Inverse Relationship between Farm Size and Productivity

In this article we will discuss about the inverse relationship between farm size and productivity.

1. The most important explanation advanced in this regard, is in terms of the low opportunity cost of family labour and the resultant variations in the amount of labour input used on different size classes of farms.

It is based on the argument that the smaller farms, characterized by peasant family cultivation, extend the input of labour right upto the point where the marginal product of labour is zero (i.e., point P in the accompanying diagram) or at least much below the ruling market wage rate. On the larger farms, the use of hired labour stops at the level (OC in the diagram) where its marginal product equals the market wage. Hence the smaller farms have higher.

This argument (put forth by Sen) based on the low opportunity cost of family labour on small farms is not sufficient to explain the inverse relationship on the following grounds:-

(i) If the peasant family farming and capitalist farming (hiring bulk of its labour) co-exist, one can argue that the opportunity cost of peasant family labour is the wage that is determined in the market through the employment of labour by various capitalist farmers and that the peasant family will try to equalize its opportunity cost of work in self-employment and wage earnings. In other words, a small farmer will not consider his labour as available at zero price it the capitalist farms also exist in the region.

(ii) Peasant family farmers even at the bottom of the scale, hire labour at the margin and even derive income from employment of family labour in alternative occupations.

(iii) Inverse relationship holds even when the larger farms (i.e., the farms using mainly hired labour) alone are ranked.

(iv) There also exists strong empirical evidence that the opportunity cost of labour on the smaller farms is not significantly different from market wage rate.

Thus, the arguments based on the opportunity cost of labour is not sufficient to explain existence of inverse relationship.

Despite the fact that Sen’s arguments suffer from certain lacunae, there is no denying the fact that the amount of labour used per acre on small farm is greater than that used on large farm. This has been empirically confirmed. Some economists like Prannov Roy, try to explain this inverse relation between farm size and productivity of by saying that this extra labour on small farms is used for increasing the cropping intensity of the small farms.

That is, more of the area of small farms is used for multiple cropping than that of large farms due to availability of more labour. Prannov Roy, infect, points out that if we look out that the yield per acre of a given crop on small and large farm, we find no difference in it on these farms.

But when we look at the gross value of output of an acre of small farm as well as that on a large farm, we find that an acre of small farm gives greater value of output because off higher cropping intensity (due to multiple cropping).

2. Khusro (1964) advanced the hypothesis that the productivity differences are due to differences in the fertility of soil. In order to prove his point he went a bit further. He pointed out that when land was “standardized” on the basis of land revenue ratings, decline in productivity per acre on large farms, was reduced significantly.

We may, however, point out that though his assertion about differences fertility may be acceptable, his process of standardization of land with the help of land revenue rates in order to substantiate his point, is open to question. Land revenue is a poor index of soil fertility because of man-made improvements in land after the land revenue had been fixed and also because of the non-economic considerations that go into its fixation.

3. It has also been proposed that larger farms may consist of land acquired through “distress sales”— the assumption being that the land so offered for sale is marginal land and hence of poor quality.

4. It has also been suggested that larger farmers may be treading off marginal profitability against leisure.

5. Larger farms may have more leased in land. If there are tenurial disincentives, productivity may be adversely affected. Soni’s study also confirms this. He found that whereas the productivity on owner cultivated farms increased as their size increased, it decreased on tenant cultivated farms when their size increased.

6. Larger farms may have a smaller proportion of irrigated areas.

7. C.H. Hanumantha Roy and A.K. Sen have also advanced another reason for the higher productivity per acre on small farms. This is based upon the need of small farmers. The small farmer with a relatively smaller piece of land will try his best to get the maximum out of his land. Psychologically, he will be keen to put his best so as to meet as much of the requirements of his family as possible from his small farm.

Green Revolution and the Inverse Relationship:

The inverse relationship between farm size and productivity was claimed by many to be a confirmed phenomenon in traditional agriculture during 1950’s.

Under the impact of the new technology which is essentially capital-based (compared with the labour based technology of the traditional agriculture), the productivity advantage hitherto enjoyed by the small farmers with relative abundance of family labour started moving in favour of the large farms which have relative abundance of land also a more easy access to capital.

There is strong evidence that after green revolution in India, the inverse relationship started yielding place to at least a ‘constant’ relationship if not a positive relationship between farm size and productivity.

Hanumantha Rao for example reached such a conclusion in 1975. He showed the weakening and even disappearance of the inverse relationship between farm size and output per acre by comparing the relationship under traditional technology during the fifties with that under new technology in the late sixties in some districts of U.P., Punjab and Andhra Pradesh. Studies by Bhattacharya and Saini, Chadha and by Kapur and Kahlon, based on the data collected in the post green revolution era also showed that the inverse relationship was disappearing.

Sen and Rudra also reviewed this controversy in 1980 and they found that the inverse relationship got weakened or even disappeared in areas using new technology. Their conclusion was, “The negative relation may hold in certain parts of the country at certain time but not everywhere and not yet all times.”

They also felt that even were the inverse relationship between size of the farm and the productivity was found to exist, it existed only in certain ranges. According to them, no conclusion that was based upon the data for one region should be considered as valid for the whole of the country.

Recently (1986) Madhusudan Ghosh has also confirmed that the inverse size-productivity relation is found to be reversed in areas undergoing technological change.

We may here refer to another study of Patiala District (Punjab) by Bagai and Soni. This study also confirms the above assertion. The authors found that green revolution had taken place only in one part of the District. Agriculture in the other region was still traditional in character.

They found that whereas productivity per acre increased as the size of the farm increased in the region where green revolution had taken place, it declined with increase in the size of the farm in the region where agriculture was still traditional.

They further discovered that relatively higher productivity per acre on large farms in the region where agriculture had been transformed was accompanied by a relatively greater use, per acre, of modern inputs namely fertilizers, other bio-chemical inputs and machinery.

Similarly it was found that in the region with traditional agriculture, the amount spent per acre on the modern inputs was smaller on large farms than on small farms.

In other words, according to the authors the common experience in both the regions was that it was the relative position of the modern inputs in the over-all input structure on the farms which determined whether the output per acre could increase or decrease as the size of the farm increased.

Returns to Scale and the Inverse Relationship:

Size-productivity relationship is essentially a relationship between output, on the one hand, and a single input i.e., land, on the other. From this relationship, some economists tried to draw inferences about the nature of returns to scale in India agriculture.

This however, is erroneous for, the returns to scale are indicated by sum of regission coefficients of all inputs (as in a Cobb-Douglas production function) and not by the returns to one single input, say, land.

This is the reason why the conclusions based upon the analysis of the Farm Management data that the scene of Indian agriculture is ruled by declining returns to a single input (acreage) are perfectly consistent with the fact that constant returns to scale are found in Indian agriculture. These assertions have been confirmed by Khusro and Saini.

Policy Implications:

The controversy regarding the inverse relationship between farm-size and productivity is not simply an academic discussion but is of fundamental significance from the point of view of economic policy. The farm-size and productivity raise many issues.

The choice occurs between:

(i) small family- based “peasant farms”;

(ii) large-hired labour-based “capitalist farms” and

(iii) large farms with cooperative type of organizations.

Thus, policy implications will differ depending on whether we treat the inverse relationship as an indication of higher efficiency of small farms or regard it as reflecting conditions of distress of small farms.

If we accept the former position, then we would advocate that land should be transferred from larger and middle farmers to small farmers either through sales or tenancy as recommended by C.H. Hanumantha Rao or, one could argue like V.M. Dandekar that capitalist form of wage-labour organization will lead to inefficient aggregate output and peasant family system based on family labour is more suitable.

By and large it may be accepted that small farms of economic size are more efficient that large size farms. Promoting large farms would make small size farms weak in their competition against large farms and may create distress among them and may even lead to the disposal of small holdings in distress. This certainly swell the already large army of landless labourers in this country.

The debate on farms size and productivity is of immense importance for policy measures such as:

1. Ceilings of land holdings, redistribution of land and consolidation of holdings.

2. Subsidizing farm inputs for economically weaker sections of farmers.

3. Price policy formulation such that it provides incentives to increase the productivity.

4. Land tenancy, loosening and tightening of land lease market purchase and sale of land etc.

The impact of all these policies should be to encourage or discourage the size holdings on the basis of their relative productivities.