neoclassical theory of production, duality theory, aggregation and index number theory, von Neumann-Morgenstern expected utility theory, aspects of the Sraffian critique of neoclassical economics, and alternative models of peasant economies are either reviewed or summarized.
Supervisor: Not available Sponsor: Not available
Qualification Name: Thesis (Ph.D.) Qualification Level: Doctoral
EThOS ID:  DOI: Not available