Returns to size and structure of agriculture: A suggested interpretation

Abstract

Neoclassical theory equates minimum costs and size among firms. Real‐world observation is quite different. Many empirical studies show constant returns to size. Explanations for economies or diseconomies often involve different technologies, buying or selling economies, integration, tax incentives, managerial limitations, demand fluctuations, flexibility and opportunity costs of production factors, particularly labour. Some explanations since the late sixties have largely involved managerial differences, which imply different optimal sizes for different firms. Optimum size does not involve minimum average costs, but maximum profit. Profit maximizing output varies among firms. An optimal structure implies diverse farm sizes rather than homogeneously sized farms. Social, cultural and political factors are also important Future South African agricultural policy will have to involve revitalization of commercial agriculture, development and commercialization of subsistence agriculture and some affirmative action regarding land use. Within this framework, policy calls for flexibility regarding farm sizes and farm structure.

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