The Primacy of Relative Scarcity in Agricultural Innovation: Summary of the Hayami-Ruttan Thesis

Summary of:

Yujiro Hayami and Vernon W. Ruttan, “Induced innovation in agricultural development.” Department of Economics, University of Minnesota, Center for Economic Research Discussion Paper No. 3, May 1971; and

Vernon W. Ruttan and Yujiro Hayami, “Toward a theory of induced institutional innovation.” Department of Economics, University of Minnesota, Center for Economic Research Discussion Paper No. 200, February, 1984

The Hayami-Ruttan thesis on agricultural innovation was developed at a time when the economics community was beginning to conceptualize the origins of technological and institutional changes as endogenous rather than exogenous to the economic system.

John Hicks, a Nobel laureat in economics, republished his 1932 seminal work The Theory of Wages in 1963, reinvigorating the argument that the relative price of factors of production could influence the direction of invention or innovation. Other economists, even detractors of Hicks’ theory like WEG Salter, observed that the relative factor prices were “signal posts representing broad influences that determine the way technological knowledge is applied to production.”

Their key conclusion was that technological advances require both an exogenous supply of inelastic factors of production and an endogenous demand for innovation.

Consistent with this perspective and using relative prices to study the origins of innovations in agricultural productivity, the crux of Hayami and Ruttan’s 1971 paper posits that

The process of technological change in agriculture can best be understood as a dynamic response to the resource endowments and economic environment in which a country finds itself at the beginning of the modernization process

The main implications of their work are twofold:

  • There are multiple paths of technological development to facilitate the substitution of relatively abundant factors for relatively scarce factors in maximizing agricultural yield; and
  • the role of the public sector in guiding technological development in agricultural innovation is crucial because independent institutionalization of this process is difficult when left to market forces alone

The chief objective of the technological innovation in agricultural production is to release constraints on greater output imposed by factors with a relatively inelastic supply. As technological innovations that save on factors with inelastic supply (defined as factors with slower shifts in supply/scarce) become relatively more profitable, both individual farmers and large agricultural corporations will be induced to take advantage of the new opportunity by adopting innovations and demanding further technological advances.

This process is efficient if

  • Prices efficiently reflect changes in the demand and supply of production of factors
  • There exists an effective interaction between farmers, public research institutions, and private agricultural supply firms

Here Hayami-Ruttan highlights the role for public institutions as

perceptive scientists and administrators respond by making available new technical possibilities and new inputs that enable farmers to profitably substitute the increasingly abundant factors for increasingly scarce factors, thereby guiding the demand of farmers for unit cost reduction in a socially optimum direction.

This becomes most effective when responsiveness is maximized through

  • organization of farmers into politically effective local and regional associations
  • decentralization of agricultural research system

The research observes two major paths of technological advancements in response to changes in the relative price factor: mechanical and biological technology.

Although the paper notes that not all mechanical innovations are necessarily motivated by labor-saving incentives nor are all biological innovations necessarily motivated by land-saving incentives,

domestic factor leading to growth of labor productivity has been progress in mechanization and dominant factor leading to growth in land productivity has been progress in biological technology.

Testing this observation, Hayami-Ruttan calculated and analyzed the relationship between fertilizer-rice price ratio and yield per hectare in several Asian countries. The research concluded that

  • higher per hectare yield in Japan correlated with lower price of fertilizer relative to rice
  • high inverse relationship between rice yield per hectare and fertilizer-rice price ratio was evident in time series data for Japan

Further comparison between the United States and Japan between 1880 and 1960 revealed that there existed

  • a substitutional relationship between fertilizer and labor; and
  • a complementary relationship between land and power

This occurred because price of agricultural inputs supplied by non-farm sectors such as fertilizer and machinery tended to decline relative to the price of land and labor, inducing mechanical innovation in the US and fertilizer innovation in Japan.

Hayami and Ruttan conclude that

despite enormous differences in climate and initial factor endowments, the agricultural production function, the inducement mechanism of innovations, and the response of farmers to economic opportunity have been essentially the same in the US and Japan

Based on the case studies of agricultural growth in Japan and the United States, the following factors are highlighted as critical in increasing the per hectare output

  • vigorous growth in industry to supply machinery and fertilizer
  • development of effective research and extension systems
  • capacity of farmers, to exploit new opportunities according to information transmitted through relative price changes

However, the research also noted that

  • substantial decline in fertilizer-rice price ratio from 1955-57 to 1963-65 in other Asian countries was associated with only small gains in rice yield per hectare
  • fertilizer-rice price ratio in Southeast Asia stands more favorable today than in Japan at the beginning of the 20th century

So why does rice yield per hectare in Southeast Asia not increase 1955/57 to 1963/65 despite decline in fertilizer-rice price ratio?

Hayami-Ruttan suggests that this is because of an “absence of adequate institutional and human capital to generate the flow of new techniques” in these countries, emphasizing that the progress of agricultural technology cannot be simply left to the invisible hand.

They expand on the role of the public sector in their 1984 paper by describing how economic units (firms and households) seek to internalize gains and externalize the cost of innovative activity.

This occurs because of the stochastic (inherently risky) nature of research which contributes to both

  • the failure of the market in attaining optimum resource allocation over time (argued by Richard Nelson) and
  • the increased cost for small agricultural producers in coordinating and organizing research.

The research recommends that when internationalization is difficult, the public sector becomes essential and the socialization of agriculture is necessary to push innovation along a socially optimal path. At the same time, the research emphasizes that effective communication of the producers’ needs is achieved when the body conducting the research is decentralized.

So where does this research lead us in analyzing North Korea’s own developmental path in agricultural modernization?

We know that

  • growth in industry to supply machinery and fertilizer did occur but remained highly dependent on foreign aid and subsidies
  • research and extension systems to coordinate between the state and the farmers were highly centralized and politicized
  • Both the command economy and the long-term exploitation of external aid altered the changes in relative prices, distorting the transmission of information to economic actors

In the decades leading up to its food self-sufficiency in the 1980s and the famine in the 1990s, North Korea pursued both mechanization and application of petro-chemical fertilizers, fostered by untenable external support – this occurred as collectivization and industrialization shifted the land-labor ratio in the country. Given these variables, the natural inquiry is whether the distortion of relative price of labor and land in North Korea lead to a misappropriation of mechanization and fertilizer usage – which, in turn, contributed to environmental degradation via horizontal expansion of farms and overexposure of chemical fertilizers.

This is indeed an interesting question that will require further investigation, but one that might reveal both the roots of North Korea’s food crisis and its resolution.


About Yong Kwon

Analyst of international relations, writer of history, observer of North Korea's food and monetary policies, and Korea blogger for the Diplomat
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4 Responses to The Primacy of Relative Scarcity in Agricultural Innovation: Summary of the Hayami-Ruttan Thesis

  1. Pingback: Premonitions of a Disaster | DPRK Food Policy Blog

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  4. haha says:

    Thank you, LSE Econ history graudate. This is almost a direct summary of MSc Econ History core module EH401/EH414…which week was that…the one on industrial development….

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