The purpose of this study is twofold. The role of land as a factor of production in the history of economic thought is the first subject of this study. In the first place it is investigated how economists over the years have explained the rent on land. Secondly an attempt is made to answer the question which factors caused economists to change their opinion about the importance of land as a factor of production. It appears that economic thought on this subject has changed a great deal from the time of the Physiocrats until the appearance of the Neo-Classical School. At first land was considered as a unique and exclusively productive factor. This view was gradually replaced by one in which land was to be regarded as a special part of capital. This change of opinion took place during the process of industrialization of the western world. However, recently there have been indications that point at a different perception of land, caused by the world-wide problems of pollution and overpopulation. They suggest a revaluation of the special role of land in the economic process. This leads to the conclusion that opinions and theories of economists are time-related.
The Chapters 3 to 5 deal with the second objective of this study: to explain the big rise in prices of agricultural land in the period 1963-1982 in the Netherlands. In Chapter 3 a review of the literature about land price development is given. Most of the literature deals with the situation in the U.S.A. It appears that technological change, in combination with conditions existing on product markets, are important factors for the explanation of the rise in land prices. According to some researchers a change in expectations about future income (caused by changes in government policy) is the main cause of rising prices. A number of econometric studies in Western Germany and the United Kingdom are also reviewed in Chapter 3. It appears that although the results for the specific variables do differ, the income of farmers is an important explanatory variable.
In the view of De Hoogh the rise in land prices can be explained by the continuing labour- saving, mechanical-technological change, in combination with the difficulty of diminishing the amount of labour on the farm beyond the last man on the farm: the farmer himself. This leads to a shift to the right of the demand curve for land. As far as the shifting of the supply curve is slower andlor less substantial than that of the demand curve for land, land prices will rise.
In Chapter 4 the analysis is continued along these lines. The first purpose is to explain the cost-push innovation hypothesis. This hypothesis sees the direction of technological advance as determined by changes in factor prices. In view of the very strong rise in labour costs in agriculture after the Second World War and the greatly diminished number of workers, this hypothesis does certainly seem to make sense in explaining this development. Because agricultural technology has fundamentally changed in this period, the cost-push innovation hypothesis explains this development more adequately than the traditional Neo-Classical theory of factor substitution with the same technology.
The second purpose of Chapter 4 is to investigate what the theory of innovation diffusion can add to the explanation of this process of mechanization of the agricultural sector after the War. The main conclusions of the reviewed literature are firstly that the speed of acceptance of a new technology differs considerably between farmers, and secondly that these differences are a reflection of the differences in entrepreneurship. It is possible that frictions appear in the land market because the speed with which the farmers want to enlarge their farms is different from that with which the farmers, who have to leave this sector in the long run, want to sell. This may cause a rise of prices in the short run.
To get a clear view of what exactly causes the shift in the demand curve for land as a result of labour-saving technological development the change in the position and the form of the isoquants and cost curves of farmers is analysed. The influence of the other form of technological advance - the biological or landsaving technological development - on the cost curves is also analysed.
Furthermore the effects of technological development on the dynamics of demand and supply on the land market are analysed, the existence of differences in cost curves between farms being essential. By means of a static analysis it is investigated how large the changes in land prices will have to be in order to restore equilibrium, when specific assumptions are made about firstly, the distribution of the positive effects of technological advance on costs between farms, and secondly, the degree in which costs differ between farms. The conclusion of this analysis is that the larger the positive effects of technological advance on production costs and the larger the differences of costs between farms, the more the least efficient farms can take advantage of the reduction in costs. Also, the greater the (absolute) elasticity of demand on the product market, the bigger the rise in land prices will be.
Chapter 5 contains an econometric analysis of the land market in the Netherlands during the period 1963-1981. It consists of three main parts. Part one deals with the structural changes in Dutch agriculture after the Second World War. The conclusion is that there has been an enormous decline in the number of workers in agriculture and a considerable rise in the degree of mechanization that has taken place simultaneously.
The second part discusses the specification of an econometric model. There are three groups of variables. First of all, there are structural ones which follow from the analyses of Chapter 4. To capture the specific influence of mechanicaltechnological change investment in machinery is taken as a proxy variable. Furthermore there are conjunctural variables. According to the reviewed literature in Chapter 3, firstly the income of the farmer (this variable has two functions: it is a proxy for the income expectations and it is important for the financial possibilities in order to buy land), and secondly the interest rate. The third variable is the change in land prices itself in order to catch the influence of speculation and to account for the influence of the mortgage system. (The commercial banks take the recent price level into account when they calculate the maximum mortgage a farmer can get on land he wants to buy.) Finally there are incidental variables. During the late seventies three policy instruments were in operation which affected agriculture. Two of those were aimed at stimulating investment in agriculture. (One of them, concerning interest subsidies, was especially made for the agricultural sector.) The other one was the introduction of the disability to work scheme.
The third part presents the econometric model and the results of the econometric analysis. A two-equation model is used in which the land prices are explained by investment, changes in the price level of land and by dummy variables to account for the incidental influences. Investment is explained by the level of the wages in agriculture, the income of the farmers, the interest rate and again by a number of dummy variables.
The results of the econometric analysis support the hypothesis of Chapter 4 that mechanical- technological development is an important variable in explaining the rise in land prices. Investment, as well as the change in the dependent variable itself, are clearly significant. The dummy for the existence of the disability to work scheme also improves the explanatory power of the equation. Investment is adequately explained by the level of wages, the interest rate and the dummy variables for investment stimulating instruments. The influence of the conjunctural variables (especially the change in land prices) in explaining the land price development, demonstrates the fact that the land market has suffered from a great loss of stability during the boom in prices at the end of the seventies. Although there certainly is a structural cause for the rising prices of land, the government programme of stimulating investment is also responsible for the rise in land prices during the seventies. It may be expected that in the next few years land prices will not rise as high as they did before the downturn took place.
|Qualification||Doctor of Philosophy|
|Award date||2 Mar 1983|
|Place of Publication||S.l.|
|Publication status||Published - 1983|
- land prices
- land use
- agricultural land