Monday, January 22, 2007

Impact of land reform: neoclassical perspective

To understand the impact of land reform, you have to view it from a theoretical perspective. The neoclassical perspective is one most familiar to economists. The neoclassical school treats land like any factor of production. The entrepreneur – an individual decision-maker - combines land, labor, capital, and material inputs, to produce output. The services of the factors of production must be purchased from other individuals who possess private property rights over the factors (unless the entrepreneur herself is the owner). The entrepreneur receives the proceeds from the sale of the output. The difference between revenue and cost (payments for all factors of production) is profit. The relationship between factors and outputs is represented by a production function, which expresses a particular state of technology. Entrepreneurial decisions are motivated by maximization of profit.

Markets are assumed to be perfectly competitive. Now suppose we define an "efficienct" allocation as follows: an allocation is efficient if any reallocation would inflict at least as much harm to losers as benefit to gainers. Neoclassical theory concludes that the way the market allocates resources, such as land, is efficient.

This all sounds very abstract. What are some practical predictions of the theory?

1. A government-administered reallocation of land from landowners to cultivators would likely reduce agricultural output.

2. Rent ceilings and transfer restrictions on agricultural land will reduce investments in land improvement, and encourage conversion to non-agricultural land.

The first opposes the claim that land reform would lead to a more efficient allocation of land. The second hypothesizes that agricultural land productivity and supply of agricultural land would decline under land reform.
Obviously the blokes who thought about land reform were not reasoning from a neoclassical perspective. What was the theoretical underpinning of land reform? Next week.


Anonymous said...

Neoclassical theory concludes that the way the market allocates resources, such as land, is efficient.

Not if all the land is owned by a few absentee monopolists and speculators, who keep it out of production in the hope of reaping speculative gains.

Of course, "land reform" is no solution to this issue. The proper solution is to tax the economic rent, so that the inefficient monopoly is broken down by the free market.

Econblogger said...

That's the theory. The reality of course is different. The suggestion of taxing economic rent is often made, and is the solution if it can be implemented. In practice political resistance and other difficulties has often thwarted implementation of such taxes.

Amadeo said...

I am assuming that the two predictions were arrived at by some form of empirical evidence.

Thus, looking forward to the rationale of the other side.

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