Wednesday, December 27, 2006

From Cartel to ?, the History of AAA

In previous posts I referred to the idea that the farm programs started as a cartel. To expand: a good part of the "first New Deal", at least as Arthur Schlesinger, Jr. diagnosed the economic problems as a surplus of production due to excessive competition. By permitting and encouraging different industries and management and labor to cooperate and scientifically plan their work, production could be brought back into balance with demand. So the National Recovery Administration set up codes industry by industry and boards with labor on them. Similar thinking influenced the agricultural programs. Different commodities already had had different groups working. Whereas the movement of the early 20th century was the development of the extension service and scientific agriculture, followed by the organization of the Farm Bureau (I was raised in the home of the first Farm Bureau, Broome County, NY) and then the development of farmer cooperatives in the 1920's. Some co-ops were for production, some for purchasing. For example dairy farmers got together in co-operatives to handle the marketing of milk, while such co-ops as the GLF (Grange-League-Federation) bought feed and supplies for resale to farmers.

The problem with farmer production co-ops was that they were subject to "free riders". If the cotton growers tried to limit production to raise prices, any grower who stayed outside the arrangement could grow all he wanted and benefit from any increase in prices. So a lot of the early New Deal farm legislation was putting the power of the federal government behind such arrangements--hence the agricultural marketing orders for fruits and vegetables and the marketing quota programs for tobacco, peanuts, cotton. The economists call such arrangements "cartels". (They don't call the Federal Reserve System a cartel, but that's what it is--it fixes the supply and price of the commodity known as money.)

IMO over the years the focus for the major field crops and now dairy has moved away from adjusting production to demand and setting prices and towards direct subsidies.

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