A measurement of the effect of technical change on the productivity of the Canadian agricultural sector : 1926-58

This study is designed to measure the amount, and character of the change in the economic performance of the agricultural sector of the Canadian economy, over the period 1926 to 1958. The major hypothesis which it examines is that changes in technology have had a positive effect on the productivity of factors used in the agricultural sector of the Canadian economy. Technological change is defined herein as any change which produces a shift in the production function of the industry, and the concept of the relative shares going to each factor of production has been used to determine the shape of the aggregate production function. In the agricultural industry natural phenomenon such as weather, which are outside the control of management, are capable of causing significant variations in annual output. These fluctuations in output make it difficult to determine the permanent effects of technological change on input-output ratios. However, the analysis assumes that farmers take into account the possible effects of weather in their decision-making processes, and also assumes that the effects of variations from this source will be randomly distributed over the 33 year period of the study. The production functions were determined by first assuming that Euler’s Theorem holds for the agricultural industry. The relative shares of each factor in total inputs were then used as the estimates of the relative share of each factor in total output. By this method the shape of the aggregate production function was determined with a minimum of distortions which may be due to the effects of exogeneous variables. The determining of the aggregate production functions in the manner used is feasible because of the high degree of competition in the agricultural industry, which contributes to a much lower level of product or process differentiation than that which exists in other industries. The problems of aggregation of products are therefore in this case minimized. The level of aggregate output was determined by expressing as an index the value series which was obtained by deflating the total value of each type of product by an appropriate price index which had a 1935-39 base. The annual deflated values were aggregated; and this output series was then expressed in terms of its value as at 1926 being made equal to 100. These indices of deflated dollar values were used in the production function as estimates of the physical quantity of the output for that particular year. A similar process was used to determine the quantity of each particular factor input which was included in the production function. The quantity of aggregate inputs, however, was determined by a geometric aggregation of the indices of the factor inputs. In this aggregate the quantity of each factor was weighted by its relative share in the aggregate input (hence output under the assumptions of the analysis). This method of geometric aggregation of inputs gives due recognition of the fact that changing marginal rates of substitution of factor inputs are possible in the agricultural industry, and that at different levels of output farmers may effect a change in the marginal rates of substitution of factors without necessarily producing a shift of the production function on which they are operating. The data for the analysis were obtained from D.B.S. material, and the changes in the output-input ratios were examined in a model of comparative statics. When this was done, it was found that when capital was measured inclusive of real estate and other improvements the net change in over-all productivity for the entire period (1926-58), was not substantially different from that which was calculated when capital was measured net of the value of these factors. Between 1926 and 1958, the net change in over-all productivity was 33 per cent when capital was measured inclusive of real estate, and 31 per cent when the value of real estate was removed. Approximately 90 per cent of this observed increase had been recorded between the years 1946 and 1958. Over the period 1950 to 1956 the difference in the calculated measure of overall productivity from each method showed, however, differences of between 3 and 6 percentage points when compared to the more frequently found difference of 2 percentage points in favour of productivity when it was derived from data which included the value of real estate. Technological change between 1926 and 1958 has been associated with an estimated decline of 28 per cent in the quantity of labour in use, a 15 per cent increase in the quantity of total capital as compared with a 43 per cent increase in the quantity of non real estate capital, and a 115 per cent increase in the quantity of annual non-labour expenses. These expenses are chiefly associated with the use of farm machinery and to a lesser extent with that of fertilizer. Feed and seed were omitted from the calculations in order to avoid the problems of double counting. The results of the analysis substantiate the main hypothesis of this study, in that technological change has a positive effect on the productivity of factors used in the agricultural sector of the Canadian economy.

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