DevP 233
 Syllabus: Law, Politics, and Policymaking

DevP 233 
Law, Politics, and Policymaking

SPRING 2017

Tu, Th. 2-3:30 311 Wellman Hall

 

Zilberman Addendum

 

3/7 – Lecture 17 – On the economic discipline: How political economy and development economics fit

The purpose of the lecture is to enhance students’ understanding of scientific disciplines and how they evolve, as well as the mechanics of science. Political and development economics illustrate this point.

 

Development practitioners need this understanding because they will be consumers of science, will engage in applied science, and will work with scientists and academic institutions.

 

3/9 – Lecture 18 – The economics of voting

The purpose of this lecture is to increase student understanding of the calculus of achieving and maintaining power. This includes how to think systematically about building an agenda, fundraising, and positioning. We will also understand different voting systems and recognize that voting is not synonymous with democracy.

 

3/14 and 3/16 – Lectures 19 and 20 – Rent-seeking and the distribution of surplus

The purpose of the lecture is to introduce students to differences in allocation between political and economic systems, and how politics affects economics. The emphasis will be on how political and economic considerations affect the differences in distribution of rent between groups. We will emphasize that there are two ways to look at distribution of income – (i) statistics, using notions like Gini coefficients, which are useful descriptions, but lack operational meaning, and (ii) political economics, which analyzes distribution of surplus among groups within regions. This approach is much more operational, and can identify how policy and political factors may shift rents between groups, and develop mechanisms to identify sources of losses in efficiency due to corruption and political considerations.

 

3/21 and 3/23 – Lectures 21 and 22 – Professor Leo Simon on Polarization

The purpose of the lecture is to illustrate how society may be polarized among different groups that maintain different views of the world. The result is, at times, malfunction of the government. This phenomenon has occurred throughout history, and in all regions of the world. Polarization may be based on class, beliefs, tribal identities, etc. The recent resurgence of populism in the US, Europe, and elsewhere are recent examples.

 

4/4 – Lecture 23 – How risk and uncertainty affect choices

This lecture will familiarize students with basic theory of risk and their impact on policy making. We will start with safety rules, which were used heavily in development analysis. We then move to expected utility, meaning risk aversion, the role of insurance, diversification. Then we move to behavioral economics, which means loss aversion, and its implications. Finally, we move to perceived self-efficacy, which leads to the economics of self-esteem.

 

4/6 – Lecture 24 – Principal-agent problem and political economy

This lecture will focus on operating in a world of incomplete information. Mechanisms include signaling, sorting, discrimination, alternative mechanisms for learning and adaptive behavior, moral hazard, and self-selection. There will be several examples.

 

4/11 – Lecture 25 – Professor Gerard Roland on China

 

4/13 – Lecture 26 – Professor David Roland Holst on political economy of corruption

 

4/18 – Lecture 27 – Lecture on Law

 

4/20 – Lecture 28 – Lecture on Law

 

4/25 – Lecture 29 – Zilberman on political economy of agriculture

 

4/27 – Lecture 30 – Zilberman on Political economics of Research & Development and Conclusion

  1. Assessing the problem of underinvestment in research and public goods
  2. Alternative mechanisms to finance research
  3. Issues of regulatory capture
  4. Intellectual property rights
  5. Applications in agriculture and medicine; access to innovations in developing countries

 

I may have two pizza and policies. One will be on reforming UC Berkeley in mid-March and the other will be on the economics of chocolate.

The Economics of Voting

The Economics of Voting

DEVP 233

Spring 2017

 

Two major ideas of economics are that agents pursue self-interest subject to constraints (profit maximizing subject to budget constraint) and that interaction of actor choices (supply vs demand) generate value and result in allocation of resources. Political systems set choices on decision making that affect the choices made by agents. These choices can be, for instance, allocation of some input (land reallocation after a revolution, minimum wage). But moreover, the political system is a parallel system of decision making that affects policy parameters- and political economic research emphasizes analyzing outcomes of several political selection mechanisms, as we will see below. We will see that in the same way that political parameters affect economic choices, economic considerations also affect political choices; and the two co-evolve. Furthermore, we will see that many political choices reflect the constrained pursuit of self-interest, such as in economic considerations.

 

I will present here several frameworks that scholars develop to analyze political economic choice, and the interaction between politics and markets. The most difficult aspect for students is that these approaches are not necessarily consistent. Each emphasize different aspects of politics or economics. By being familiar with them, you are able to think better on economic and political systems and identify key considerations to incorporate.    

 

Voting Behavior

Anthony Downs (1957) developed a model of political economy of a democracy, where he develops a model for voting, which could also be applied to other forms of government. MDP 253 (Economic Development and Policy) presented several major models of political economy, which include public choice, community choice, and rent seeking. Here we emphasize public choice through analysis of voting behavior and rent seeking behavior.

 

Downs, a political scientist, provided the framework that was crucial for public choice theory. This framework was expanded by Nobel Prize winners Arrow, Sen, and Buchanan. We will start with Downs’ insights on theory of voting. In a democracy, there are many systems of voting, but the most intuitive one is majority rules. Namely, voters face two proposals and vote one against the other. In this situation, the voting population is heterogeneous in terms of preferences, and the median voter determines the outcome. Basically, he viewed voting choice as a discrete choice between alternatives, and the logic applied to this vote is the same logic applied to a technology adoption choice – the voter has to consider the utility between one vote and another, and choose the one she prefers. The literature on adoption can provide a lot of insight to voting outcomes. As you recall, the threshold model of adoption has three elements.

 

The first element is the decision criteria by the agent. Applying this to a voting choice means that a voter must choose between proposals and/or candidates. The process that leads to the vote is a dynamic process. It may include several changes, such as learning about the candidates (can be proposals, but we will use candidates here), assessing their character and programs, obtaining new information, and, at the end, casting a vote. Generally, there is an ongoing narrative that evolves during the campaign and it affects the choices people make. There are also polls that assess the relative strength of each candidate at some point in time, and may also affect the choices of a voter.

 

The choice is a discrete choice among alternatives, and the voter chooses the candidates that maximize their expected utility (e.g. benefits) subject to constraint. The utility function of the voter may include several elements. First are pocket-book issues. The voter prefers candidates that improve their economic situation. For example, if you are older, you support candidates that assure maintenance of social security and pensions. Parents with young kids will support candidates that promise subsidized school and school lunches (e.g. Bolsa Escola and Bolsa Familia in Brazil). Second are identity politics. In many countries, people first vote for their tribe, and in others votes are related to their ethnic group or any form of personal identity. Third are social norms. These include to what extent candidates are strong on drugs, support abortion, etc. These issues are also related to identity politics, because when religion plays an important role, you may vote your religion as well as the norms that the religion applies. Forth are personality issues. For instance, does a voter like or trust the candidate. Of course, there are other issues, such as foreign affairs.

 

In a more formal way, we can look at the utility function simply as  as the utility of voter i from candidate j. For simplicity, we assume that the voter i, is using K criteria to evaluate candidate j. Each voter ascribes a different weight to different criteria, and we denote this weight as .  The estimated performance of candidate j according to criteria k by voter i is . Thus the utility function can be written as

For example, suppose criterion one is pocket-book issues and voter i gives it weight of 0.5, criteria two and three are identity politics and social norms each with weight 0.25, and criterion four is personality issues, with weight 0.0. The voter normalizes the grade given to each candidate for each criterion. Suppose there are two candidates that voter i=1 is considering.

 

Table 1

Weights () 0.5 0.25 0.25 0.0
Candidate (j) Pocket-book (k=1) Identity (k=2) Social norms (k=3) Personality (k=4)
j=1 8 2 8 10
j=2 6 10 4 2

 

Now, we calculate the utility for each candidate by voter i=1 (and we assume the error term is 0).

With these values of utility, this voter will choose candidate 2.

 

Heterogeneity

People are different and their voting choices are a reflection of their heterogeneity. There are also many sources of heterogeneity, including, income, sexual preference, age, regional differences, temperament, education, etc. One of the key elements of campaigns is that they are becoming more scientific in their reliance on statistics and identifying sources of heterogeneity and their impact. Differences among individuals leads both the differences in weights ascribed to different criterion, the alphas, as well as perception of the candidates (h elements). Because people in various regions share a lot in common, and since information tends to be sticky and doesn’t travel much across locations, candidates may use polling to identify their strengths by location and then shape their message to the preferences of each location.

 

            To illustrate how this applies to the model, let’s take a second voter, i=2, with the same grade ascribed to each candidate on each criterion, but has a different weight for criteria. The second voter cares only about pocket-book issues and personality, and gives them equal weight, namely 0.0).

 

Table 2

Weights () 0.5 0.0 0.0 0.5
Candidate (j) Pocket-book (k=1) Identity (k=2) Social norms (k=3) Personality (k=4)
j=1 8 2 8 10
j=2 6 10 4 2

 

Now, we calculate the utility for each candidate by voter i=1 (and we assume the error term is 0).

With these values of utility, this voter will choose candidate 1. What we see is that although the two voters evaluate the candidates on these four issues in the same way, they vote differently because they ascribe different weights.

 

What pollsters and scholars do is estimate both the h functions and the alphas. For example, pollsters may ask individuals to rank candidates based on criteria, the weights they assume on each criterion, collect demographic data, and estimate the impact of demographics on both evaluation of candidates and on weights. A more sophisticated approach is to poll voters about their choice of candidates and demographics, use data grading candidates based on the criteria (this can be done independently by social scientists that look at candidates’ proposals and assess their ranking or it can be done by interviewing voters), and then estimate the weights given to each criterion by different demographics. The estimation of weights based on demographics allows the pollster to predict the outcome of an election decided by the full population based on data gathered on a sample of the population.

 

Obviously, a key for accurate assessment of candidates’ situation is good survey design that allows the pollster to elicit the alpha and h functions, and having a good quantitative relationship between the distribution of various groups within the sample and the population. A good pollster is able to obtain good estimates with relatively limited budget, and is able to identify the relevant sources of heterogeneity. A good political strategist is able to interpret the data well and shape the message of the candidate and the area where they emphasize their efforts. Because campaigns are evolving, this type of exercise may repeat over time.

 

 

Dynamics

Campaigns take time – in some countries they take weeks, in others they take years. And voter attitudes and beliefs are changing over time. Generally, there are several mechanisms that affect this behavior. Voters are learning; the learning process follows a general Bayesian process. Voters have a prior belief about each candidate, they obtain new information, and then update their prior belief. Bayes developed a formula for this process of updating; and behavioral economists and statisticians have modified it. But generally speaking, someone with strong prior beliefs, the person will need strong new information to change it, and vice versa. Because of the importance of prior beliefs and information, candidates with good name recognition tend to be promoted and nominated to office. In most countries of the world, success in military, civil activities or business (even movie stars), tends to lead to easy entry to the political arena. There is a lot of new knowledge in psychology that has improved our understanding of learning. One’s self-confidence (called ‘perceived self-efficacy’) affects the weight they give to their own attitudes versus others in shaping their alphas and h functions. In many cases, we see imitation. People will follow to a large extent the advice of their tribal leader or experts. Especially when it comes to vote on issues that require some unique expertise, or a controversial issue, having credible spokespeople is very important.

 

The credibility of various sources of information varies across groups. Even in countries with a separation between state and church, religious leaders have significant influence on political choices. Good political operators are capable of identifying who are the opinion leaders (religious leaders, tribal chiefs, etc), and frequently put effort to convince these leaders to support them. And at times they may even gain their support by adapting their own opinion, or simply ‘buying’ them.

 

Voting Outcomes

Thus far, we have considered the behavior of individual voters. But a candidate is interested in obtaining a majority, and therefore needs to affect the behavior of multiple voters. Let the voting behavior of an individual i be denoted by the function, , which takes the value 1 if the voter voted for candidate j, and 0 if the voter didn’t vote for candidate j.

 

Thus voter i selects j=j*, and  if  for all other j (). The winning candidate is the one, with the greatest number of votes, namely,  for all other j. In the case where there are two candidates, candidate 1 and 2, and voter i has utility,  and the difference between these utilities is . We can order the voters according to value of this difference. It can go from a large negative to large positive number. We can also form a distribution of these differences. The winning candidate is the one for whom the median voter chooses, which we refer to as the median voter theorem.

Source: University of Delaware, class notes. https://www1.udel.edu/johnmack/apec406/govt_failure.html

 

Table 3 illustrates the median voter theorem. Suppose we have 11 voters (one vote each) and 2 candidates. The voters are ranked according to the difference in utilities () between the candidates. Voters may have many sources of heterogeneity, but they are reduced to the difference in utilities between candidates because of the discrete choice of the voting process. And thus, voter number 6 is the median voter, and candidate 1 wins.

 

Voter   Vote for  
1 -50 Candidate 2  
2 -40 Candidate 2  
3 -38 Candidate 2  
4 -10 Candidate 2  
5 -5 Candidate 2  
6 5 Candidate 1 Median Voter
7 6 Candidate 1  
8 10 Candidate 1  
9 11 Candidate 1  
10 40 Candidate 1  
11 50 Candidate 1  

 

The median voter theorem suggests that these voters don’t have strong preference for one candidate or the other. They are frequently undecided throughout much of the campaign and much of the campaigning effort is directed to sway the median voters. Research by the candidate and her team attempts to identity the demographics of these voters. Understanding the weighting (i.e. alphas) that represent the priorities of the median voters will help to shape the strategy.

If, for example, they are located in certain regions, they may suggest policies that specifically target these regions. For example, studies of politics in Taiwan show that incumbent governments coming upon re-election tend to pay out relatively more crop insurance to farmers that supported them, as well as people that supported the opposition but are likely to change their vote. At the same time, if median voters are shown to have a strong preference to personality traits, the campaign will attempt to appeal to these preferences. For example, candidates will always tend to eat the local food, play a popular sport, go to a religious ceremony, etc, to show that they “fit” with the voters.

 

 

One element that is emphasized in the marketing literature is that adopters prefer products that fit for them. For example, a voter may find a candidate more fitting if the candidate conforms to the same social norms and beliefs, in addition to an appealing personality. In the same way that marketers use demonstrations to allow a potential user to recognize fit, the candidate engages in social activities that demonstrate his fit as well. Several key elements of a campaign, for example speeches, interviews, meet-and-greets, are akin to demonstration activities in promoting a product. Money-back guarantee is a very important marketing tool, and in some cases, you have recall or impeachment, but the price and process are arduous.

 

Alternative voting systems

There is a large literature on voting systems, and a recent timely review of its implications is in the New York Review of Books (Maskin and Sen 2017). The mechanics of the voting model described before can apply to many situations. But the political economy and its implications vary according to the details of the system. In direct electoral systems (such as in Switzerland, propositions in California, and in many small communities around the world), voters select directly among policy proposals. In each of these cases, there will be some campaign that varies in length and intensity. In a representative system (such as parliamentary), individuals vote for representatives who then vote on policies that relate to issues. In this system, candidates campaign to voters as discussed earlier. When it comes to decision about laws, representatives have to make two types of decisions. First, continuous choices about the details of policy proposals. Second, the final vote whether or not to approve a given proposal. This process of decision making is quite complex. The design of detailed proposals is done by subcommittees or the representatives. They, of course, rely on a large staff, who require assistance from the government bureaucracy and experts, from public, private, and academics.

 

The political economic modeling in this case becomes more complex. In the process of shaping proposals, interested parties that may be affected by the law, may be officially in the room as part of discussion that leads to the design of proposals. They may also lobby representatives about various aspects of the law. The literature on rent seeking behavior develops frameworks that aim to capture this part of the decision-making process. But there are a lot of linkages between the different elements of the political process, namely selection of representatives, introduction of proposals, and voting for laws.

 

Let’s return to the candidate who is running for election. As we recall, she has campaign costs that are akin to marketing costs. There is a literature on the economic behavior of candidates and representatives (Becker XXXX). The candidates aim to maximize his net present value (in terms of utility) from the benefit of being elected to a position of power, and from the income derived from the position, directly and indirectly (i.e. during and after) times the probability of being elected, minus the costs of campaigning. The candidate faces a budget constraint, and in addition to his activities in office, he has to design and engage in fundraising activities. When designing the fundraising activities, she has to realize that the supply of campaign contributions will be dependent on the perceived benefit the donor is expected to gain from the candidate’s choices.

 

To make the discussion more concrete, let’s formalize a simple, static model, where the candidate attempts to maximize the expected gain from holding office, in monetary terms, minus the net cost of financing the campaign. The candidate has two decision variables: (i) campaign spending and (ii) her proposed political agenda, namely the policies he will advocate/oppose. The candidate has to adapt his proposed agenda to the constituency that he aims to target.

 

The measure of adapting his agenda is denoted by A, which can be quantified as an indicator within some range. To simplify the analysis, we will assume that A is bigger when the candidate changes his agenda to enhance acceptability to potential donors. If A=0, the candidate’s actions are completely independent from her donors, while higher value reflects a higher dependency. For short, we will refer to the degree of adaptability of political agenda as ‘agenda.’ Generally, the candidate can increase the likelihood of being elected and receiving donations by modifying his agenda, but it may reduce his utility (i.e. benefit) of holding office. Another decision variable is the campaign costs, which we denote by C. The candidate may fund some of their own campaign while also receiving contributions, and direct contributions are denoted by DC(A,E). They increase with adaptability of the agenda, as well as the candidate’s experience (E), since more experienced candidates are more likely to get support as supportive donors view them as more reliable and known entities. Thus, the difference between direct contributions (DC) minus campaign costs (C) is the net income. Sometimes the candidate gains from the campaign, but when the net income is negative, it means the candidate gave up financial resources to run for office. Finally, the expected net benefits from holding office,, where  is the net benefit from holding office as a function of the candidates agenda and  is the probability of winning as a function of campaign costs (C), experience (E), and agenda (A). The objective function of the candidate is thus .

 

So, the candidate’s decision making problem is

 

Before deriving the optimality condition, let’s specify the properties of the various functions. The probability of being elected is an increasing function of campaign spending (C), experience (E), and agenda (A). Both the benefits of office and the direct contributions are also functions of the agenda promoted by the candidate. Direct contributions are likely to increase with A, but the benefit from holding office will decline with larger A, the candidate is likely to enjoy less holding office if they are committed to a compromised agenda. Direct contributions are also likely to increase with E, as donors are more likely to donate to an established candidate.

 

The first optimal decision rule of the candidate is:

 

This rule states that the candidate will continue to spend as long as the gain from winning, , times the marginal increase in the probability of winning because of campaign spending , is greater than the marginal cost of campaigning, which is 1 unit (because C is a monetary unit).[1]

 

The second optimal decision rule is:

 which leads to,

(3a)

 

The second rule states that candidates will compromise his agenda as long as the marginal increased probability of winning times benefits of winning  plus the marginal direct contribution resulting from agenda  is equal to the expected marginal reduction in benefits from the winning of compromising the agenda   which is positive since  is negative.

 

The first result is quite straightforward. You spend as long as the expected benefit of the money exceeds the cost. But the second result indicates that the candidate may compromise her position (with some decrease in personal benefit, DB), as long as the expected marginal value of compromise through increased probability of winning and direct contributions is greater than the cost of comprising her agenda.  One can use further analysis to show mathematically that the model suggests that candidates with better reputation and track record will adapt their agenda less to meet donor needs. In other words, candidates with stronger track record and name recognition are less likely to need to “sell themselves” to get funding and be elected. Beginning candidates may need to sacrifice much of their agenda to obtain funding that will allow them to run. That may lead to situations where interest groups may look for candidates who are more likely to push their ideas, and especially the ones without a strong initial track record are more likely to oblige.

 

Voting and democracy

Sometimes it is implicitly assumed that voting is a sign of a democracy. What we can say is that a key element of democracy is voting. But what we can discuss here, applies to other forms of government. There are two features that determine the degree of democracy. The first is exclusion, namely to what extent different segments of society have the right, and are able to exercise it. And the second is weight given to different groups.

 

Some of the most important fights for more democratic governance focused on increasing the right to vote among groups. Early on, even in democratic Athens, there were slaves that were excluded, and in England, the Representation of the People Act in 1884 extended voting rights to male non-land owners and in 1918 to women (Roberts 2001). Early in the United States, only well-to-do white citizens were allowed to vote, over time more groups were extended the right to vote. Voting rights extended from all white citizens, to all male citizens, and by 1920 to all citizens. We can see from the graph, widespread democratic voting spread gradually, and follows an S-shape diffusion curve.

Source: Wikipedia, User CircleAdrian, published November 2016

 

When voting is restricted to rich individuals, the country is an oligarchy. As developing countries like India gain independence and establish democratic governments, they leapfrog to a system where the right to vote was universal. In the same way that the first US first adopted landlines, and then cellphones, Africa was able to leapfrog to cellphones directly. So, voting and democracy are institutional innovations – they spread gradually originally, but after they are established, adoption in new locations is of the most advanced form, which in the case of voting, is universal suffrage.

 

As rights to vote expand, it expands the political agenda, changes the party structure and the way policy is created and executed. Amartya Sen noted that once India gained independence, and voting rights expanded globally, the likelihood of famine declined drastically. In non-democratic regimes, there are systems of voting, but they are limited to select groups of people. For example, the communist party in China have electoral systems, but they are limited in their range and scope. In Saudi Arabia, there are limited elections at the municipal level, but at the national level, it is an absolute monarchy. But some key national decisions are decided by unofficial votes within a subset of the royal family and with consultation with religious and business leaders.

 

Another dimension of elections is the distribution of voting rights. For example, in a corporation, voting power is allocated in proportion to ownership of stock. In some water districts around the world, each member has equal voting rights, while in others, voting rights are proportional to ownership of water rights or acreage or water use. Different systems of voting result in different resource allocation because, say, individuals with different ownership of land have different preferences regarding policies. In water districts with equal rights to all members, including the urban sector, the first priority is to allocate water to hydroelectric power to reduce electricity rates and farmers may not receive sufficient water when they need it. But if ownership of land or water rights determine voting rights, the main priority of the water district will be to satisfy farmers.

 

The notion of unequal voting power is very important in a market economy, where wealth determines your voting power. The co-existence of a market economy with democratic government results in conflict. Since the democratic government, in principle, is supreme, it develops rules that modify the outcome of a market economy by reallocating resources. 

 

 

 

 

 

Roberts, Martin. Britain, 1846-1964: The Challenge of Change. Vol. 12001. Oxford University Press, 2001.

 

[1]  = Marginal probability of winning with respect to campaign costs =  .

Political Economy of Agriculture and other topics

Political Economy of Agriculture and other topics

DEVP 233

 

Agriculture is perceived to be a competitive industry, but in reality it has been regulated for years.

 

First we will speak about the history of US agriculture, which has been a major topic of agricultural policy research because the US moved from a developing country in the 17th/18th century to a developed country in the 20th century.

 

History of US Agriculture

The settlement of the United States and the evolution of US agriculture are unique case studies in economic development. Of course, studying this process doesn’t mean that we condone the takeover of existing civilizations by settlers nor the practices they employed. What we are interested in is the history of agriculture and agricultural policies and the lessons we can draw.

 

We will discuss agricultural policies in the US beginning around 1620 when settlers from Europe established new agricultural policies and systems. The discussion draws much from Cochrane (1979). Currently, when we speak about agricultural policies we mostly speak about price supports, subsidies, and environmental regulations and payments, but agricultural policies evolved from land and settlement policies to farm support policies to landscape and environmental quality policies.

 

We can distinguish between several stages in US agricultural development process:

  1. Search for appropriate farming technologies – 1620-1740,
  2. Establishment of viable production modes – 1740-1810.
  3. The westward movement – 1812-1900.
  4. The intensification of farming practices – 1900 – present.

 

The early periods – 1620-1920

 

In the 1600s, groups of aspiring settlers migrated from Europe to find their luck in the new world. They brought some farm animals, seeds, and equipment, and some know-how, and started settling. But not many made it; the weather and soil conditions were not accommodating and many perished. We really only read about the success stories though. From the beginning they adapted to the local conditions, even borrowed practices and crops from Native Americans, and established some modes of operation that became successful. They established several modes of operation. In the New England states, they produced grains, apples, and livestock. Some farmers started growing maize and others tobacco. In the Southern states, farmers grew tobacco, cotton, sugar cane, among other crops.

 

But the mode of operation in the two regions differed. While the north attracted many migrants from Europe, who established relatively small farms and villages, in the South the dominant form was the plantation, which relied on slave labor. We must recall that the popular mode of settlements in South America, which attracted a relatively small number of European settlers, was also the plantation model. Brazil was a major importer of slaves in the production of sugar cane. The earlier slaves in the US arrived to South Carolina for the production of sugar cane, but once the demand for cotton took off the South transitioned to it. The division between the North and the South resulted in a continuous conflict that led to the civil war.

 

While the early settlements were established on the East Coast, during the 1800s, the government had an interest in populating further west. After the Louisiana Purchase, the US government controlled nearly the entirety of what we recognize as the continental US today. While some people moved west and occupied land with no official rights (i.e. ‘squatters’), in order to attract people to move en masse, the government established a system of homesteading whereby a family was granted the rights to a parcel of land in a designated area of the west. The basic idea was that first arrivals ensured rights, but these rights were only held up when families occupied the land. This system later on applied to water rights, where it is called the prior appropriation system based on the principle of ‘first in time, first in right’ as well as ‘use it or lose it.’ As we will see later, these systems of land and resource allocation proved effective early on, but later became sources of inefficiency.

 

The government played a crucial role in the settlement process because it owned much of the new land. It used its ownership to direct the settlement process. One approach was giving land rights through homesteading. But another approach was to use land sales to finance develop of public goods. The government wasn’t able to collect taxes, but it held many assets that it could provide the public. It used land grants to incentivize the construction of the railroads, and the railroad companies owned a mile of land to each side of the tracks. Until this day, the Southern Pacific company is one of the biggest landowners in California. In each municipality, the government granted land to build schools and finance them through land sales. The establishment of rural schools was one of the major achievements of the US. Later on, land grants were used to finance universities, and every state has a land grant system. 

 

I believe that one of the reasons that US citizens expect much from the government, but don’t like to pay taxes, is that for much of its early history, the government acquired assets with little or no payment and used or sold them to provide essential services. One has to admit, though, that the investments made by the government have been effective and yielded fruits. In the beginning of the 20th century, the government realized that it needed to now raise taxes to continue, and expand, the services it provides. This led to the establishment of various forms of taxation, including the Internal Revenue Service.

 

The major rural ideology of the US, based on the reality of the North, was that family farms should be the main form of farming and that agriculture should be a competitive sector consisting of independent farmers not peasants. This ideology is called the Jeffersonian Vision, after the renowned slave-owner Thomas Jefferson. Within this ideology, the role of the government is to provide education, information and technologies. Nobel Laureate Theodore Schultz, the father of the idea of human capital, emphasized the difference between peasant and farmer (Schultz 1975). Peasants are traditional farmers who learn practices from their parents. Traditional agriculture has been in equilibrium, where yields and methods changed little, and therefore imitation was the best form of acquiring practices. A farmer lives in a dynamic environment, requiring adjustment to changes in economic conditions or technology.

 

After the start of the Industrial Revolution, and the massive expansion of global trade, the importance of adapting to change increased. Schultz distinguished between two types of human capital – worker ability, which is the physical ability to conduct tasks, and allocative ability, which is the ability to make business and management choices. He also used the term ‘the ability to deal with disequilibrium’ to describe allocative ability. Allocative ability requires literacy and numeracy, and rural schools were introduced to produce farmers with allocative ability. Moreover, the thinkers behind the idea of family farms recognized that individual farms cannot develop new technologies to address changing agricultural realities and therefore they later introduced the land grant universities with their experiment stations that developed new agricultural practices and later on cooperative extensive that transferred knowledge to farmers. The land grant colleges were established by the Morrill Act of 1862. They were established during the Civil War where the North wanted to institutionalize its way of thinking. Agricultural experimentation stations were established by the Hatch Act of 1887 and cooperative extension through the Smith-Lever Act of 1914. The US Department of Agriculture was established in 1862 and one of its major roles was to provide price information to farmers to assure competitive and fair trade.

 

The idea of a competitive farm sector that is augmented by collective actions prevailed throughout the history of US agriculture. Farmers established the farm bureau, an organization that aimed to represent them politically, and have the market muscle to obtain better terms of insurance and other products to farmers. There has been a continuous tradition of agricultural cooperatives that were established to negotiate terms of trade between farmers and buyers.  Because buyers tended to have monopolistic power, there was a need for countervailing power, and it was provided by farm cooperatives and legislation that allowed farmers to collaborate in controlling supply.

 

The 20th century

Throughout the 19th century, agriculture expanded by moving westward. Production per acre changed little, even though US agriculture acquired the capacity to adapt production systems to varying conditions. The US is a large country and adapting wheat, corn, cotton, and other products to various regions required significant efforts and innovation (Olmstead 2008). But towards the end of the century, it became clear that expansion of US agricultural production would require intensification, namely increased yield per acre. The 20th century indeed has seen significant intensification as a result of breakthroughs like the introduction of nitrogen fertilizer, modern breeding, pest control, etc. Some of these technologies were commercialized by the private sector, but their use was adapted to various locations by cooperative extension and experimental stations. While agricultural prices fluctuated reflecting changes in market conditions, they reached a peak during the first world war. During the war, the US was a food supplier for much of the world and agricultural land use peaked between 1918 and 1925.

 

Figure 1: Area of corn harvested and production, US 1866-2010, indexed to 1866=1

 

As Figure 1 demonstrates, agricultural production in the US increased proportionally to acreage until the 1930s, and since then has risen almost 5-fold while acreage harvested declined. As Figure 2 shows, crop acreage peaked around 1929 at 359.2 million acres, declined significantly during the recession, rebounded almost to its peak during the war, and then declined steadily to about 273 million acres in 1969. Since then, crop acreage has stabilized around 310 million acres. Of course, agricultural land includes cropland as well as rangeland and woodland. In total, agricultural land is about 900 million acres.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Figure 2: USDA Land in Farms, Land Use: 1850-1969

 

Figure 3 – Land use, Source: US Census of Agriculture 2012

 

Figure 4 depicts the prices of agricultural commodities for the last 100 years. Inflation-adjusted prices reached their peak during the last years of the first world war, declined drastically during the Great Depression (1929-1932), peaked again during the second world war, declined afterwards, but peaked briefly in 1973-1974 due both to the Russian wheat deal[1] and the oil embargo. In 1972, the US government sold Russia a large volume of grains (about 10 million tons) in subsidized prices not realizing that inventories were limited and the net effect was a drastic increase in prices. President Nixon imposed price controls on foods as well as restricted exports in response. The government also established a more systematic monitoring process of grain inventories. Prices then declined until around 2005 and have since risen as a result of the introduction of biofuels, but are declining again.

 

Figure 4: Major crop commodity prices in US, 1912-2014

 

The overall trends in the 20th century were declining prices and reduction in acreage. Declining prices, resulting in declining farm income, was a dominating factor in US agriculture policy. Thus many policies sought to stabilize prices, assure income, and restrict acreage.

 

Cochrane (1979) and Schultz (1964) developed a framework to analyze the major features of modern agriculture. They include:

  1. High rate of innovation.
  2. Many small firms.
  3. Homogenous product.
  4. Competitive markets.
  5. Inelastic demand.
  6. Use of natural resources.
  7. Environmental and health side effects.
  8. Lack of mobility of inputs.
  9. Credit imperfection.

 

These assumptions lead to what people have called the ‘farm problem.’ This problem has several dimensions.

 

The first dimension is that commodity farm prices tend to decline over time. The same may be true to aggregate income of agricultural commodities. Inelastic demand for agricultural commodities, competition, and technology change lead to reduced farm prices and farm income. In particular, adoption of new supply enhancing technologies by competitive industries benefited consumers but reduced the overall income of the agricultural sector due to inelastic demand. Two factors contribute to increased demand for agricultural products and therefore agricultural income. One is increased non-farm income domestically, but this effect is declining because agricultural commodities have low income elasticity in a country like the US. The second factor is increased global demand. Therefore periods of low supply overseas, for example during the wars, and opening of new markets like China and Russia tend to increase demand and prices.

 

The second dimension is instability of prices. Randomness in supply, and sometimes demand, due to changes in weather or economic conditions lead to fluctuating commodity prices. The third dimension is rural poverty. This is caused by the fact that agricultural assets, including human capital, are not mobile and cannot be easily reallocated to other uses. So reduction in farm prices leads to reduction in farm income and farm assets, and sometimes causes significant bankruptcies and crises. An additional dimension is the environmental side-effects of agriculture. Agricultural production may cause environmental and resource degradation. The great dustbowl of the 1930s was a wake-up call for the need for land stewardship. The publication of Silent Spring (Carson 1964) raised awareness of the need for pesticide management.

 

Several policies were developed to address the different dimensions of the farm problem. To address the problems of low income, the government established a series of supply control policies. In the 1950s price support policies served to increase supply and resulted in a high level of inventory, and the excess supply reduced prices even further. One solution to the excess supply problem was to send some of the excesses as foreign aid to countries that had food shortages but couldn’t afford importing food. An unintended consequence was low prices in these countries that impeded the growth of their own agriculture. Recognition of this problem set a limit on food aid, and now the aim is to use it when it is justified. Another policy was deficiency payments, where government allocated to farmers a certain quantity target (called payment yield), and based on this target were assured a price. So if the market price was below the target, they would receive a payment. This approach aimed to control supply, but still average prices increased, risk declined, and thus supply increased. To deal with this problem, governments established set aside requirements where farmers were supposed to divert a certain percentage of their land to conservation or fallowing in order to qualify for deficiency payments. The establishment of some base yield and acreage that were entitled to deficiency payments were aimed to protect income, rather than price.

 

To address instabilities in agricultural policies, the government developed inventory policies, which can be viewed as a break from supply control, but still considered as direct intervention policies. The government established a price floor and ceiling – if the actual price was below the floor, the farmers were able to keep their crop in inventory while receiving a loan at the floor level. If the actual price went above the ceiling, the farmers were required to sell and pay the loan. In many cases, the government covered or subsidized the debt service on the loan. The idea behind this scheme was to keep the price within a range. Of course there were periods when prices stayed low and inventory increased too much – indeed there was one year (1983) when the government established a Payment-in-Kind program (paid farmers not to grow certain crops and instead sold crops from inventory and paid farmers based on their production quota).

 

Another approach to deal with instability is crop insurance that insures yields, and later revenue insurance that insures revenue. Farmers pay a premium and are assured a minimum level of income based on yield or revenue targets. The premium paid is based on several alternative levels of coverage. The program is subsidized heavily, so the premiums paid do not cover expected payments. The government also covers administrative costs of this program. In addition to insurance, government has disaster assistance programs in cases of catastrophes. Most of the government programs applied to major commodities, like corn, wheat, and cotton. There are also programs for peanuts and others for dairy. Specialty crops, like vegetables, grown in specific states are not part of the major USDA programs, even though they were recently covered by crop insurance programs. But for these crops, growers may organize together and vote on product quality standards enforceable through a marketing order.

 

Agricultural policies include several environmental regulations. The initial set aside program has become the payment for ecosystem services programs. The most notable is the Conservation Reserve Program where farmers are paid to modify their production activities towards actions that provide ecological benefits. These benefits can be reduction of soil erosion, wind erosion, protection of native plants, etc. Because farmers are subject to credit constraints, government instituted credit products provided by the Farm Credit Administration.

 

One of the major problems, especially in California, was labor shortages. The government developed programs to recruit cheap, international labor. One such program was the Bracero Program, where farm workers were recruited from Mexico to work in the US at very cheap costs. The program was abolished in 1963 and afterwards farm workers unionized while migrants continued to enter the US, now illegally, and work in farms at a higher rate than during Bracero. Farmers were active in supporting policies to reduce immigration restrictions and allow illegal workers to become citizens. During the 1980s, the Simpson-Mazzoli bill provided citizenship to a large number of previously illegal immigrants, legalized some illegal seasonal agriculture workers, and required only self-reporting of worker status by employers. To comply with some of the regulations, many farm owners used labor contractors to hire their seasonal workers.

 

Changes in perspectives on agriculture

Over time, the farm population declined, average income in agriculture increased, and farmers are not poorer than the rest of the population (Gardner 1992). In addition, international trade barriers have been reduced, allowing farmers access to more export markets, and farmers continue to develop differentiated products that enable higher income. In addition, the US was part of the World Trade Organization, which aimed to reduce barriers to trade, including decreased subsidies for agriculture. Deficiency payments were eliminated, but there was increased emphasis on crop insurance as well as green policies.

 

These new trends resulted in reduction of policies focused on direct intervention strategies but expansion of insurance programs that became the new carrier of subsidies, as well as continuation of environmental policies. With growing awareness of climate change, there is an effort to reduce agricultural greenhouse gas emissions and, at the same time, to use agriculture to sequester carbon. One of the challenges is to incorporate credits from carbon sequestration in the various carbon reduction policies and markets.

 

The concern about climate change, combined with concern over energy security, also led to the introduction of policies targeted at increasing the production of biofuels. Agricultural policies thus became meshed with energy policies. The introduction of biofuel policies was part of the growing emphasis on establishing the bioeconomy, which we will cover in more detail later on.

 

The analysis thus far ignores many aspects of agriculture, for instance food safety, nutrition, water quality regulations, and others. There are many other challenging issues in agriculture. To what extent should the government continue to support agricultural research? What is the role of intellectual property rights on seeds and genetic material? Furthermore, to understand agricultural policies better, one must consider political economy issues that will be discussed later on.

 

On the Nature of Agricultural Policy

Nobel laureate Theodore Schultz was an agricultural development economist who studied agricultural development. He distinguished between agricultural policy of developed and developing countries.

 

Developing countries: In many developing countries agriculture has been heavily taxed, and in many places, government imposed a ceiling on agricultural prices. Taxation, especially of exported goods, occurred because it was easy to monitor export of goods (e.g. cacao, bananas, coffee, etc), and farmers were less organized compared to industries or the masses in cities. Upper bounds on food commodities that were consumed domestically were introduced as a mechanism to assure cheap food for the masses. Of course, this type of policy discouraged production and at times led to shortages. This contributed to hunger problems and necessitated foreign aid. To achieve domestic food targets, sometimes governments impose quotas that need to be sold at a low price. In some instances, when farmers didn’t reach these quotas, food was confiscated. Schultz (1964) always advocated limiting this regulatory regime and taxation to instead allow for markets to determine price and supply – and indeed, there is a literature that reduction of restriction increases supply, with the best example being China.

 

Increase in agricultural productivity requires investment in research and development. In many countries, agriculture is bifurcated with a few large plantations, and many smallholders. Plantations may emphasize international commodities and may be linked to a global network of knowledge. Smallholders may depend on public research and extension. However, because governments in developing countries lack resources, they also are unable to sufficiently support extension and research. In many countries, the local universities and extension benefited significantly from the contribution of donors and the international research centers. Nevertheless, China, India, Mexico, and Brazil among others have developed powerful research institutes that work with the CGIAR centers to develop the Green Revolution varieties. Research capabilities in these countries have evolved significantly, and today they have a strong private sector that conducts research and introduces commercial products to agricultural producers. On the other hand, in African countries, and some Central American and South Asian countries, the private sector is weaker and are dependent on donors to generate physical and human capital for agriculture.

 

When agricultural commodity prices were capped and productivity was stagnating, government “contributed” to increase productivity by not regulating natural resources, like water, soil, or forest. In India, for example, hydroenergy was used to subsidize cheap electricity for pumping, which led to a severe problem of groundwater depletion. In many countries, deforestation has become a major contributor to increase production, for example expansion of palm oil in Indonesia. Thus, the political system has been such that future generations are paying for subsidizing current agricultural production. This doesn’t mean that we need to reduce agricultural production in developing countries, but rather invest in improving productivity while regulating externalities. Still, underinvestment in agriculture, in many cases, is a result of inability to enforce contracts and of excessive regulation and corruption.

 

Developed countries: While agriculture has been taxed in developing countries, it has been subsidized in many developed countries, as shown in the case of US agriculture. Agricultural lobbies have been strong, especially for major commodities grown in different regions. In the US Senate, each state has two representatives, and so agricultural states with low population (e.g. Wyoming, South Dakota, etc) use their power to obtain support for commodities grown. A more interesting coalition is between agricultural states and large urban states that has resulted in agricultural policies that include major food aid program (SNAP, WIC, etc) and agricultural support programs. In the last few years, most of the USDA budget has been used for food aid programs. Notice that not all commodities receive the same level of protection. Corn, wheat, and dairy, which are farmed throughout the country, and southern crops, like peanuts, tobacco and cotton, have benefited from federal support more than other crops. Fruits and vegetables, as well as livestock, have received less support. The federal government produces mechanisms (called marketing order), which allow producers of fruits and vegetables to restrict supply. The government also uses tariffs to restrict import from the rest of the world, especially when the imports are competing with US farms.

 

An important product is sugar. The US historically imported sugar, and much of it from Cuba. But after Castro rose to power, the US imposed a quota restricting sugar imports, and divided the quota to friendly regimes. The price of sugar in the US went up, which increased local production of sugar cane, and the use of corn syrup to replace sugar. The international price of sugar went down because of the reduction in US imports; while the few countries that got contracts for exporting to the US at the high US price gained a lot. Here we see how food was used to serve political purposes. One implication was that price of sugar to US consumers was higher, but with the concern about obesity, this may not be as bad as it was seen. Of course, even with these higher prices, sugary foods are cheaper than fruits and vegetables, and people like sugar, despite its health effects. So, there are now attempts to reduce sugar consumption by incentives and education (Cash, Sunding, Zilberman 2005). In the US, water has been subsidized, as well as R&D, but pesticides have been regulated.

 

In parliamentary European countries, the representatives of agricultural regions used their power to protect agricultural commodity prices. Like in the US, prices of grains and dairy have been subsidized and tariffs were imposed on imports. Both in the US and Europe, there has been a transition to support of environmental sustainability activities. They gained support from farmers because they were used as mechanisms to reduce supply.

 

One important development that has been seen and documented by Anderson, Rausser, and Swinnen (2013) is a reduction of price distortion due to GATT and WTO agreements. As Figure 5, the rate of agricultural commodity price distortion has declined. Namely, subsidies in developed countries declined, and the taxation in developing countries has decreased. Some developing countries, like China, moved from taxing agriculture to subsidizing it. Figure 6 illustrates that the big difference between developed and developing countries is in their relative support to agricultural producers.

 

Figure 5

Figure 6

 

The WTO introduced the notion of decoupling where support wasn’t aimed to distort prices, and develop ranking of distortion among different types of policies. So subsidies are considered to be less desirable than insurance, which is further considered to be less desirable than environmental policies. The desirability is from the perspective of social welfare perspective, and the trade agreements set limits on the amount governments could use subsidies and crop insurance. This regulation led to expansion of crop insurance, which has become an implicit form of crop insurance. In this case, farmers and insurance agencies became strong supporters of these schemes.

 

Developed countries subsidize agricultural research in order to have inexpensive food. Overall, the social rate of return for agricultural research is high, which implies it is underprovided. At the optimum, the rate of return of agricultural research should be equal to the discount rate. But while the discount rate hovers around 0%-5%, the rate of return for agricultural investments is above 15%, and many times approaches 40%. Farmers are aware that research that increases productivity reduces prices, but yet they need it to address sources of crop loss and provide new products. Allocation of funding to research is political – federal governments support research for major commodities that grow in many states, but individual states support research for specific crops, and then farmers’ associations further support research being exempt from anti-trust activities. One argument for support of agricultural commodity prices in developed countries is to compensate farmers for the increase in supply, and reduced prices, generated by public research.

 

In many developed and developing countries, governments have wanted to expand agricultural land use and to settle frontier areas, and therefore subsidized settlement in these areas, especially indirectly by providing property rights to settlers. This has occurred throughout the world. Governments also invested in transportation and irrigation infrastructure to spur development. Overall, there is wide agreement that improved transportation tends to be beneficial, but at the same time, excessive irrigation without regulation may cause depletion of resources.

 

Political economy of agricultural technology

 

It is useful to recognize how different types of technology affects different groups in order to understand the basic camps that shape political economy debates on various topics. We will illustrate it in the case of agricultural technology.

 

In developed countries, more and more agricultural research is conducted by the private sector, and property rights to agricultural innovation is moving to the private sector. So the political economy of technology considers the interest of consumers, farmers of different sectors, environmentalists, input providers, etc. For example, in the case of agricultural biotechnology, companies that developed the technology will lobby for it while companies that stand to lose will support opposition to it. Consumers may benefit, and they may be both final consumers or livestock producers in the case of technologies that increase feedstocks. Then there are environmental groups, and political attitudes vary by countries. Countries that invent technologies are more likely to support it.

 

Political economy of biofuels is quite interesting. In the case of biofuels that are produced from corn or sugarcane, crop producers support it due to increase in output price. Livestock producers are against corn ethanol, on the other hand. Consumers, at least in the short-run, are divided – while drivers may like it due to downward pressure on fuel prices, the impact on food prices will result in negative impacts on some low-income consumers (grain comprises a low percentage of expense of food in the US, but not in developing countries). Petroleum companies will support some level of ethanol because it reduces their cost because ethanol increases octane of fuel. But beyond a certain level, oil companies will oppose biotechnology because it reduces the price of fuel. Environmentalists will support it if it reduces greenhouse gases; but the reduction in greenhouse gases, in many cases, is not significant and biofuels may lead to expansion of agricultural acreage.

 

Agricultural technologies aimed at labor savings have caused major debates. The US developed a Bracero program where Mexican workers would come to the US and work as seasonal farm workers, and then required to return. As another example, Vietnam had a program that shipped workers to Russia and now Taiwan. The cotton harvester in the 1950s in the US, reduced the demand for sharecroppers in the South, and contributed to the major migration from the South to the North, while allowing President Johnson to support liberal policies. The 1960s led to the abolition of the Bracero program and led to the introduction of the tomato harvester as well as unionization of farm labor in California. The farm labor unions and activists sued the UC system for developing the harvester because it reduced the power of the farm workers. When it comes to automation of agriculture then, there are those that benefit (farmers, high level farm workers, some farmers) and those that lose (most farm workers). When there are good jobs in urban areas, introduction of technologies to automate processes is made easier.

 

Today, experts expect in California and Europe agriculture to see increased mechanization. On one hand, due to supply factors and improved information technologies, as well as increased minimal wage and reduced migration from Mexico to the US. In the future, we can expect other interesting technologies. One example is cultured meat that relies on biological processes to produce meat products (e.g. hamburgers). It is done without the use of animals, but with the use of animal proteins and enzymes and converting feedstock, like soybean, to meat. The research into this technology is pushed by rich investors, some of whom are vegan and others seeking a disruptive technology.

 

This technology may lead to significant changes in agriculture. In the long-run, it will significantly reduce the size of the livestock sector, and the communities that depend on it. It will reduce the acreage of land allocated to grains and other meat feedstocks, and may provide more water and land for other uses. It may also reduce the greenhouse gas impact of agriculture, and actually provide more land for bio-based products, and the bioeconomy. Of course, there will be many supporters (investors, environmentalists, consumers) but also opposed to it (livestock producers, etc). The acceptance of this technology will vary by different regions based on their conditions – it may be adopted first in some developed countries that export meat, and adopted later in livestock dependent, developing countries. Signing a global agreement on climate change may lead to enhance acceptance of this technology.

 

Conclusion

Agriculture is considered a traditional sector, but in some developing countries it is stagnant. In developed countries and in many sectors of developing countries it has actually modernized significantly and industrialized. It has gone through many changes and is likely to evolve further. But the extent and rate of these changes are affected by political considerations. Generally, agriculture becomes more open and competitive, but still is subject to a lot of regulation and market distortion. Understanding the impact of different policies and technologies in agriculture requires understanding of economics, but even more of the political economy.

 

References

 

Anderson, Kym, Gordon Rausser, and Johan Swinnen. “Political economy of public policies: insights from distortions to agricultural and food markets.” Journal of Economic Literature 51, no. 2 (2013): 423-477.

 

Carson, Rachel. Silent spring. Houghton Mifflin Harcourt, 1964.

 

Cash, Sean B., David L. Sunding, and David Zilberman. “Fat taxes and thin subsidies: prices, diet, and health outcomes.” Acta Agriculturae Scand Section C 2, no. 3-4 (2005): 167-174.

 

Cochrane, Willard W. The development of American agriculture: A historical analysis. U of Minnesota Press, 1979.

 

Gardner, Bruce L. “Changing economic perspectives on the farm problem.” Journal of economic literature 30, no. 1 (1992): 62-101.

 

Olmstead, A. L., & Rhode, P. W. (2008). Creating Abundance. Cambridge Books.

 

Schultz, T. W. (1964). Transforming traditional agriculture. Transforming traditional agriculture.

 

Schultz, Theodore W. “The value of the ability to deal with disequilibria.” Journal of economic literature 13.3 (1975): 827-846.

 

 

[1] See https://en.wikipedia.org/wiki/Great_grain_robbery