339. Assuming that farmers maximise profit

Agricultural economists building models of agricultural production often use simplistic assumptions about what motivates farmers. The simplest possible assumption — that farmers maximise profits — is still quite commonly made in agricultural economic models. Can this ever be defended? 

One of the papers in the recent AEPP Special Issue of papers on adoption of agricultural innovations is on this topic. The paper is by Alfons Weersink from the University of Guelph and Murray Fulton from the University of Saskatchewan. You can hear my interview with Alfons about the paper here. My conversation with Alfons is available as an episode of the AEPP podcast series.

They point out that many motivations other than profit maximisation have been identified in research about the uptake of new practices by farmers. Other factors that influence them can include risk, leisure, family, social norms, peer pressure, environmental concerns, and altruism.

Weersink and Fulton also picked up a table from an old Pannell Discussion (PD103) in which I suggested that the factors that influence adoption of new practices are likely to vary in different stages of the adoption process. Early on in the process, when farmers are learning from others about the practice, social, cultural and personal factors are likely to play a relatively large role. Later in the process, when farmers have personal experience in using the practice on their own farm, the influence of outsiders will be reduced to some extent. Influences like social norms could still play a role, but the farmer is no longer primarily relying on outsiders for their information.

The finding that farmers are more complex than we might like to assume is reinforced by research in the booming  field of behavioural economics. This has identified a large number of biases that affect people’s decision making. Some relate to the way our brains process information, and some are more about our responses to social situations. This work tells us that farmers will often diverge from profit-maximising behaviour even if they think that’s what they are going for.

Having read the Weersink and Fulton paper a few times (in the course of editing the special issue), it got me thinking about the role of profit in adoption of innovations. Here are some further thoughts.

I think that the main thing driving long-term adoption of a practice is its relative advantage (how well it enhances the achievement of the farmer’s goals). An important element (but, as I said, not the only element) of relative advantage for most farmers is the effect of the practice on profit. There is plenty of evidence that, although various factors influence farmers’ decisions, profit remains one of the main ones. It doesn’t mean that farmers are motivated by wealth for its own sake, but they seek to make money for what it allows them to do.

At the same time, the cognitive biases identified by behavioural economics don’t seem to me to be so large that profit-motivated farmers would make decisions that are really poorly correlated with their objectives.

If I was putting a number on it, I’d say that for Australian farmers, profit explains something like 70% of the variation in adoption between different practices. We can potentially do a more sophisticated analysis to get a more accurate understanding of adoption, but even if we don’t, a 70% understanding is likely to be very useful.

Economists should think carefully about whether some other factor is likely to overwhelm considerations of profit, but in most cases profit at least gives a useful indication of the broad trend in behaviour. If a scientist, an extension agent or a policymaker wants to know whether a new practice or technology is likely to be adopted by farmers, an analysis of its effect on farm profits is bound to be a useful first step.

Why not just include those other motivations in the economic models, to pick up some of the remaining 30%? Because it is much more difficult. The big advantage of modelling profit is that it can relatively easily be quantified, whereas most of the other factors can’t.

So, in summary, my view is that basing agricultural economic models on profit maximisation is often not a crazy thing to do, because it is relatively easy and reasonably useful.

Like all of the papers in the special issue, Alfons and Murray’s paper is free to access.

Further reading

Streletskaya, N.A., S.D. Bell, M. Kecinski, T. Li, S. Banerjee, L.H. Palm-Forster, and D.J. Pannell. 2020. Agriculture Adoption and Behavioral Economics: Bridging the Gap. Applied Economic Perspectives and Policy 42(1), 54-66.

Weersink, A. and M. Fulton. 2020. Limits to Profit Maximization as a Guide to Behavior Change. Applied Economic Perspectives and Policy 42(1), 67-79.

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